Written by Avantika Sharma
Most shareholders seek to maximise their wealth. As a business owner, you want to realise the value of your lifetime’s investment and reap the rewards for all the sacrifices that have been made along the way. However, whilst you seek the highest possible price, a potential purchaser would likely be looking to pay as little as they could get away with. Before committing to the transaction, a potential buyer will want to ensure that they know what it is they are purchasing and the obligations that come with it – due diligence. Any discrepancies they find during the due diligence process gives them ammunition at the negotiations stage for reducing the price, a.k.a. “a price chip”. Therefore, it may be smart to ensure all the correct processes and procedures are in place so that, when this day comes, you are in a strong negotiating position to present your business to different purchasers and maximise your wealth.
Below is a list of the top 10 things that potential buyers will pick up on during the due diligence process and therefore something to think about:
Potential buyers will be concerned with the company’s historical financial statements (usually last 3 years) and related management accounts. Knowledge is power. If you can demonstrate to a potential buyer that you have a comprehensive understanding of what is happening within the business then the level of comfort in the deal will be heightened and may fetch a higher price.
A study of deals rejected by a UK business angel investment group highlighted that financial considerations, notably flawed financial projections, were one of the main reasons in deals being rejected or the price being severely chipped. Having a robust set of financial forecasts with iron clad assumptions, ones that have been clearly thought out, shows to investors you are looking into the future with open eyes. Ideally you want to have demonstrable and higher earnings when it’s time to sell. Focus on achieving those operational efficiencies, cost reductions and other value enhancers in advance so they’re easily demonstrated to a buyer as no buyer likes to pay extra for “potential growth in profits”.
Working capital is often an overlooked source of value as this forms the basis of the potential free cash you would receive upon the completion of a deal. Working capital is the lifeblood of a business, and buyers expect to receive a “normal” level. Therefore, to get ready for a sale by doing things such as reducing slow selling or obsolete stock, managing debtors and creditors to their standard terms.All of these help to normalise, i.e. reduce your working capital and thus maximise the amount of free cash you may potentially be able to negotiate.
How would your business cope if you were no longer part of it? A potential buyer will want to ensure that the business continues to run smoothly once the deal has been completed, and you are no longer working there. This means removing yourself from the day to day running and having a strong management team who you can delegate tasks to. Having an effective, highly motivated management team also means they do not have to bring in their own team - reducing costs for them and increasing potential value in the deal for you.
What is your business model? Potential buyers are turned off by businesses that lack focus; where comprehensive, credible market information is lacking and there is no unique selling point (USP). They also want to understand the way that your product or service is distinctive or superior to that of the competition and how any competitive advantage will be sustained. Therefore, having a clearly written strategy and business plan could help potential buyers understand the business better and justify the right value for you.
Controls are the processes, procedures, and safeguards that protect your company from uninformed or inappropriate decisions or actions by any team member. Strong internal controls increase the likelihood of achieving and maintaining business health through four key business objectives – safeguarding of assets, ensuring reliable financial reporting, maintaining compliance and accomplishing operational efficiency. Not having this would reduce a potential buyer’s confidence in a deal, giving them ammunition to price chip.
Part of any sale process is an element of trust and the buyer’s confidence in the business and its processes. Therefore, it is imperative to have all the correct documentation in place for all aspects of the business, be it sales orders, purchase invoices, lease documents or any other agreements. Not having the correct documentation in place instils doubt in the potential buyer since they will question the accuracy of the information when there is insufficient evidence to back it up and then they might start to question everything else.
Any potential buyer would want to fully understand the company’s customer base including the largest customers and pipeline. Things such as customer relationships and satisfaction levels, warranty issues, sales terms and policies and the sales team are some of the things that will be assessed. As such you want to ensure there is a good sales mix, with no overreliance on one or two customers whilst maintaining a strong relationship with them. Having good credit control, i.e. very little to no bad debt, is also essential as this is something a potential buyer may use in their favour.
Disputes suggest to a potential buyer that there may be some underlying issues that are unresolved and as such are a contingent liability. Disputes and claims can arise internally (from employees) or externally (from customers, HMRC, etc.).
Therefore, it is important that robust controls and correct documentations are in place so that it can be demonstrated to a potential buyer that you keep adequate records in place to cover yourself in the event of a dispute.
Disasters don’t just happen to other people. Many business owners underestimate the disruption caused by a major incident such as a fire. It's not just the rebuilding, lost stock and equipment you'll need cash for, but also the loss of business and possibly the time needed to re-recruit staff and to encourage former customers who have gone elsewhere. No one can predict the future and therefore it is of paramount importance that a business has the necessary insurances in place, of an adequate cover, should the worst happen. Potential buyers too want to be sure that their investment is going to be protected and in the even of a disaster, the right insurance policies will pay out to keep the business running.
To conclude, we understand that as a business owner you want to realise the gains from your investment of a lifetime and therefore it is of utmost importance that you are “deal ready” for when the time comes that you sell your business.
If you'd like more information or advice about the potential sale of your business, contact AvantikaEmail Avantika
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