Grooming your business for sale

Just like achieving a good result with a house sale, it is usually better that the transaction is planned. If you were selling your house you would ensure that everything looks its best before allowing potential purchasers to view the property. You need to do the same with your business. Clearly it is always better to sell when the sales and profit graphs are on the up.

Let’s assume your business is growing and profitable. You’ve attracted a potential purchaser and provisionally agreed the main terms of the sale. Typically, the potential purchaser will then conduct checks to ensure all is as it seems. This is referred to as due diligence.

If your business affairs are not in good order, the due diligence process can be lengthy and costly. This could range from involving your professional advisers in answering lots of questions through to the potential purchaser identifying issues which chip away at the price you have provisionally agreed for the business.

The most efficient way to deal with due diligence is to ensure that there is nothing for the potential purchaser to find. Five areas that you should always consider are:

Taxation If you are selling a company, the new owner inherits your tax history, so any potential purchaser will want to ensure that they do not inherit past mistakes. 

Ensure all your tax returns and payments– VAT, PAYE, corporation tax, etc. are up to date. Be particularly careful with benefits in kind – these often cause problems. Keep records of all correspondence with HMRC, especially if it confirms their acceptance of your responses to enquiries that they raised with you. Consider asking your professional tax advisers to conduct a health-check of all your tax affairs and ensure that any contentious issues with HMRC are resolved before marketing your business.

Employees Employment issues can also be a cause for concern. Do you have current employment contracts for all your staff? Are there any pending employment tribunals or claims against your business? Do you have a legacy pension scheme which you need to address? Ideally these issues should be resolved prior to a sale.

Contracts Ensure your sales contracts with customers up to date. Over reliance on a small number of customers can reduce the price paid for a business so if necessary, take steps now to broaden your customer base. Is your sales ledger in good shape? Do you have unallocated cash or credit notes that need to be tidied up? This is equally true for suppliers. The absence of a contract with a key supplier could be a deal breaker if the potential purchaser can’t secure the supplies they need to continue the business – gentlemen’s agreements will not suffice!

Assets Are your assets in good order? Can you prove that you own them? Do you service records and maintenance logs to show that you’ve looked after them? Do you have copies of the HP and finance agreements? Consider the revaluation of assets to bring valuations up to current market levels. Sell any assets that are surplus or are not used in the business. Does your stock include items that are rusty or dusty? Ensure that they are valued appropriately.

If your business has intellectual property rights, is their ownership properly established and recognised? Do you have current licences for the software that you use in the business?

Management and control A business with significant owner-manager involvement, for example, may require a review of its management structure: potential purchasers may not be keen on a company that is dependent on one or two key individuals – especially if those people are exiting. It may be appropriate that a strong second-tier of management be gradually introduced for this reason. Are your controls documented? Are they effective? Reviews of best practice in several areas may be instigated and more formal recording and reporting processes implemented.

Due diligence in these areas is something you should expect when the time comes to sell – pre-empting these issues will make your company more efficient, enhance its value and make for a better ‘story’ for potential purchasers.

Good preparation should ensure that you are not side-lined with bureaucracy and can focus on getting the best possible deal. As Warren Buffet said, “Someone's sitting in the shade today because someone planted a tree a long time ago”.