The three pillars of preparing your business for sale

by Michelle Kvello 10th of October, 2022

The three pillars of preparing your business for sale

There comes a time in (most) founders' lives when their thoughts turn to selling their business. For some it has always been the objective and for some a gradual realisation that this is the endgame.

But having already gone through two years of “unprecedented times” the current macro-economic climate has decided to throw businesses a few more curve balls. Treasurer Jim Chalmers in his July statement expects inflation to peak at 7.75% in the December quarter before it settles down and the uncertainty around inflation and interest rates globally is playing havoc with currency exchange rates. If there is one thing that markets don’t like, it's uncertainty, and as a result, business valuations are getting squeezed as potential acquirers become more conservative.

So what does this mean for businesses thinking about selling? What can you to do enhance your valuation and are there additional considerations which come into play in this market?

At its core, the key to a successful exit is preparation, preparation, preparation. And that has never been more true than right now. Effective preparation has a direct impact on a business’ market valuation. And a useful framework for this preparation, particularly for a first-time seller, is to use a three-pillar approach...

The practical or “Is your business ready for sale”

The readiness of your financial books and records, corporate compliance and governance and your general record keeping will make a huge difference in maintaining the credibility of your business as you enter into the due diligence phase of the sale process.

“Simple” things like

Will the high-level figures you talk to in initial meetings be borne out in the detailed financials of the business?
Compliant board minutes and regulatory filings sound obvious, but how well organised and accessible is this information for presentation to a third party? The same goes for your customer and supplier contracts.
Are your financial policies and processes best practice and defensible?
Even if your size doesn’t yet require a statutory audit, are your financials recorded in line with key accounting standards? You may want to consider an audit before it is formally required to give an acquirer confidence in the robustness of your numbers.

These health and hygiene factors are absolutely key in maintaining the confidence of potential acquirers. Never underestimate the financial impact of inconsistent information when selling your business.

The sale process will also monopolise a significant amount of founder time, so can operations run successfully and smoothly without your full attention? If the decision-making within the business has been fluid up to this point it’s essential that key management and the broader business have a clear decision-making framework so the business doesn't stall just when you need it to be hitting all its targets. If it doesn’t exist yet, create it.

Sales processes can also take a long time, particularly in the current market. From a practical perspective make sure the business has enough cash to survive it! All too often I see too many businesses underestimate their cash runway and it is so fundamental to maintaining a strong negotiating position.

The commercial or “How do you best maximise value on sale”

Yes, robust financials are important for maximising value on exit but there’s so much more to it.

Are you really clear on where the value lies in your business and are you realistic about what that valuation is? Similar to when you are selling a house, it's tempting to believe the real estate agent who gives you the highest valuation but it might not give you the most realistic outlook.

At Lantern Partners we’ve worked with some great advisers who work closely with us and the founders to tease out the key value proposition, and the financials that support that, to really maximise the value of the company. Getting the right combination of transactional, legal and tax support is critical. Both from the perspective of experience within your sector and for your size but also a commercial team with the sellers’ interests truly at the heart of how they operate. A deal team who leave their egos at the door are worth their absolute weight in gold.

Typically through the due diligence process you’ll be asked to provide guidance on future results; projections around sales, customers and investment requirements. Hitting these projections are more important that ever, again because it demonstrates credibility. Your objective is to minimise uncertainty in the eyes of the acquirer.

And demonstrating how the business can continue to run successfully without you at the helm will go a long way to demonstrating the robustness of the business model you’re presenting. Smart Company reported that “almost one-third of a business valuation is lost during a sale due to poorly structured succession plans”.

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The mental or “Are you ready for the sale process”

Know why you are selling and keep that in the forefront of your mind throughout the process. If you do not need to sell right now, it may benefit you to delay and ride things out until market conditions are more favourable.

If you do decide to go ahead know when the price or the conditions on sale no longer make sense to you. It can be hard to keep perspective on this in the midst of a sale process so documenting it at the start can be helpful. If the sale process doesn’t complete and you’ve prepared the first two pillars effectively, you can reenter the market when the timing is more advantageous and you get a valuation that lets you meet your objective. The added bonus is that the structures you’ve introduced through the preparation mean you’ll have a stronger business no matter the outcome.

Prepare yourself for an emotional roller coaster during the process. Have a great support network (professional and personal) in place because there are always bumps in the road, even for the smoothest of transactions. Being able to hold your nerve and keep perspective is essential. Business isn’t personal but it absolutely will feel like it at points.

Preventing deal fatigue, or at least its unintended outcomes is important. Some processes are quick, particularly at the moment, but most processes feel long, particularly for a founder who is used to rattling through decision-making. Having a team you can rely on to push through the mundane elements and ensure you are properly engaged when it counts is critical.

So whilst market conditions may look tricky at the moment, the game is still the same and there are still great deals to be done. But the sharper your preparation, the better your outcome.

Tags: selling coaching exit strategy