How to Build a Sale-Ready Business Before You Exit

James Shand of vfdnet explains why preparing early can build the value of your business, strengthen its finances and processes, and give you more choices when the time comes to sell.

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When business owners start talking to me about a future sale, one of the first questions I am often asked is:

“What is my business worth?”

It is an understandable question. You may have spent 20 or 30 years building the business and, when you begin thinking about what comes next, you naturally want to know what all that hard work has created.

But before getting too focused on the number, there is another question I think is just as important:

“If a buyer looked closely at your business tomorrow, what would they find?”

Because the value you hope for and the value a buyer is prepared to pay can be two very different things.

Over the years, and through more than 30 completed deals, I have seen some very different approaches to preparing a business for sale. I tend to think of the owners as three types:

• The Wild Goose
• The Wishful Goose
• The Wise Goose

Which one sounds most like you?

The Wild Goose

The Wild Goose runs their business in a way that works perfectly well for them.

Cash comes in, bills get paid and the business keeps going. But there may be no meaningful monthly management accounts and little detailed understanding of margins. Ask which customers or products are most profitable, and the answer may be based more on gut instinct than financial analysis.

“It works for me. I’m happy.”

And while the owner remains firmly at the centre of the business, perhaps it does work.

The problem comes when somebody else is being asked to buy it.

A potential buyer needs more than the owner’s knowledge and gut instinct. They want evidence. They need to understand where the profits come from, the strength of the margins, how the business operates and whether performance is sustainable without the owner at the centre of everything.

What works for you may not be enough for a buyer.

The Wishful Goose

The Wishful Goose looks rather more prepared.

They know their business well and can talk confidently about customers, margins and performance. But much of that knowledge may still be held in their head rather than supported by accurate financial information and robust processes.

“I don’t need accurate accounts to tell me how I’m doing. I just know.”

The Wishful Goose is also known as the Wing-it Goose. And winging it becomes much more difficult when due diligence starts and everything is put under scrutiny.

We recently worked with a business preparing for sale to a private equity-backed group. The buyer requested 36 months of monthly accounts. When the figures were reviewed, reported gross profit margins ranged from 0% to 90%.

The information had to be reworked and prepared properly for the data room before the deal could progress.

Sometimes the consequences can be much more significant. I have seen a business enter due diligence on a £9 million deal and ultimately be acquired for just £3.3 million.

Another owner may discover that they are simply too critical to the business. That can leave them facing a substantial earn-out or having to work for the new owner for another two or three years.

By then, it is rather late to start fixing the fundamentals.

The Wise Goose

The Wise Goose takes a different approach.

They start preparing at least three years before their planned exit, developing a clear strategy, identifying gaps and putting stronger processes and financial information in place.

“Prior planning prevents poor performance.”

Three years may sound like a long time, but buyers want to see a track record. Good management information, strong financial controls, repeatable processes and a capable management team are not created overnight.

I worked with one business owner for two years ahead of a sale. We improved the management accounts, developed their Financial Controller and helped prepare the business thoroughly for due diligence.

Despite the business being around break-even, it sold for £2 million to a private equity-backed group. The owner walked away after just one week.

That is quite a different outcome from discovering during negotiations that the buyer needs you to remain for several years because too much of the business still depends on you.

A sale-ready business is a stronger business

There is another reason I encourage owners to start early.

Preparing your business for sale should also make it a better business to own.

Stronger financial analysis gives you a clearer understanding of where profit is really being generated. Better management accounts help you make better decisions. Robust and repeatable processes make the business less dependent on individuals, while developing the management team creates greater resilience and capacity.

All of those things can help build the value of the business.

And if, three years down the line, you decide you are not ready to sell? The work has not been wasted. Everything else being equal, you will have a stronger, better managed and potentially more valuable business as a result.

Preparation gives you choices

Becoming sale-ready does not mean deciding today exactly how you will eventually exit.

In fact, good preparation gives you more choice.

Depending on your business, your objectives and what matters to you personally, your options could include:

• a trade sale
• a sale to private equity
• a management buyout
• a sale to employees through an Employee Ownership Trust

For some owners, employee ownership can provide a planned succession route while helping to retain the legacy, ethos and values they have spent years creating. For others, a trade sale, private equity or management buyout will be a better fit.

There is no single right answer.

The important thing is to be able to make that decision from a position of strength, rather than discovering too late that weaknesses within the business have limited your choices.

How sale-ready is your business?

So, back to those two questions.

What would a buyer find in your business today? And what might your business actually be worth?

For Cotswold Networking Magazine readers, I am offering a Wise Goose Business Value & Exit Readiness Snapshot.

The normal cost is £2,500 + VAT. For the first three business owners who respond, it is available for £1,000 + VAT.

The offer is particularly relevant if you:

• have more than 10 employees
• have turnover between £1 million and £10 million
• are aged 50+ and beginning to think about what comes next

The aim is to identify the key financial, operational and succession red flags that could affect the value or saleability of your business while you still have time to address them, alongside giving you an estimated current value for the business.

You do not need to be ready to sell now. In fact, that is rather the point.

Don’t wait until you are ready to sell to discover whether your business is ready to be bought.

To take up one of the three available places, email James Shand with the subject Cotswold Magazine Wise Goose.

About James

James Shand BSc FCA CF is the founder of vfdnet and has been involved in more than 30 completed business deals, including sales to private equity, management buyouts and Employee Ownership Trusts. He works with SME business owners to strengthen their businesses, prepare for exit and understand the options available to them.

Connect with James on LinkedIn or view James’s profile on vfdnet.com.