How to prepare for a business sale
How to prepare for selling a European company
The preparation for selling your company needs to start very early on, many years before you complete the actual sale. On this page, we first take a step back and start looking at the reason why you want to sell. When we know this, it is easier to determine which alternatives you have, and which type of buyers will be most suitable. After that, we describe the practical items you need to arrange before starting the process of a business sale.
Reasons for selling your business
There can be various reasons for selling your company. Be honest with yourself (and others) about why you really want to sell. If you are tired of pushing the ball up the hill do share this. Knowing this is important, as it determines which type of buyer will be most suitable, what type of transaction you want to make and which actual companies to contact or not.
Here are some reasons why people sell their businesses:
- To retire
- To do other activities
- Financial security (‘take some chips off the table’)
- Consolidation in your industry
- Age: you want to work less but stay involved
- Too much competition
- The company is in financial difficulty
- Economies of scale
- Further development is too expensive, or investments are too costly
The reason why you want to sell your company is where it really starts. Once you know this, it is much easier to determine what the most suitable type of buyer will be. If you do not want to run the company anymore you will need to look for a buyer that brings management. This means that buyers with limited infrastructure and no local management will not be suitable. If an adviser knows this, he or she knows which buyers not to invite to the process of a business sale. Selling your business is not done quickly. Visit the process of selling a business and find a download of the timeframe of the whole procedure.
Options in business sales
The options in strategic business sales are various. Below we give some examples of possible choices to make.
Some of the alternatives you need to consider are the following:
- Cross-border M&A versus local M&A
- Sell the whole or a part of the company
- Minority stake
- Majority stake
- Sell to which type of buyer
- Public (listed company)
- Retire or stay on
- Management buy-in (MBI) or management buyout (MBO)
Type of buyer when selling a business
There can be various reasons for selling your company. If your business is able to grow more quickly with a larger partner, it can be wise to look for a strategic buyer and benefit from synergies that exist between both companies.
Type of buyer you can sell to:
- Strategic buyer
- Private equity
- Management buy-in (MBI)
- Management buyout (MBO)
Once you know your true reasons for selling your company it will be easier to determine which type of buyer you will need to go after. Selling your company to a strategic buyer will most likely help you to realize the highest sales price. If you need further capital, selling to a private equity group would also be a good opportunity. If you care about the DNA and the culture of the company, selling to a long-term manager with a good vision (an MBO) might be most suitable. Visit different types of buyers when selling your company for more details about this subject.
Actual items to arrange before selling your company
In order to achieve a successful sale and to minimize the risk of a failed transaction, owners should start their preparations early. The preparation process begins by recognizing that divestiture is a normal part of the business lifecycle. Success requires understanding that a sale is a process, like any other, that needs to be well prepared.
When selling, you need to have a “clean house” in all areas of the company. It is as simple as that. Any buyer will want to see a well-run and nicely structured company. Further, a buyer will want to see a company with a forward-looking strategy that fits its vision. In the end, this is the reason why they buy a company.
These are some of the main items you need to have arranged before you start a business sale:
- Corporate structure
- Owner independency
- Business procedures and relationships
- Competitors and industry landscape
- Many more …
These are just some of the main items to consider when you prepare for a business sale. We are happy to discuss them in more detail with you in a personal conversation. Please do get in touch, if you want to sell your company and want to better understand how to prepare for a business sale.
Business sale preparation 1: corporate structure
The first item that needs to be arranged is the corporate structure. Do you have the correct legal structure that is interesting for a buyer? Does this structure cover you against negative tax consequences after a business sale? Are all real estate assets separated from the operational business? Many legal items need to be sorted before a business sale.
Business sale preparation 2: owner independency
Making yourself redundant and having a good second-layer management team in place is crucial. One of the items that can decrease a company’s value is the dependency on the owner. Make it easy for a buyer to step into your role. If you have all the knowledge and skills to run the business, the buyer’s greatest fear is that the business will walk out the door when you do. Owner dependency is often most visible in the area of your customers, one of the company’s main assets. Your company should depend as little as possible on yourself when you sell it.
Business sale preparation 3: financials
It is important to have audited and clear financials. Please ensure you have an external accounting firm audit your financials. Preferably, this firm should have a good reputation in the market. The best situation is if you have two, three or more years with audited financials that are consistently reported. Another piece of advice is to leave out personal expenses as much as possible and try to normalize your costs as if you were a regular director. Financials in an information memorandum or during due diligence can be normalized by your adviser but the best is if your annual accounts show the right numbers, and no material normalizations need to be made. For the future, you need to develop financial projections into a sound budget and back them up with a picture of strong potential.
Business sale preparation 4: customers
Very often, customer relationships depend on the business owner. This is risky for a buyer and will decrease the value the buyer will place on your company. You can improve a lot in this area, which increases your company value. A first example is to have well documented and long-running contracts with your customers. Further, passing on the management of individual customers to your sales team, makes these relationships depend less on you. Finally, you should prevent the dependency on a few large customers and have a well-balanced customer portfolio instead.
Business sale preparation 5: business procedures and relationships
For other business relationships, the same applies. Document the policies and procedures that exist as unwritten rules. It is advisable to create procedure manuals. Any buyer will then be able to operate the business without the need to rely on you. Each employee should have a documented and clearly defined role, and a designated set of tasks and procedures which leads to measurable and desired outcomes.
In the area of suppliers, it also helps to document the relationships which are key to your business. Convert any verbal agreements with suppliers into written agreements wherever possible. Written agreements will make your business look stronger and build confidence in potential buyers. Examine existing contracts with suppliers to ensure they will not expire or require renegotiation just as a new owner steps in.
Business sale preparation 6: competitors and industry landscape
The items mentioned above mostly were backward-looking. If you want to increase the value of your company, you will need to have a forward-looking vision. Ideally, there would be a business plan that would be updated annually. This would have a 3 to 5-year strategic vision with the expected developments in your industry. Further, it would have an operational annual plan with a budget for the next year. In all these plans, your competition and how you differ from them needs to be described in detail. This is exactly the reason why a buyer will want to acquire you and not a competitor.
Information to prepare for the sale of your company
Feel free to contact us if you have any questions concerning the preparation of a sale of a company. We have advisers that speak your native language and have experience with many business owners that have sold their company before you. We are happy to share this knowledge and give you some free consultation on what to consider when selling your company.
It is nice to be well prepared. It is also important to have an overview of all the costs involved in a business sale. Visit costs of selling your company to learn more about the financial aspects involved.