Smart documentation is key to selling your business

No matter where in the world we run our businesses, we aspire to be successful, profitable and happy. We have either started the business from nothing, purchased an existing enterprise or taken the reins of the family business. Often, we begin with limited skills, have minimal formal industry training and largely “learn by our mistakes.”

While running an enterprise, we probably don’t plan for the day we must sell it. Many of us expect to get carried out in an old sewing machine crate we have stored in back—in other words, we expect to die on the job. The reality is that every day we’re in business is a day spent preparing it for sale. Providing great customer service, producing fantastic products, expanding our enterprises, upgrading our machinery, training employees, establishing procedures and systems and being profitable all add enormous value to a business.

All of this is vitally important to our business success. Often, however, it is “finding the time” that prevents us from focusing on these fundamental actions (or waiting until the machinery fails before upgrading) rather than following a clearly defined path to ensure quality business performance.

Get help with the fundamentals

All too frequently, owners of small and medium-size businesses don’t record achievements or keep an inventory of machinery. We don’t have well-written company policies and procedures, and many of us don’t graph our company’s financial performance to measure our growth. We don’t have well-defined mission statements or properly written business plans—certainly not five-year plans to measure ourselves against each year.

It may sound overly critical, but for the majority of us it’s true. Clearly, there are many quality structured organizations with well-designed processes and procedures. Every business should invest energy in these tasks—normal monthly stock-taking and annual budgets are often seen as the domain of big business, but they are not.

Because many of us get into business without the necessary skills, surrounding ourselves with people who can support us—accountants, mentors and business consultants—is critical. While we can often run our businesses with modest ambition, ultimately that’s not fair to anyone. Owning a business is a wonderful adventure with the potential for significant rewards … and an equal amount of stress. Don’t be afraid to seek guidance and support; it has the potential to make the adventure even more exciting.

By taking investors into my own business 15 years ago, I reduced the mental strain by spreading the load. I learned a great deal about good business planning, and I was invigorated to drive the business to another level to ensure its success to make sure investors were rewarded.

We sold 50 percent of our business when it reached the point where we didn’t feel confident we could manage its growth appropriately. We needed quality guidance, sound financial knowledge and motivation, too. This step in our exit strategy allowed us to benefit from the sale and invest in other interests, rather than waiting until we were too old to enjoy them.

Early preparation is key

If you decide to sell your business, and the steps I have described above have not been part of your daily business practices, you’re likely to find the sales process challenging. When dynamic, motivated purchasers come along, you want to avoid diminishing their excitement by presenting unnecessary obstacles.

To prepare yourself, here are some questions to ponder well in advance of the sale:

• Do you have all the documentation necessary for the due diligence process to help a potential buyer evaluate your business? This includes up to five years’ worth of previous accounts, budgets and forecasts for the next three years, an asset register and cash flow forecasts, as well as all legal requirements, which will differ in each country.
• Do you know which sales path to follow? Will it be formal advertising, word of mouth or placing the business with an agent or broker? Each of these paths requires careful planning.
• When will you inform the staff of your intentions? Will you tell them early, or wait until the deal is done? How do you keep their confidence? Clearly, advertising the sale on the open market will mean the staff needs to be informed sooner rather than later.
• Consider your customers—when do you inform them? Will they stay loyal to the new owner or leave and go somewhere else? Your suppliers will need to be advised along the way as well.
• How long should you be prepared to wait for the sale process to be completed?
• How does the business get valued, and who might do this for you?
• Is it a share sale or an asset-based sale?
• What are the tax implications?
• Will the potential buyer run the business properly and look after the valued customer base you have built up over years in business?

On the record

There are many more questions to answer, of course. An important one is: how will you establish a fair value for your business? While our industry is small and comparisons often not easy to find, standard accounting principles primarily base the value of a business on its financial performance.

A potential purchaser’s accountant will see less value than you do, and this is the starting point for discussion between the parties. “Proof of performance” will become your baseline to present fair value. This may be when you think, “I wish I had kept better records.”

Providing verifiable documentation will make the sales process far easier. The clear business plan mentioned earlier—your asset register, financial records of previous years, cash flow, five-year business plan, customer base, successful projects—needs to be in order and available in a level of detail that shows off the performance and special features of your business in the best possible way. This is your opportunity to “sell the sizzle” of your pride and joy.

The purchaser may ask if you are prepared to leave any money in to get the sale across the line. You need to consider this carefully and evaluate the risk against the opportunity.

Here are two final tips:

• Don’t get excited about a sale until the sales agreement is signed and the funds are in the bank.
• Be prepared to ride a roller coaster of emotions, and don’t be greedy.

My philosophy is that the business has been kind to us for all the years we’ve owned it, and we should want the new owner to be equally or more successful. Holding out for the very last possible dollar may not be as important as reaching a sales agreement that acknowledges the long-term value of the business, and incorporates terms that respect current employees and clients, as well as the future owner.

Brendan Duffy, along with his wife, Sheryl, owned Canvasland in Levin, New Zealand, for 30 years. They recently sold their business, with Brendan remaining with the company in a part-time mentoring role. He is a past president of OFPANZ (Outdoor Fabric Products Association of New Zealand).