There’s a lot of things that need to be put into place prior to a trade sale of a business - whether you're selling to your management team or to another business. Here are five critical tasks to complete in the lead-up to the sale:

1 - Make yourself redundant

For at least 12 months prior to sale I recommend that you move into a chairman role. Any later than this and buyers will feel that the move is more window dressing than reality. In making this move you will need to successfully fill the CEO role and demonstrate that on a day to day basis the business runs without your input.

It is a good idea to keep a record of your days away from the business so that you can evidence that your involvement has reduced to a few key touch points per month. This has the added benefit of giving you the time and space to work with your advisors on the sale itself (which won’t count as working in the business as it is clearly an exceptional project).

For an owner-manager, this can be one of the most testing transitions you ever make. You remain at full exposure to the success of the company, yet you are handing control over to people other than yourself. But doing this is a critical success factor in your route to exit.

Your business plan should have identified your key requirements around people, process and technology and you will have been managing to this plan for several years. Recruiting for your replacement either externally or internally requires a careful assessment of the candidates, their skillset and importantly their alignment to you and your objectives. A failed CEO appointment can set a business back as much as two years.

2 - Review and update audit and accounting policies

While a buyer is acquiring the future of your business, their assessment will be heavily dependent on its past. Any buyer of a business is taking a risk. They will therefore be looking for as much certainty as possible. Evidence of a recent and robust audit conducted by a recognised brand name is a valuable way to inspire confidence in a potential buyer – and it can also provide valuable insights to help you prepare for sale and power your growth objectives.

To facilitate a smooth due diligence and exit process, it is fundamental to get the audit right and have certainty over the balance sheet and the operating effectiveness of internal controls. Any issues raised should be addressed before you begin the exit process. Are liabilities fairly represented? Or undervalued? Hidden, or off-balance sheet?

Accounting policies are the specific principles and procedures implemented by a company’s management team. These are crucial in an exit because the fundamental valuation basis (such as EBITDA multiples) may be impacted by the company’s accounting policies. Ensuring the accounting policies and controls are robust and in line with sector practices will give comfort during the due diligence process around quality of earnings and presentation of (and reconciliation of) financial results to the underlying earnings position.

Different types of buyer may be looking for slightly different assurance on accounting policies. Private equity acquirers may want to ensure that policies are industry benchmarked to make sure their valuation thesis holds. Trade acquirers will want to ensure policies are similar to their own to support their valuation and enable a smooth integration into their wider group. Non-standard or aggressive accounting policies can create difficulties during exit as they can make investors nervous and disappoint sellers when value is eroded through realigning past practices.

3 - Conduct vendor or buyer due diligence

There are two accepted ways of approaching due diligence, and an informed decision needs to be made before entering the market. Essentially, owner-managers have two choices. They can carry out the traditional buyer due diligence where, post offer, the buyer instructs their own teams or they can choose a newer option called vendor due diligence (VDD).

VDD is where, ahead of going to market, you appoint an independent third party to undertake due diligence on your business. The potential buyer receives the VDD report and, because it is from a third party who will owe a duty of care to the eventual buyer, that buyer can establish trust in the process without needing to carry out their own due diligence. Although the VDD provider has this duty of care to the buyer, they will report any issues to the seller which will give you the chance to address significant issues before going to market and before value is eroded.

Because the report can be made available to all serious bidders, time can be saved and the transaction can be run more smoothly, with the time between agreeing a deal and completing minimised. The costs of this work need to be underwritten by the selling business and, in the event of a failed sale process – paid. These costs can be significant so only a committed and well-prepared seller instructs VDD. Buyers know this, so the presentation of a VDD report tells a potential buyer that you are serious, and that you are ready.

4 - Conduct legal due diligence

Legal due diligence is a vital process that can make or break your exit, so it is important that the legal affairs of a business preparing for exit are in good order. Potential buyers will want to see many things when looking at the legal affairs of a business, but broadly speaking they include: an easily understandable group structure; an order book underpinned by well drafted legal agreements; key employees tied into the business by their service agreements; IP protected by trademark and patents; and well-ordered statutory registers.

When you are looking to appoint your legal advisors, you should also consider the ‘bench strength’ of that team. When the transaction needs to be delivered, the size of the corporate team and their ability to process significant numbers of documents in a short period of time is an important consideration.

A sense of loyalty to your preferred law firm is understandable, but it should not drive you to appointing them if they are not fully equipped to handle the transaction. Appointing fresh eyes and asking them to undertake a legal audit 12 months in advance of a planned exit will help uncover any issues that might have otherwise derailed a transaction. There will be a cost to this, but it will be money well spent and an exceptional item that will not impact the valuation Ebitda.

5 - Prepare an Information Memorandum

As you begin to step away from the business, now is the time to engage with your advisors on preparing the information memorandum (IM), sometimes known as a sales memorandum. The IM is a document produced prior to selling your business and is effectively your opening pitch to any prospective buyers. Approximately half of this document should describe the business as it is today including history and evolution, the other half needs to map out to the buyer the future opportunities and vision for the business. Certain elements of VDD and completed legal work can also be included.

To be credible, your vision for the future of the business needs to be founded in activities already undertaken or being developed by the business. After all, if your route to growth is purely blue sky thinking then the buyer’s rationale to acquire your business diminishes.

Thinking about how your business is developing to meet emerging trends in your sector and how the work that you have done positions you to capture those opportunities can add value. Many acquisitions of SMEs by larger corporates happen because the SME is nimble and has reacted quicker to the market. The slow and lumbering corporate is then forced to acquire to regain that advantage. Such transactions drive better value for owner-managers as they bring about a strategic premium.

As you project the business plan forward, your rolling five-year financial forecasts should make the financial side of this straightforward. The data analysis that has now become part of the day-to-day running of your business can validate and support these assumptions and pass buyer interrogation.

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