Evaluate and Prepare a Company for Divestment

Refine the operation, so it produces maximum profits as well as structures the business to transfer ownership with minimum impact on operations and profitability.

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Here’s a checklist of what you need to do and understand to prepare your business for divestment.

Get the Records Straight

Some business owners are very diligent at keeping detailed, up-to-date accounts and records relating to contracts, customers, staff, leases, asset ownership etc. Some are not so diligent. The first step in preparing your business for exit is to get the books up to date, so there is a clear picture of your operation, with supporting facts and projections. In addition to your existing accounts, ask your accountant to prepare a set of ‘normalised’ accounts to show maximum operating profits. This means adding back any expenses or purchases (sometimes personal) not directly related to your business’s operation. An explanation of any such corrections is usually required, and you should be prepared to discuss this openly.

Eliminate the Perks

You will need to review how unreported cash sales (if any) and any personal items that are paid for by the company, such as travel or entertainment, are managed. Unravelling personal expenditure from that of the business can make a big difference to the selling price. For example, a $20,000 trip paid for by the company is essentially $20,000 off the bottom line and could reduce the sale price by four or five times that amount. Review leased and financed assets to see whether they are better converted into wholly-owned assets. In an ideal world, business owners should plan for the sale of their business from day one and work through a process of ‘grooming’ it to achieve optimum value.

Review Accounting Policies

Accounting policies vary widely, and business owners may discover that their accounting policies are not the same as others in their industry. Some accounting policies are tax-driven, resulting in conservative profit recognition. Whereas others are earnings driven, seeking to maximise profit. Changing your accountancy policies to conform to those of your industry may increase your business’s market value. When someone is looking to buy a business, consistency of practices and conformity to industry standard will be important. Financial information must be current and accurate. If you’re selling halfway through the year, ask your accountant to prepare half-year accounts.

Are You Critical to the Business?

A business is more attractive if its success is not solely dependent on the owner’s input in terms of operational know-how, technical skill or personal relationships with clients or suppliers. It is helpful to have a reliable management team to demonstrate that the business will continue to be successful once the owner has left. Most companies looking to buy a company expect the seller to continue working in the industry for a short transitional period following the sale. Others prefer a more extended period or even indefinitely, which can be negotiated and included in the Sale and Purchase Agreement. This sometimes occurs when an owner is a critical part of the business.

Should You Invest in Your Business Prior to Sale?

When looking to buy a business, buyers will consider the level of debt and the quality of assets, particularly in manufacturing operations. Generally, the sensible advice is to continue investing in the business as if you were going to keep running it yourself. This enables future growth opportunities and opens up new doors for potential profit in the long term, both of which look good to potential acquirers. When a buyer looks to evaluate a company, a healthy and current investment record will show confidence and assurance. LINK Enterprise can provide advice on these and other aspects as part of a structured programme covering the grooming and marketing of the business.

Will You Offer Finance?

It is not uncommon for a business owner to be asked to leave finance in the business. This can be a good way of helping achieve maximum value for the seller. It gives the purchaser additional confidence in the company, knowing that you will continue to have an interest in maintaining its success. This particular custom is more than a show of good faith; it ensures that the business will continue running profitably and with investment through the transitional period and into the new era of ownership. Those looking to buy a business often find this is a good security blanket for what is a significant investment of their valuable time and funding and is known to contribute to trust.

Things You’ll Need

LINK helps you prepare the following information, in association with your advisors, to ensure the information is presented appropriately.

Profit and loss accounts for two to four years

A schedule of abnormal and/or non-recurring costs in the accounts

Brochures or marketing information of your product(s) or service(s)

Historical background on the business

Schedule of plant, equipment and any equipment leases

Copy of franchise agreement (if applicable)

GST Returns for current trading year to date

Stock value estimate within 10-15%

Lease details including rent, term, renewals, outgoings, etc.

Staff levels, including part-timers and contractors

Staff employment contracts including EPP clauses

Details on any trademarks, patents, licenses, agencies or intellectual property (IP)

Details of any major strengths and/or commercial advantages

Competitor analysis

SWOT analysis

Business organisational chart

Business plan

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