RSM New Zealand

Succession planning | Shaping up for Sale

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To extract maximum value from your business it is critical that it is firing on all cylinders and in its best shape before heading for sale. In our second article “Succession Planning: Your Best Exit Strategy”, we stressed that having an understanding of your best exit option(s) allows for better planning and greater control towards a successful execution of extracting its top dollar out on the market.

Good growth, stability and ROI will mean buyers will pay a premium, however if there are glaring cracks internally and externally, the money on the table will reflect this. Most business buyers aren’t looking for a risky purchase.  They want something reliable and robust. Let’s look at ways to shape up your business for sale.

Get Annual Valuations

Understanding the industry benchmark for the capitalisation rate in relation to your business and what can increase it or decrease it is important. Periodic indicative valuations of the business allow for a way to measure the impact of any fixing of weaknesses, consolidation of strengths, taking of opportunities and minimising of threats executed. This allows for realistic expectations around perceived current business value and the targeted business value commonly known as the business value gap. The game is to reduce it!

Aim for a Strong Balance sheet and Cash, Cash & Cash!

Businesses generally fail or fail to be viable because of poor cash flow. Strong working capital controls and levers to manage inventory, payables and debtors will go a long way to supporting what every buyer is looking for and that is strong sustainable and protected cash flow. Equally important indicators buyers will be looking at in a good business purchase are equity and vitality of the balance sheet.

Therefore, a focus only on traditional measures around profitability can mean the owner overlooking the importance of building the balance sheet. 

Savvy Business Plan

Ensure you have a good business plan in place as potential buyers may ask to see it. A good business plan will have the KPI’s and other information that will allow someone to make a diagnostic assessment of the operational efficiency, management, and plans for growth. An incoming owner will want to see evidence of a business that is durable and robust enough to allow for expansion and development. 

Structure and teach the business to survive without the owner 

Most businesses have a central ‘COG’ the person in the business that must be present for the business to continue operating. For many businesses this person happens to be the owner(s) of the company. This creates a challenge, when you think about a sale of the business as the common question that needs answered for most potential investors is how much of the value does the owner being in the business represent? 

Remember also that a definition of a business is one that can run exclusive of the owner’s direct effort.  If it needs the owner, then maybe you have a job rather than a true standalone business available for sale. 

As part of your succession planning owners need to build resilience within the business.

This can be achieved in many ways, however one way would be to start with the following: 

  • Documenting what and how your daily/weekly tasks are performed (at the same time, document all the supplier and customer relationships you have).
  • Where possible, shift or delegate some of these tasks to employees of the company. Work with them and given them time to develop the same knowledge and skill level you have. 
  • Review what worked well and what could be improved. Give your team feedback.
  • At your next supplier or customer meeting, bring one of your team along.  Look for other similar opportunities to de-risk your business and its reliance on you.
  • Pilot an opportunity to fully step away from the business once you are happy that you can have a day off i.e. consider a 4 or 3 day week.  Another good test is that you should be able to take a reasonable amount of leave without the business being adversely impacted.     
  • At this point it is important to monitor but try not to get in and ‘fix it’ all else you may revert back to doing it yourself again.

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Make the business more valuable 

Assuming, you do not have an acquisition in mind and you want to concentrate on your existing business, adding value will depend on how much time you have. Depending on your sale timeline you may want to fix every issue identified, or you may want to identify the key issues you want to address before putting your business up for sale.

Before you do, spend some time thinking about what your business has to offer: 

  • What are things that differentiate it from the rest of the competition/market? Spell out how you are different and give tangible evidence. 
  • What is it that someone else would pay for and what things would result in people reducing their offer? Most of it comes back down to the type of business you have. If one of your key assets is your customer base , great questions to ask yourself are:
  • Whether you understand the revenue by customer outlook? 
  • Do you have customer contracts in place and do you know the timeframes for the next renewal period? 
  • What are your next big opportunities and how progressed are these in terms of conversion?

Look at all those things you have being putting off such as:

  • Updating lease agreements, particularly those where the landlord or lessor is a related entity. 
  • Ensuring key people within the business are on up to date employment contracts. 
  • Addressing any staffing problems. Buyers may be put off if there is a risk of inheriting difficult employees. 
  • Sound maintenance programs are in place for machinery & equipment maintenance. 
  • Updating Health and Safety obligations and standards. 
  • Resolving any legal disputes.
  • Getting your intellectual property appropriately protected.

By methodically tying up loose ends you will inherently improve the value of your business.

This requires a full and extensive review of your current business, and putting in place a timeline on when and who will be responsible for actioning items.  This action will ensure that when you are ready to sell, you can confidently answer questions asked and you have the reporting and evidence to support information provided in investor memorandums or when your business is subject to a due diligence review. 

Timing

We’ve all heard the saying “Timing is everything” and it again rings true when it comes to achieving maximum value on the sale of your business. Improving business processes and value-drivers is a constant task in every business, and it can take years for the benefit of these changes to flow through to the financials. 

A prospective buyer will require 2-3 years of financial data and so it’s not unreasonable to start making changes to improve business performance 3 – 5 years before going to market. It is evident that you must allow enough time to maximise value.

While we are often able to dictate when we would like to exit our business, this timing does not always coincide with the ‘best’ time to exit. We need to be alert to external factors such as recession, over-supply within our industry, or regulatory change that may cause us to sell earlier (or later) than planned. Unforeseen health issues may also alter our timing. Being ready to sell before you think you need to is key to achieving maximum value whenever the ‘time’ to sell comes.  So start the process today.

Get your records looking good

A prospective buyer wants to see 2-3 years’ worth of accurate and current information. The figures are the starting point for placing a value on the business so ideally your financial records should show growing revenue and profits.  However, it’s the quality of the information you provide that gives the prospect confidence in the numbers, and ensures they don’t feel the need to apply a discount to their valuation. 

Being able to provide quarterly management accounts for the year-to-date, with accurate reconciliations adds weight to your argument, and it also makes it much easier to answer questions in a timely manner. For the majority of our business lives, we are motivated by efficient tax planning, however this behaviour needs to change when it comes to preparing a business for sale as the higher the tax bill, the greater the value of the business. This means removing those expenses from the business that while legitimately claimed, may not be essential to the running of the business.

Some businesses also engage an independent reviewer or voluntarily subject themselves to a financial audit by independent expert auditors as part of their sale readiness.  This serves to provide a reliable independent assessment of the truth and fairness of the financial results and position of the business. 

A history of audited financial statements can add good value to a business sale process due to the greatly enhanced reliability of the financial information being provided to prospective purchasers. 

An independent review or audit can also greatly assist the owner in identifying areas of risk or weakness in systems that can then be addressed before sale to further enhance the business value. 

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Systems & Processes

It’s essential that all processes and procedures within the business are documented and up-to-date. These records are an instruction manual that allow a new owner to step in and take over day-to-day operations with confidence. Providing high quality documentation of processes gives assurance to a prospective purchaser that there is capability of execution via the existing team, allowing the new owner to work on the business rather than in it.

Our next article in the series will take a look at the sales process and things to be aware of.

If you are wanting a review of your business, or require assistance increasing its value - please feel free to contact us today.

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Authors

Don Aue
Associate Director - Audit