The majority of small to medium sized businesses (SMEs) are not sale ready to take advantage of maximising the sale price when they sell. Approximately 50 per cent of businesses that have sought advice are not in a position to do so.
In 2014 middle market mergers and acquisitions increased by 21 per cent according to BakerTilly/Pitcher Partners Deal Makers: Middle market M&A in Australia 2015. Private equity activity passed $19.2 billion during the year and a record 25 mid-cap buyouts were completed worth approximately $2.6 billion.
To ensure a business sets itself up to achieve the best possible sale price requires significant planning. It is recommended that a two year plan is put in place prior to any business sale.
Five areas have been identified which provide a foundation for business sales. These include record keeping, intellectual property, key employees, customer contracts, and a strategic business plan with future forecasts. Most of the businesses that have sought advice did not adequately cover all of these areas.
Numbers do the talking, hence it is imperative to ensure financial records are accurate. Most SMEs are not required to undertake an audit which leaves the doors open for speculation over numbers. It is recommended that an audit is undertaken to independently verify the numbers to ensure the books and records are complete and accurate.
Over time businesses build up intangible assets including intellectual property, unique technologies, processes or products. These need to be protected with trademarks, patents and copyright wherever possible to ensure they can be transferred on sale. Key employees need to be identified and retained when the new owners take over. Having the right employees can add tremendous value to a business value.
Strategic business plans with financial forecasts show potential buyers where the business could go in the future. Business owners are best positioned to know what their business has achieved and can achieve in the future. Finally and importantly, long term customer contracts create significant value as they provide guaranteed or committed income. This provides surety to the purchaser’s minimum future cash flows.
The environment is now ripe for SMEs to take advantage of the current market conditions to maximise their sales price. With a low Australian dollar, interest rates at record lows, private equity houses looking for opportunities and overseas investors seeking businesses in Australia, these are very compelling reasons to get ‘your house in order’ now to sell.
Five tips to consider prior to selling a business:
- Maintain accurate financial records. Undertake a financial audit to provide credibility to your business results.
- Protect those assets created. Use trademark, patent and copyright protection to preserve these assets so that they can be transferred on sale. Additionally, make sure all customer contracts are agreed in writing. Generally the longer the better.
- Plan in advance. Two years from the date of sale is an excellent starting point.
- Business owners need to focus on growing the business not the sale. Appoint an experienced advisor to assist with the sale component.
- Make sure there is business plan with a financial forecast for at least three years. This provides a clear insight into the business and its future to purchasers.
About the author:
This article was written by John Shim, Founding Principal of Hunter Bay Capital Partners and former partner at PwC for over 24 years.
