How to Prepare Your Micro Business for Sale
Gareth Smyth, Hilton Smythe
Gareth Smyth is one of the founding Directors and owners of Hilton Smythe. Having worked in the Business Sales arena since 2006, he has a wealth of experience in helping buyers and sellers of businesses.
Hilton Smythe experienced a 29% growth in enquiries from buyers at the beginning of the pandemic compared with the same period of the previous year, which is perhaps not something you'd expect at a time of such uncertainty. He writes for us today on what you, as micro business owners, can do to prepare your business for sale in the event you're looking to move on. Over to you, Gareth!
If you are reading this article, chances are you are either considering or have decided that you’d like to sell your micro business. For whatever reason you may be selling, whether that is due to financial difficulty or COVID uncertainty, now is actually a great time to get your business on the market – in fact, Hilton Smythe saw a +29% increase in buyer enquiries at the start of the first lockdown compared to the same time period in 2019.
This genuinely came as a bit of a shock to us too, but over the past year, buyer demand has remained strong across all sectors. Many business owners who considered selling at the start of the first lockdown completely withdrew due to uncertainty, a trend seen across the whole industry, meaning there are now more buyers than sellers out there – great news for anyone looking to sell now!
The important thing to remember, though, is not to rush. Even if you want to sell your business in a year or two, preparing for sale early is absolutely essential and sets you up for a smooth transition – especially when it comes to increasing profit and/or multiple, which can boost the value of your business, but more on that later. Below is a round up of key factors to consider when preparing to sell your micro business.
Get your accounts organised
First and foremost, having your accounts set up properly from day one can avoid a lot of stress further down the road. As a micro business, it’s likely that you may only record income and expenditure, but if you inform your accountants early that you plan to sell, they will understand how best to lay out your accounts to best appeal to a prospective buyer.
Typically, buyers like to see three years’ worth of trading and accounts to get an understanding of what money is currently being spent on, as well as evidence of long-term clients and consistent and increasing revenue streams. They will want to see that the accounts align with the price that your business has been valued at. Although, if a buyer is specifically searching for a micro business, the three year time period is often reduced as many micro businesses may not have been trading for that long.
You should get to know your accounts inside and out as you will be asked plenty of questions about them during the sales process. Questions to definitely bear in mind are: How have the business’s costs fluctuated since the day it was founded? How much revenue have you turned over across the past 12 months? Where does most of your output go? If you stumble on any of these answers, it doesn’t instill buyers with the best confidence in your business.
Sort out other necessary paperwork
Along with your accounts, buyers want to see other relevant paperwork such as VAT returns, tax returns, a full list of assets (including software and memberships as well as receipts for physical items), and any licencing information. Perhaps you do this by printing off hard copies of each and storing them in a folder ready to hand out.
If you are registered as a limited company, check that your filings with Companies House are all up to scratch and keep them updated.
Although you may only employ a few people, it is important to get a list together with the following details for each of them:
- Full name
- Job role
- Salary/bonus information
- Contract length/details
- Contact details
- Any important medical information
Document key processes
Prospective buyers will be very impressed if you have documented key processes within the business in advance. Although this is typically done as part of the handover process once a price has been agreed upon, preparing early will give buyers more of an insight into your day-to-day activities and can ask any questions beforehand.
One way to get an idea of the processes involved in your business is to witness a sort of ‘day in your own life’. Starting from the minute you walk through the door, take note of every process you carry out – who you contact for certain tasks, how you schedule meetings, any tools you use etc. The detail you go into for each process can vary greatly depending on the task. For some, it may simply be a case of noting down someone’s contact details; other processes may require lengthy Word documents or flow charts.
Become a less essential part of the business
We understand that this can be really hard for micro business owners who have invested so much time and effort into building the business. This is certainly more difficult for smaller business owners in comparison to leaders of larger businesses who are less involved in day-to-day operations. But, let’s face it – if you are such an essential part of the business that it cannot run without your input, the risk factor is high for buyers and could put them off.
Start to delegate some of your tasks to other members of the team – documenting processes can tie in with this as they will have something to refer to if they have any further questions. Ideally, you should be at a point where you just oversee the business activities rather than be actively involved in the work.
Manage both the multiple and profit
This is absolutely key if you want to increase the value of your business. Of course, you want to make sure that your business is profitable regardless of whether you are selling or not, but managing the multiple a buyer uses against your profit figure can seriously increase the value of your business.
Do not slash your costs and increase your prices for a short term gain – this will only work against you in the long run as your profits, and therefore multiple, will not be as sustainable. You should seek to increase revenue steadily over time; this makes a buyer feel much safer taking over.
Thinking about these factors early on can help to increase the speed at which your business is sold, when you finally come to that decision. Start preparing today and you will be well on your way to handing your micro business over to a safe pair of hands.