Preparing a business for sale or transfer

Whether a business is transferred to family, sold to management or sold externally, the same preparation increases what it is worth and whether the transfer succeeds at all.

Reducing owner dependence

The single largest value driver, and the hardest for an owner to accept.

A business where the owner holds the customer relationships, makes every significant decision and carries the technical knowledge is worth substantially less than one that runs without them.

The practical work: transferring relationships to other staff, documenting how things are done, delegating decisions genuinely rather than nominally, and taking extended absences to test whether it holds.

An owner who cannot take four consecutive weeks away without the business suffering has identified the problem.

Financial records

Buyers and lenders assess what they can verify.

Several years of consistent, accurate statements. Ideally reviewed or audited, depending on size.

Personal expenses run through the business — extremely common in owner-managed companies — reduce apparent profitability and complicate diligence.

Cleaning this up requires two to three years of clean statements before it is useful, which is why the preparation period is measured in years.

Separately, the owner's own compensation should be normalised to a market rate, so that a buyer can see what the business actually earns.

Customer concentration

A major factor in valuation.

Where a large share of revenue comes from a few customers, a buyer discounts heavily for the risk of losing one.

Diversifying the customer base takes time and is one of the more effective ways of increasing value.

Where concentration cannot be reduced, longer-term contracts with those customers mitigate it partly.

Contracts and relationships

What survives a change of ownership.

Customer agreements with assignment provisions. Supplier arrangements. Leases with reasonable remaining terms and assignment rights. Licences and permits.

Anything terminable on change of control is a diligence issue, and it is worth identifying and addressing before a buyer finds it.

Employment arrangements matter too. Key staff without contracts, and without any incentive to stay through a transaction, represent a risk a buyer will price.

The management team

What a financial buyer is largely purchasing.

A second layer of management capable of running operations is both a value driver and the mechanism by which a management buyout becomes possible.

Building it requires giving people genuine authority and financial information, which many owners resist.

Retention arrangements — bonuses payable on a transaction, or equity participation — align the team's interests with a successful sale.

The diligence preparation

Anticipating what will be examined.

Corporate records, minute books and share registers, which are frequently incomplete in owner-managed businesses.

Intellectual property ownership, including whether work created by contractors was properly assigned.

Litigation and disputes, current and threatened.

Tax compliance, including payroll and sales tax filings.

Employment compliance, including worker classification, which is a common area of exposure.

Environmental matters where relevant.

Insurance coverage.

Assembling this in advance, and fixing the problems found, prevents the price reductions that emerge when a buyer finds them instead.

The valuation reality check

Obtaining an independent valuation early does two things.

It calibrates expectations, which are consistently too high.

And it identifies which improvements would move the number most, which directs the preparation.

A valuation obtained three years before a sale, with the recommendations acted on, frequently produces a materially higher price than one obtained at the point of sale.

The personal preparation

Discussed elsewhere on this site and worth repeating.

Owners who have not decided what they will do afterwards find reasons to delay.

Deciding that — a phased role, a specific commitment elsewhere, a plan for the time — is frequently what determines whether any of the rest gets executed.

The timeline

Set out plainly, because the expectation is generally too short.

Three to five years of preparation to address owner dependence, clean up records and build the management team.

Six to twelve months to market the business and negotiate terms.

Two to four months of due diligence and documentation.

And frequently a transition period afterwards during which the seller remains involved.

Which means an owner intending to exit at sixty-five should begin the work in their late fifties, and the most common regret reported is having started too late to fix the things that would have raised the price.

General information only, not legal, tax or business advice. Consult qualified professionals about your own circumstances.