Zenith Finance Blog

Business Finance

How to prepare a business for sale – and how to value it

These days it’s not uncommon for a home owners to spend $5000 or more to ‘dress up” a house that’s for sale to extract a premium price – but how do you dress up a business that you wish to sell?

Be prepared for due diligence

Once a business is put up for sale a buyer will investigate it from all angles – this is called doing “due diligence”. Your solicitor and accountant can help you with this side of the preparation.

The buyer will look into every aspect of the business to determine whether the your stated reasons for selling are legitimate – there may well be suspicion that that the business has been in decline, or that the product is outdated, or that competition has increased.

Balance the books (and everything inside)

The question in the buyer’s mind is: “Why would the owner want to sell a good, healthy business?” So be aware of their desire – and need – for scrutiny of every detail for accuracy.

One furniture retailer in Sydney had her business up for sale and thought that a prepared set of accounts as well as a detailed 6-year sales and profit history would suffice. She said “The prospective buyers had their accountant request matching invoices against the sales records.

“It made sense when I thought about it, but I was shocked that they would spend money to do such a forensic check of the figures.”

Maximise the value to your buyer

Ahead of time, make sure you have these immaculate and detailed records with hard evidence to back up the sales. You’ll save buyers (and yourself) time and make them feel much more confident about doing business with you.

Analyse your financial records

Are profits still healthy or has there been a recent or gradual downturn? Has your customer base changed? Are distribution channels still operating efficiently? Has the business developed a reputation for shoddy product or service? It’s important to know and be prepared to answer these sort of questions from potential buyers.

In order to properly value the business, you need past and present financial records to see outgoings, sales and profits. Do a physical inspection of the business resources – this means staff, equipment, any stock, any property or other assets just as you would if you were selling your house.

Ask clients and suppliers for feedback

Get out and about and ask clients and suppliers how they feel about you and your business. Not to alert them of an impending sale, but to be sure that you are in tune with any issues. If a buyer is keen they may well call in to a supplier and check out your business and get a different picture from that which you are projecting.

Benchmark your business

In preparing a business for sale, a buyer will want to know how your business ranks against others in the same sector. This is known as benchmarking. Does yours achieve the same level of profit? There may be other issues. Fixing the issues could turn around the business and its valuation.

Manage your stock levels

If you have too much stock you could hold a sale and clear it, then bring in fresh stock.

Debtor issues

If you find too many overdue accounts, you could tighten up on credit terms, and debt collection

Number of clients

If the business derives most of its income from only one client or project buyers may be wary. Look to bring others on board before you look to sell.

Financial ratios are poor and worsening

Does it charge a competitive rate for its product or service?

Answers to these and other questions can help you identify the strengths and weaknesses in the business and highlight opportunities where the business could be more competitive.

But what’s my business worth?

The price a buyer will pay for your business should reflect the value of its assets and level of profits. This includes:

  • tangible assets, such as office furniture or machinery.
  • intangible assets, such as trademarks, ‘reputation’, experienced staff and business know-how.

Valuing tangible business assets can be straightforward, but it can be harder to put a value on the intangible assets such as goodwill.

To determine the value and profit level of the business that you wish to sell, you should get advice from a business valuer with specialist knowledge about this particular type of business.

Earnings Multiple

One method you can apply to determine the value of a business is multiple earnings. A business not listed on the stock exchange is usually valued at between five and 10 times its annual post-tax profit. But be sure to check industry benchmarks to determine the multiple for your business sector.