David Newport: How to prepare your business for sale

A Q&A with the principal of a firm specialising in the purchase and sale of small-to-medium businesses (SMEs).

When should I begin preparing my business for sale?

The first day you open the doors for business you should begin readying your company for sale; that is, long before you have made any concrete decision to sell. Every business is for sale if the price is right, so make sure it is ready in case someone knocks on your door or your personal circumstances or health suddenly change.

How should I plan for my exit in the future?

You should continue to run your business as you would normally, striving for sustainable growth and cash-flow, but always asking yourself how a new owner might view the decisions you make. Ensure you have clean financial records with minimal discretionary expenses; that all supply, agency and employment contracts are current; that premises are tidy; that stock and staffing levels are optimal; that debtors are current; that there is no prospect of litigation; and that and plant and equipment is functional without any replacement required in the foreseeable future.

When is the right time to exit my business?

There is never a perfect time to exit a business. You have to weigh the pros and cons, considering how well the business is going, whether it is ready to sell according to the above criteria, and where the market stands against the opportunity cost of what you would like to exit for. For example, if you have another opportunity that you would like to take on, you would have to compare what you might lose on exiting your current business to what you might gain on taking on the new opportunity.

Are there any buyers for my business?

In the New Zealand market there are always more buyers than sellers - even in the present economic climate. Today's buyer will require equity to be able make a purchase, because the days of fully-leveraged finance are a distant memory. This has the effect of reducing the number of potential buyers while increasing the quality, so a business broker will have fewer enquiries but also fewer tyre-kickers.

What are buyers looking for in a business?

Buyers are looking for a business that has historical and future maintainable cash-flow. In most cases purchasers can be very flexible in what category of business an opportunity operates in, if it has maintainable cash-flow. A would-be seller will need to demonstrate the historical cash-flows with verifiable financial documentation, and show a potential purchaser that the business' cash-flow can be transitioned to a new owner.

Who do I talk to about selling my business?

You need to talk to an experienced business broker. Start with Google to find the websites of business brokers in your area, and look at the biographies of brokers who have the specific transactional experience that you feel will help in the possible sale of your business. Pick a couple of brokers that you wish to interview, meet with them for a coffee and ask them to appraise your business and give you a proposal on how they would market it should you select them and/or their company.

* David Newport is the principal of Switch Business Ltd , which assists clients with the buying and selling of businesses throughout New Zealand.