Q: “Why should I get my business ready for sale when I’m not planning to sell it anytime soon?”
For lots of reasons actually. But probably the most important one is that if your business is not ready for sale you are not getting the best out of it. Everyone has their own reasons for why they got into business and regardless of what those reasons are, generating cash from the business is usually the key to satisfying them. It just so happens that the things that maximise the potential sale value for your business also maximise its earning potential. So your business should always be ‘ready for sale’.
What I often see happen is the opposite. The business owner decides they are paying too much tax so they don’t declare all of their income, they pay all sorts of personal expenses from their business account and deliberately run as close to break-even as possible. Aside from the very real risk of being caught out by an audit from the Australian Taxation Office this tactic is very damaging to your business value.
Eventually, when it comes time to sell, the business owner wants to maximise the sale value and as the business’ value is based on a multiple of profits (which have been deliberately minimised to avoid tax) there is a big disappointment. Sadly, you can’t “have your cake and eat it too”.
Now, I know there’s some readers who’ll think “I’ll just boost profits in the year I want to sell and I will get top dollar.” But be aware, buyers are not stupid and they’ll always become suspicious when they see that the most recent year’s results are drastically better than prior years. The most valuable businesses have a track record of consistently good profits – at least three years as a minimum. These are the business that attract multiple buyers and a top-of-the-market price.
Q: “How do I go about getting my business sale ready even though I have no intention of selling?”
For the SME business owner, the best source of this type of advice is a virtual CFO. They will help you amplify your recurring business profits and focus on the all-important sales growth. They will help you clean out your balance sheet and eliminate any non-business related expenses – especially personal expenses of the owner. This all sounds straightforward, but there’s a few specific actions to attend to.
1.Review your management structure
It is important that your business is well staffed. If you have a management layer in place ensure you understand exactly what they are doing, and how well they are doing it. Have your virtual CFO assist you with documenting your procedures into a manual that spells out what each team member does and what they are responsible for. This will make it simple for someone looking to buy your business to understand how it operates and reduce some risk to the buyer.
2.Improve profitability and sustainability
Frequently review every facet of your business with the view to improving sales, increasing your gross margin and reducing overhead expenses. Maintain a policy of requiring multiple quotes for expenses over a certain limit and ask for discounts. Small improvements across multiple areas will result in a much better bottom line. Remember there are just four ways you can grow your business:
- Get more customers (of the type you want)
- Get them to buy from you more often
- Get them to buy more from you each time you deal with them
- Improve your systems and processes
3.Review the way you accounting for private expenses
Nearly all small and medium businesses include some form of private expenses in their profit and loss. Examples such as private travel, entertainment, home utilities, some motor vehicle expenditure and so on. Including these expenses reduces your profitability which is the last thing you want when you are trying to maximise your business value.
4.Improve the cash flow
Everyone likes a business with a good cash flow. You need to work on getting the cash in from your sales as quickly as possible. Have a debtor’s policy in place and stick to it. Ensure you have proper stock control and your turnover of stock is at best practice levels. If you have non-business assets on the books, either dispose of them or at least get them off the books.
5.Review your HR capacity and commitments
Is your business carrying more employees than it really needs? Are there non-core functions that could be outsourced to save the business money? Do all employees observe the core values of the business? Those employees you have need to be good quality ones – preferably multi-skilled. Be aware of what leave entitlements your team members have accrued and keep it to a manageable level.
6.Establish effective budgets
A prospective buyer will take comfort from a business that can demonstrate a good track record of preparing budgets and actually hitting the targets. This is a classic indicator of a well-run business and gives confidence to the buyer.
7.Monitor key performance indicators
Ensure that you have a good system for monitoring key performance indicators. A simple dashboard of the key drivers in your business will save you hours of time poring over financial reports and tell you what is working well and what is not!
For more information on what KPIs to measure, download a free copy of my eBook “The Magnificent 7” – an easy 7 minute read that is light on jargon and big on easy to implement ideas.
Some of the KPIs you may like to monitor include:
- Sales growth
- Number of quotes per week
- Percentage of successful quotes to quotes given
- Number of product defects per month
- Sales target for month
- Profit target for month
- Number of sales calls per day
8.Review your assets
Ensure all your plant & equipment is in good order and that you do not have surplus. Holding onto surplus stuff for sentimental value or ‘for a rainy day’ is unwise. Turn it into cash and free up the space. Review your stock for any obsolete items have a sale to turn them into cash.A business that is lean and operating at maximum efficiency will be maximising profit and generating good cashflow.
About David Officen
David is a virtual CFO and the Founder and Managing Director of proCFO.
David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.