Preparing your business for investment or sale
Updated: Oct 1, 2018
How much would, or should, you sell for? How many shares would a £100,000 investment buy? How do you figure that out? Well, you’ll need to value your business to have at least a minimum price you would accept and maximum someone might be willing to pay. Privately-owned businesses (whether private companies or sole-trader businesses) are very difficult to value. However, whilst a valuation is one key area, another one is actually preparing for major investment or the process of an outright sale. Using the analogy of a car, (if you don’t know, I’m a ‘petrolhead’) it is the equivalent of ensuring that the car is in good working order, in great interior and exterior condition, legal for the road, and all its service history and other paperwork is up-to-date.
So, whichever valuation method you use – and you could use more than one – it will be imperative to get your company’s affairs in order, with the aim of facilitating financial analysis from multiple perspectives, and preparing for investors going through their due diligence process. The better the preparation, the smoother the due diligence process will be, and the more attractive your company will look to investors.
What that looks like…
You should ideally have monthly management accounts, so make sure they’re up-to-date, and kept so. Additionally, have a look at whether your management accounts can be ‘sliced and diced’ to view sales, expenses, and profit for different verticals (sometimes people only do this for sales and direct costs). Ensure that it is fairly simple to drill-down from headline numbers to the underlying detail. Note that this is no easy feat if your accounting system hasn’t been designed with this in mind at inception.
Prepare robust forecasts of the annual profit and loss, balance sheet position, and cash flows – if possible for 5 years ahead. The nature of your industry may dictate that these should be broken down to monthly figures. Depending on your potential buyer, there may also be a case for preparing a forecast adjusted for post-acquisition synergies, just to try and stay ahead of the game. It will also stand you in good stead if your systems and forecasts are pre-set to allow easy re-forecasts based on different scenarios which may be brought up during negotiations.
If your company hasn’t had an audit before, bear in mind that some prospective buyers may want you to have had one. This gives them extra assurance that the financials are as you say they are. Audits can take some time – from booking to completion – and can be expensive, so you’ll need to think ahead as to whether it is a necessary and justifiable process to achieve your desired outcome.
You should be showcasing a slick operation. So, both your internal and external systems should be reviewed and streamlined, with any glitches - that you might have lived with so far - put right.
Things like your ‘customer journey’, ordering and fulfilment process, customer services, and recording of relevant information should be smooth, efficient, complete, and accurate.
Ensure all compliance related issues are above board and up-to-date. This may be either routine things like trading licence renewals, filing of Statutory accounts and taxes, insurance, or more bespoke things like compliance with bank loan terms. Creditors should, of course, be paid within agreed terms, with clear, logical reasons in any cases where that hasn’t happened.
Review issues such as key person cover and your disaster recovery plan, and make sure proper procedures are in place, and are demonstrable where possible. Check that relevant data security is up-to-scratch and fit for purpose.
There will be other areas to cover, and different ones for each business, but the aforementioned are the main common areas.