Business Sale Readiness Factor #5: Availability of financial information
Monday, 05 July 2021
The third president of the United States, Thomas Jefferson, stated on multiple occasions that “knowledge is power.” My personal view is that application of knowledge is power, but maybe I’m splitting hairs!
When it comes to selling your business, knowledge is not only power, at some point it will need to be shared. One way or another, whether it be early in the marketing phase of the sale process, or towards the latter stages during due diligence, the chances are you’re going to need to disclose your knowledge to the buyer, whether it be good or bad.
The following are areas in which businesses tend to differentiate themselves from being “sale ready” in this regard:
1. Knowing your profit margin by product/service and aligning strategy to this
I mentioned this in Business Sale Readiness Factor #2: Profit Maximisation but it’s worth highlighting again. Without the knowledge of the profit margins on their products or services, businesses are easily drawn to selling the easiest products/services to sell rather than the ones which deliver the greatest profits.
A buyer of your business will need to know your profit margins by products/services so they can devise a strategy to maximise the return on their investment. In turn, it also gives them the ammunition they may need to justify paying you a higher price for your business.
2. Preparing annual accounts promptly after year end
Where timing allows, it’s often worth aligning the launch of a business sale with the release of up-to-date annual accounts. Basic stuff, but it’s surprising how the impatience of some business owners will force their advisors to go ahead with a sale process without up-to-date accounts. Baffled buyers will tend to question the seriousness of the sellers and walk away pretty quickly.
Let’s be honest, you’ve got to prepare the company accounts at some point, so why not do it promptly; get them done and get on with the sale process.
3. Preparing management accounts regularly and accurately
Another basic but crucial point. Turning around reliable management information quickly after each month end or quarter end demonstrates good working practices and reassures the buyer that you’re on top of the numbers.
It should then be possible to go one stage further and start analysing key performance indicators in your business, which, in turn, should allow trends to be reviewed and opportunities found for improvements.
4. Having financial forecasts prepared for at least the next 12 months with supporting assumptions
This point was also covered in Business Sale Readiness Factor #2: Profit Maximisation. If you’re confident your profitability is going to grow in the next few years, don’t leave it to chance that a buyer will pick up on this, quantify it and then factor it into the sale price. You’ve got to do the work yourself. Document it with financial forecasts broken down on a monthly basis and by using an integrated Profit & Loss, Cash Flow and Balance Sheet. Then back this up with robust written assumptions.
In a business sale last year, we added more than a million pounds to the sale price by doing just this. It’s hard work, but the investment is well worth it.
The above key factor is taken from our free and insightful ‘Sale Readiness’ diagnostic tool which aims to give business owners a score on the nine key factors determining:
- How attractive your business is for sale;
- Whether you will maximise the final business sale value; and
- The efficiency and smoothness of your business sale process.
The online tool takes only five minutes to complete and your results will highlight the top three factors which are working well and the top three factors which require the most attention before you consider a business sale process. You will also be able to see how you compare to the global benchmark (average scores of all completed diagnostics) on each of the nine factors.
Of course, if it would be helpful, my team and I would be pleased to discuss your results and guide you on your next steps. In addition, each month I will be releasing a blog, just like this one, on each of the nine business sale readiness factors to help bring them to life.
Next month’s blog: Business Sale Readiness Factor #6: Systems and administrative housekeeping