Business mentor: Do the legwork for a quick, smooth sale

Q: How should I prepare my small business for sale?

A: Peter Taylor, of BDS Chartered Accountants, replies:

In getting your business ready for sale you should remove all obstacles to the process and ensure that the business is presented in the best light. A business owner can spend a lifetime building a company and then compromise value when selling it.

It can be useful to use a business broker, so that you can concentrate on running the business, keeping it profitable and maintaining confidentiality throughout the process.

A broker can also assist you with determining a realistic market value. Lack of experience may lead to time-consuming delays or costly mistakes by not being able to work a prospect or close a sale.

Your lawyer and accountant will always be involved whether you use a broker or not. Some due diligence can be done before the sale to mitigate any risks and identify potential problems that can be solved in advance.

You will need to be clear on what you are selling. For most small businesses, a sale of the assets and trading name is usual, as a sale of shares can expose a potential buyer to considerable risk by acceptance for any contingent or actual liabilities of the old business. With an asset sale, fixed assets, inventory and goodwill would be sold, with the vendor retaining debtors, creditors and bank balances.

For the vendor, a share sale is clean and can result in a capital gain on the sale of shares. But we would recommend that this decision be made in conjunction with your accountant, as you will have to consider such things as shareholder continuity and excess tax credits in the company, among other tax planning considerations, to ensure that the best decision is made in your particular circumstances.

When marketing, ensure that you manage the confidentiality aspects. A sale can often hinge on retaining key staff members.

Also beware: the purchaser can rely on representations made and it is not unusual for an aggrieved buyer to seek redress in court.

The timing of the sale can be critical to achieving the best price, as there may be negative industry sector information, notwithstanding that the business has performed exceedingly well and appears to be bucking the trend.

Ensure that you have prepared sufficient information to support buyers' inquiries. This will help you to close a sale sooner.

The usual information required by potential purchasers would be:

* Business profile.

* Competitor information, and your positioning in the market.

* Information on the size of the market and its potential for growth, and in particular how well-placed you are to take advantage of that growth.

* Financial information and copies of accounts for the past three to five years.

* Usually the accounts are required to be modified to add back items such as interest and a fair assessment of the directors' remuneration. To add credibility, have these prepared by your accountant.

* Interim management accounts with some explanation of trends. It would also be useful to supply budgets and projections if available.

* Employment contracts for key staff.

* The spread of customers and suppliers so that the buyer can assess any exposure that could make the business vulnerable. Naturally, it would be useful to demonstrate a lack of dependence on any one customer or supplier or make available details of any contracts.

Selling a business has plenty of traps for the unwary, but many things can be done in advance to maximise value and remove the perceived risk to the buyer.

As value is closely linked to growth prospects, the more that can be done to support the view of a growth-oriented business with minimal downside, the better the price and the smoother the sale process.

* Peter Taylor is managing director of BDS Chartered Accountants, who specialise in business development, working with small-medium businesses.

Contact Peter at 0800 829-627 or at petert@taxmaster.co.nz

* Send Mentor questions to: ellen_read@nzherald.co.nz. Answers will be provided by Business in the Community's Business Mentor Programme.