Preparation business for sale

Mar, 22 2021

Contents:

Pre-sale preparation of the business is considered one of the most important aspects of the implementation of the company.

The most important thing in the pre-sale preparation of the business is to create effective plan, to figure out all specifics in business functionality and business-processes nuances, perspectives in growth and development of the firm, its maximum capabilities, in financial equivalent as well. The end goal is to fully prepare business for sale for fair price.  

Preparation stages

Main motivation during preparation should be minimization of questions from potential buyers and revealing the full picture. Preparation of the business for sale often goes through following stages:

  1. Creation of sales strategy
  2. Internal audit
  3. External audit
  4. General question (regarding organization process)

On the first stage it is important to analyze sales strategy, to create a detailed plan. Moreover, financial analyze should be trusted to professionals to perform.

Following the rules of preparation and analyzation of finances allows to minimize risks and loses. During the scrutiny and preparation, all responsibility lies on company’s directors. 

Development of successful plan for business sale

Strategically correctly build the company’s sales funnel is extremely important at the preparation stage. There are several crucial things to consider. Not the last place is occupied by the reason for the sale of the enterprise and the goals that the owner pursues, the entire strategy will depend on this. The situation in the future and the financial condition of the company will directly affect both the sales strategy itself and the formation of the sales price of the enterprise.

Sales strategy can be as follows:

  • The sale of the property
  • Company’s reorganization through dividing it on several different parts
  • Restructuring of non-core assets
  • Hiring an external representative (manager) to manage the company 

Within the framework of the strategic situation, it is possible to consider and evaluate the state of the entire industry in which the enterprise operates, the problematic “areas” of the company, the risks in the course of activity, and the prospects for the development of the company.

During financial analysis, objective indicators of the company’s liquidity, financial stability, overall solvency, and profitability are identified.

The implementation of the entire property complex is applied to enterprises that are financially stable, have the optimal size of assets, and are proportionally balanced.

For those enterprises that conduct several activities at once, a reorganization strategy is more often used. Each of the company’s activities should be independent of each other to a high degree, that is, have different production areas, equipment for each direction is used in its own way, the staff works differently.

Audit of external activities of enterprise 

Before preparation for sale of enterprise no matter the size external and inner audit takes place.

During external audit an opinion is formed about the reliability of company’s financial reports and it is determined whether firm’s accounting is performed according to Russian law. Received results give an opportunity to notice and fix errors, which could have happened earlier, to minimize taxation risks.

During internal audit it is checked, whether managing report was done correctly, how fully and faithfully compiled all reporting, that the correct approach is selected in the pricing of the product/service, how accurately the cost was calculated, profitability and cash flow in the final result.

If an independent audit was conducted by a third-party contractor during the preparation of the business for sale, its data will be a huge bonus for the future acquirer, as it will show how reliable and correct the accounting and management statements of the company are, and this will in turn negate the risks in the future.

Audit of the internal financial condition of the business

The main purpose of the audit of the company’s finances is to identify the internal problems of the company, so that they can be analyzed and evaluated. All this will be used in making management decisions, justifying these decisions, and will also be taken into account in the preparation. This also applies to the area of enterprise development activities in the framework of crisis management, will affect the process of the transaction for the sale of the business will affect the formation and sale of shares or stakes in the company, might become a factor of influence in attracting borrowed funds (investment).

If we consider the reasonable factors that affect the formation of the price of a business with the intention to sell it, financial analysis will become the main element of pricing. In the pre-sale preparation of a business, a financial audit is a mandatory element and determines the state of the company’s finances not only at the moment, but also in the future.

Financial analysis (audit) is carried out on the basis of financial statements (financial or management). The following indicators are subject to analysis:

  • Financial sustainability;
  • Net profit;
  • Relative profitability of the enterprise;
  • Asset turnover;
  • Solvency;
  • Absolute indicator of assets and liabilities;
  • Liquidity;
  • Probable forecast for bankruptcy.

A competent audit can be provided by third-party consulting firms.

Support of a business sale transaction

Legal support of the transaction is an important procedure, since it is possible that a future buyer will want to find out confidential information about the acquired business. One of the financial risks is not receiving payment due to the identification of defects after the transaction, when the buyer makes claims.

Transaction support is divided into the following stages:

  1. Study and analysis of the company’s constituent documents.
  2. Preparation of documents for purchase and sale.
  3. Preparation of documents for state registration as a new owner.

At the first stage, significant aspects will be identified:

  • Is it necessary to notarize the contract for the purchase and sale of a business?
  • In what order does the sale of each participant’s shares in the business take place according to the constituent documents?
  • Who, according to the documents, acts as a shareholder?
  • Who is the founder?

At the second stage, contracts for the sale of shares of the enterprise are prepared, papers are drawn up for the sale of shares of this legal entity, and much more.

At the third stage of preparation of documents for the state registration procedure, all necessary changes are made to the constituent documents. The charter will already be in effect in a new version, the founders and managers will be changed, and the legal address will be changed. The entire set of documentation is also submitted to the tax authorities.

Often, business owners do not pay due attention to pre-sale preparation, which leads to financial and time losses.

Author of the article
Preparation business for sale
Valentina Khlavich
Managing Partner
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