Business Planning: Are you ready to sell

FINISH LINE: For many business owners, realising the dream is to sell a successful business.

Your business is probably your principal source of wealth, so when the time comes to sell it you will want to maximise its value. Tom Clarke seeks advice on preparing a business for sale.

For many business owners contemplating selling, one of the biggest problems they are likely to face is deciding on a price.

Ask professional advisers such as lawyers or accountants, and you can get quite different outcomes from each, based on the particular methodology each may recommend.

Ray Kingston, managing director of Link business brokers, says there are no absolutes when it comes to the selling price of a business, other than what the market is prepared to pay. "There are all sorts of formulas used to arrive at a selling price, but at the end of the day you have to apply a sanity test of what the market is going to pay, and that could be anything from half a year's earnings to two or three times a year's earnings, depending on the sustainability of the earnings."

Selling a business is a lot more complex and has more traps for the unwary than most other sales transactions. In the initial planning stage, according to a guide by Deloitte, matters to be considered include:
*Reasons for the sale, since buyers are often cautious, genuine reasons for a sale will be important

* Profit patterns, such as trends in turnover, gross profit and pre-tax profit, are crucial

*Ideally purchasers look for consistent growth in the pre-sale period

* Risky projects should be avoided, capacity should be planned carefully and non-business expenses minimised

*Business composition: maximise value by considering the mix of business and consider piecemeal sales of separate businesses

*Employees, customers and suppliers will undoubtedly be unsettled by a prospective sale and confidentiality is essential

*It is vital that your business can function without you. Issues relating to key customer relationships and management succession may need to be addressed now

*Possible types of buyers and the reasons for their likely interest should be identified so the business can be prepared for sale in the most advantageous way

*Before you sell, you may wish to consult an expert to determine if your business has franchising potential

*After the initial planning stage is completed, if you decide to go ahead, tax-effective structuring prior to sale is essential

The Sales Process

Potential purchasers may include competitors, companies seeking vertical integration, or others seeking synergy, and financial purchasers such as equity companies.

How should you approach a potential purchaser? Although it depends on issues of confidentiality, often a letter or phone call to the chairman or chief executive is best. A one page summary can be a useful marketing tool.

A more detailed memorandum is needed to support the sales process, which includes a review of the business, its organisation and management structure, marketplace, relationships with customers, financial details and forecasts. It's essential that potential purchasers sign a confidentiality agreement before releasing this document to them.

You will need to set limits on the degree of due diligence and investigation you allow a potential purchaser; some matters may be too commercially sensitive to risk disclosure until negotiations are well advanced.

The sales contract marks the culmination of the process, and may only be achieved after protracted and painful negotiation!

Businesses in demand

Food manufacturing is one of the most popular - more so if it involves exporting, followed by industries such as horticulture, floriculture and aquaculture. Retail and hospitality are less popular, but remain the two sectors with the highest turnover of sales.

"There are more businesses sold in hospitality than any other sector - anything from bakery to a lunch bar to a takeaway or restaurant," says Ray Kingston of Link. "That's because there are more of them and people who buy them tend not to keep them for long.

Whereas a sound manufacturing business may stay under the same ownership for 30 years, a lot of businesses in the hospitality sector may change hands every year or two."