Preparing a business for sale: where and when to clean up

Getting your business looking ship-shape and tidy is a vital element of the pre-sale process. Buyers are more likely to see the company in a favourable light when it appears to be organised and well-managed – so doing your housekeeping is incredibly important.

In this four-part series, we’re looking at each of the core elements needed to prepare your owner-managed business for a sale.

In part three, Paul Simmons, Senior Partner at Haines Watts Slough, explains which areas to declutter and tidy, and the importance of seeing your company through the eyes of the buyer.

Keeping your house in order

When it comes to preparing your business for sale, we’ve already looked at the need for a robust sale plan, and how to enhance the quality of earnings  as the seller. But a critical part of any sale process is carrying out the necessary housekeeping.

If we liken selling your business to selling a house, it’s easy to see why you’re more likely to get a quick and profitable sale when your house looks like an attractive option to a buyer. A tidy and declutter of the company helps to get rid of any mess that a future buyer won't need.

Housekeeping is a two-part process:

1. Tidying = getting the house in order and making it an attractive proposition. This will mean looking at the company structure and the organisation and making sure you’re selling a lean, organised business.

2. Decluttering = getting rid of the things you no longer need. That means throwing out all the old agreements, out-of-date documentation and unnecessary mess that’s been clogging up the business.

Looking through the eyes of the buyer

The main focus when going through your housekeeping process is to always see things through the ‘eyes of the buyer’ – that’s the key to success here.

A potential buyer will be looking for a purchase that presents as few hurdles as possible. If we return to the analogy of selling your house, your buyer is not looking for a ‘fixer-upper’ in most cases. What they want is an attractive business proposition that’s ready to move into.

So an interested buyer will look for:  

• An organised business where everything looks ship-shape

• An experienced management team to run the company

• The potential for future profits and a good return on investment

• A lack of any hurdles or pitfalls that may derail the sale.

If you’re going to attract your perfect buyer, it’s time to get out the mop and bucket and start doing the hard graft needed to make the place shine like a new pin.  

Tidying up the business

Over time, any business will evolve. Companies will grow organically, directors and managers will come and go, and old processes, agreements and contracts will be forgotten.

Tidying is your chance to do a proper ‘deep clean’. And, generally speaking, there will be some common areas in need of attention:  

• Employee contracts – if you’ve grown over time, it’s likely many of your first hires won’t have proper employee contracts, or that there are discrepancies around pay, remuneration or benefits between new and old employees. Sorting out the contracts helps you get a level playing field on all employee agreements.

• Supplier contracts – equally, it’s important to have formal contracts and agreements with your suppliers. For example, you may have an agreed £20,000 annual rebate from a supplier that’s never been formalised. Get this in writing so the rebate can be quickly evidenced by your buyer.

• Quality of the back office – buyers expect quality throughout the business, including the quality of the internal recordkeeping and paperwork. The housekeeping of these is likely to influence the multiple that is applied to the profit level. If all the administrative boxes have been ticked then it's much easier to argue for a high number.

• Customer agreements – being able to evidence that customers are locked in will clearly help with the sales price. So make sure that you’ve got documented agreements around areas like discounts, agreed orders in the order book and that everything’s been formalised, rather than just being agreed during a casual chat.

• Property contracts – property and leases often cause problems during a sale. If there's an issue which exists on a lease – maybe you’ve carried out improvements to the building that the landlord hasn’t approved – this will raise questions for your buyer. If the buyer's solicitor latches onto a legal issue then you're in for a world of pain. So it’s sensible to give these property contracts the once over.

• IT and software contracts – with software so integral to most modern businesses, having your IT contracts and subscriptions in order is a must. You should be able to evidence that you're fully compliant with your software licenses, numbers of users and that everything’s up to date. If your buyer can’t prove they have access to a fundamental software system, this could give them cold feet.  

No pain, no gain!

A lot of the housekeeping process is going to be painful, and won't directly increase the profits of the business. But it’s worth remembering that there are two aspects to a valuation.

One aspect is the amount of profit, and the other is the valuation multiple. Going through the tidying process is not about changing the profit amount. But it is about changing the multiple to demonstrate that the quality of the business goes from top to bottom.

With this in mind, let’s switch our focus from tidying over to decluttering…  

Decluttering the business

As we’ve explained, decluttering is about getting rid of the rubbish that’s accumulated in the business. And, if you’ve never been through this process, you’d be surprised how much mess and out-of-date information can build up over time.

Some key elements to declutter will include:  

• Litigation – if you've got bits of old litigation floating about around staff claims, or other legal claims, now’s the time to go through these and get rid of the clutter.

• Old creditors and debtors – if you've got debtors which are a year or two years old, then they need sorting out. It just looks bad if they're not dealt with. Similarly, with creditors. If you have old creditor balances, then all that stuff needs tidying up and decluttering.

• Filings – a standard due diligence question will be 'Are the filings up to date?'. So your tax returns, annual accounts and confirmation statements all need to be up to date. And any enquiries from HMRC need to have been resolved.

• HR and staffing – your buyer wants a solid team in place. So, it’s critical that your management team is in the right place to operate without you. You may need to move people around the structure and having an effective HR team will help with recruitment, remuneration and staff contracts.

• Statutory records of the company – having your company minutes, shareholder listings and shareholder agreements evidenced is crucial. For example, you could have an old shareholder in your records who actually died 20 years ago, where no-one's bothered to sort out their shares. Statutory records need to be properly maintained to evidence who the current and correct shareholders are, and that dividends in the past have been properly minuted and approved.

• Overheads and costs – getting proactive about pruning overheads is a good idea. A careful review of costs helps you cut out any lazy expenditure and ensures you’re running a tight ship when it comes to your finances, overheads and potential profitability.

• Customer relationship management (CRM) – chucking the rubbish out of your CRM system is also a sound move. Whether you got a Rolodex, a planner on the wall, or a cloud CRM system, it could still be full of rubbish. So, regardless of what system you're using, get rid of any old data and ensure that everything’s current.

   

Getting ready to give up ‘your baby’

Most of this prolonged housekeeping process is based around dry and relatively tedious administration tasks. But there’s one element of selling the business that’s extremely personal and emotive, as the business owner...

As the seller, you’ve got to get yourself in the right mindset to deal with the loss of ‘your baby’. So, it's about the emotional loss of this company you’ve spent years nurturing, and also the fact you’ll lose the ability to make decisions on the future of the business.

It’s a big step for you, as an owner, but with the right preparation, support and guidance, it needn’t be a stressful or upsetting experience.

We’ve got decades of experience of working with sellers and buyers. So if you’re preparing to sell your business, we can walk you through what needs tidying, which elements of clutter to chuck out and help you prepare yourself for the next stage in your business journey or retirement.

Part 4. Management info and due diligence

Before a buyer signs on the dotted line, they’ll want to know as much detail as possible about the company they’re purchasing. In part 4, we’ll examine how running a smooth due diligence process is a critical final stage in the process of selling your owner-managed business.  

Talk to one of our Slough Business Advisors about selling a business.