David Newport: If a buyer came knocking, is your business ready?

Ask any owner whether their company is for sale and they are likely to say 'yes, if the price is right'. It is the condition of the business and its future prospects that determine at what level the asking price is set for a possible transaction.

It's the proverbial 'chicken and egg' scenario: most owners would sell for the right price, and the set price can only be realized if the purchaser is able to verify a business' past profits and maintainable future value and profits.

The acquisition of a business is generally the simplest way for any owner to exit. The buyer pays the broker, the business never hits the open market, and there is an extremely motivated buyer because they chose the company in the first place.

So, what are the big things a business owner needs to do to be ready for a knock on the door?

1. The obvious place to start is the aesthetics. For most people, perception is reality, and you don't get a second chance to make a first impression. Look at paint, signage, gardens, flooring, rubbish and so on. Even if a business is making good money, selling will be a struggle if prospects can't see past the mess to what they would get for their investment. A better option would be to withdraw the business from the market, clean up the premises, and re-launch the sale process.

2. Keep personal and business lives as separate as possible. Although there are obvious benefits of business ownership relating to personal expenses, these need to be kept to a minimum. No matter how accepted the practice is by most parties (except the IRD), it never leaves a prospective purchaser with a good feeling regarding a business.

3. Have current contracts in place. Some business owners operate by handshake for years with customers, suppliers, site leases and even key staff. None of this means anything to a purchaser or their financiers, so formalize everything possible. If they can't be certain of it, or it is not on paper, in most cases it doesn't count. Operating by a handshake means nothing in today's business world.

4. Ensure all financials are current. Verifiable records are essential to demonstrate the historical performance of the company. End-of-year financials and monthly management accounts are the minimum requirement. Ensure that your debtors are in check and that the best possible payment terms have been negotiated with suppliers, because the 'working capital' requirements of the business greatly affect saleability. Any experienced purchaser will add the working capital requirements to the listed sale price of the business, and if these requirements are out of control (the perceived 'price asked' for the business being list price + WC/EBIT), the return on investment will be less attractive.

5. If the business has to hold stock, it is paramount that it is current and in good condition. If there is any stock in the warehouse that has had a 'birthday', a stock adjustment will apply, so get rid of it immediately. If possible, ensure that the business has a modern stock-control programme which can show the business owner and any prospective purchaser how all stock lines move. Stock and its treatment is always a major sticking point in any sales process.

6. Have a business plan that shows the direction the company is following. Make sure it includes budgets, actual targets for growth (customer or products/service) and margins, and ensure that current performance is measured against the targets. The value of any business is based on the risk associated to 'future maintainable earnings', so minimize the perceived risk by having a sophisticated business plan and measuring progress.

7. Put together a comprehensive procedure manual. The risk associated to ownership transition can be greatly mitigated if there is a manual for a new owner, instead of the information being held only between the current owner's ears. A purchaser and their advisers will relax markedly in the due diligence process if they are shown how the business operates day-to-day and can see that everything is documented should there be questions or problems after the owner has exited.

* David Newport is a principal of business sales & acquisitions firm Switch Business Ltd.