Plan well ahead to maximise sale price of your business

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Back in August we discussed the importance of succession planning and how too few business owners have a plan in place for exiting their business. One of the surprising statistics revealed in that article was that according to a June 2013 MGI Australian Family and Private Business Survey, 75% of business owners admitted their business was not sale- or succession-ready.

Getting your business sale ready

Only by planning ahead to get your business sale ready can you expect to maximise the price you receive for the business you’ve worked so hard to establish and grow over the years.

There are 5 key areas in which to focus on well in advance of any sale. These are:

  1. Preparing complete and up-to-date accounts – 2 years minimum to present to prospective buyers.
  2. Protecting your intangible assets.
  3. Keeping your key employees.
  4. Negotiating long-term customer contracts.
  5. Strategic business planning for the future.

1.    Preparing complete and up-to-date accounts

Naturally, you will need to have complete, up-to-date accounts to demonstrate to any potential buyers the financial health and future prospects of your business. Financial statements prepared by your accountant will hold more weight with buyers than accounts generated by your own accounting system.

2.    Protecting your intangible assets

What is it that makes your business unique and of value to a potential buyer? It may be the products you manufacture, something you create, technology innovation, expertise or a specific process you employ. Safeguard these intangible assets with appropriate trademarks, copyright and patents that can be transferred to a new owner.

Similarly, your company branding is another intangible asset. What impression does your current company logo, stationery, website, and marketing material convey? If your branding looks outdated and tired, this will likely reflect poorly on your business in the eyes of potential buyers. If your branding doesn’t show your business as innovative and modern, consider it time for a refresh.

3.    Keeping key employees

Who are the employees that really make a difference to the success of your business? It may be the well-connected sales manager, the creative designer, an IT specialist with a knack for solving everyone’s issues, someone with a unique or rare talent. Or, it could be the outgoing receptionist who greets every customer with a friendly smile.

Identify all the key employees who are an asset to your business. What incentives can you offer to encourage those key employees to stick around for the new owner? Conversely, you may need to address any inefficiencies in staffing well prior to putting your business on the market.

It’s often said that a company’s employees are its greatest asset. So, having the right employees will be worth a great deal to any potential buyer.

You should also encourage employees to take or reduce outstanding holiday leave, long-service leave and other entitlements prior to any sale, as the sale price may be reduced by the value of employee entitlements.

4.    Negotiating long-term contracts & building customer loyalty

If you are a supplier of goods or provide certain services, negotiating long-term customer contracts can add significant value to your business as this will provide a guaranteed income stream and provide some certainty in terms of future minimum cash flows.

For other businesses, however, long-term customer contracts may not be an option. What you can do though, is focus on building your loyal customer base.

5.    Strategic business planning for the future

Prepare a detailed strategic plan for the future of your business including financial forecasts for at least 3 years ahead. Identify opportunities for growth. Consider dropping any unprofitable or low-margin products or services. Demonstrate to any potential buyers what the business is capable of achieving in the first years following a change in ownership.

Remember though, it’s important to be realistic. Don’t inflate the numbers. Consult your accountant when preparing financial forecasts.

The big question: How much is the business worth?

You’ve spent the past two years planning ahead and now your business is ready for sale. Now for the big question: How much is the business worth?

There a number of methods for calculating the value of a business. These include:

  • Current market value in your industry – What are other comparable businesses selling for within your particular industry? This can be a guide as to how much your business may be worth to potential buyers.
  • Return on investment (ROI) – To calculate ROI, divide net profit (before owner’s salary) by selling price (net annual profit / selling price) x 100. If you have an ROI in mind:
    Selling price = (net annual profit / ROI) x 100.
  • Business assets valuation – Add the value of all assets including cash, stock, plant & equipment, receivables and any goodwill.
    Note: A common method of calculating goodwill is to multiply adjusted net average earnings over 2 years by 1 – 2.5 which represents a business multiple valuation.

Consult your accountant

When planning for the sale of your business, consult your accountant. They can assist with determining a sale price, assess if you are entitled to tax breaks such as the small business CGT concessions, analyse the tax implications of the sale and calculate your likely tax position after the sale.

To contact your Westlawn Business Services Accountant:

26 October 2015

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Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

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