Money
Issue No. 41 - June/July 2008
How to prepare your business for sale
by Kimon Lycos
Private equity firms will only acquire a business if they have a clear exit plan. This model is applicable for all business owners.
Unfortunately, many business owners often sell their businesses without adequate ‘preparation for sale’.
This approach usually ends up with ‘surprises’ being identified during due diligence, when surplus assets are included for no consideration or the after-tax consideration is not optimised.
By preparing your business for sale you can identify and deal with issues that may detract from value. This process also enhances those aspects that will enhance the value.
The key to a successful exit is planning. You need to start with a clear understanding of the value of your business today and develop and implement a plan to enhance this value. You can then commence a sale process at the most appropriate time, which may be when market conditions are ripe or when you are ready.
The value of a business is usually determined by the expected return - free cash flow - growth opportunities and risk.
The risk in a business may be reduced by:
•improving the depth of the customer base
•improving the depth of management staff
•reducing the volatility in earnings
•improving the location of the business
•enhancing the ability to hand over the business to a new owner
•improving the Return on Investment in comparison to other businesses
•reducing the threat of litigation
•enhancing the market position of the business.
One growth strategy that I have seen successfully employed is an effective acquisition strategy before sale. The aim is to grow the business and also deal with identified risks in the business. The acquisition increased earnings to a level that made the business attractive to private equity and also provided greater management depth, reduced the level of competition in the market and diversified the customer base.
Many...
