When it comes to selling a business, having good documentation is crucial. Detailed and well-organized records not only make the selling process smoother, but they can also increase the value of the business. In this podcast (which is also available as a blog post at johndenton.com.au), I'll explain how to document a business ‘ready for sale’ and the types of information buyers will be looking for.
I cover 10 areas where you need to have good uptodate documentation. This is not an exhaustive list but covers the main items that apply to the majority of businesses.
My series 2 podcasts are relatively short episodes and specific topics related to buying or selling businesses.
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Welcome John Denton here with another episode in the business ready for sale podcast series. Why business ready for sale? Because I believe that all businesses should be ready for sale all the time to give the business owner options. And a business's ready for sale is well worth keeping. All the things you need to do to have your business ready for sale, you should be doing anyway to have a really good business that hopefully operates without you, the owner having to be there.
And what am I going to talk about in this episode?
Something which comes up quite often with business owners is I'll get what I call a too late call. In other words, it's, it's a phone call where the business owner calls me and says, Oh, look, I've just had somebody walk into my business. And they've said they really liked my business. And would I like to sell it, and they'll give me a million dollars for it. Problem is, I don't know whether a million dollars is a good offer or not. But then they asked for all this information. And while I just don't have it, what do I do.
So the reason I call it a two late call is because they should have been thinking about these things way back. You know, you should be working on having your business saleable from when you start the business. And you should definitely have some idea of how businesses are valued, what kind of sales happened in the marketplace, and what your business is likely to be worth. So if you are fortunate enough to have someone come into your business and and say they're interested in buying it, and talking dollars, then you've got some idea as to whether it's a good offer or not.
But apart from the value, and I cover how to value businesses and other podcasts and how to sell businesses and other podcasts, and blog posts, the topic of documentation comes up.
So a potential buyer is going to want to see all kinds of documentation. And when it comes to selling a business, having good documentation is crucial. Detailed and well organised records not only make the selling process smoother, and less painful, but they can also increase the value of the business.
So in this podcast, which is also available as a blog post on my website at John denton.com.au. I'll explain how to document a business ready for sale, and the types of information buyers will be looking for, you might be surprised to know that I'm going to talk about 10 different areas. And this is not an exhaustive list. Okay, this is just the main ones, the ones that are common to most businesses.
So the first thing, which is pretty obvious to most business owners, I think, is you need to have good financial records. You know, financial documentation is one of the most important aspects of selling businesses, buyers will want to see evidence of the company's financial health, including the profit and loss statements and balance sheets. And if it gets to due diligence, they'll want to see tax returns as well. But that's later on. It's a good idea to have at least three years worth of financial records available. And I'm talking accountant's finalised accounts. And you'll also need your year to date profit and loss. And I suggest reconciled to the last month and these days with all the bookkeeping and accounting apps that are available. It's a lot easier for business owners to keep financials up to date, and to reconcile them regularly and be able to provide this information. So that's the first area.
The next one is marketing materials. Potential buyers will want to know about your marketing efforts and how you attract customers. So how do you get customers into the business? This could include all kinds of information about your website, social media presence, any advertising that you do and promotional materials that you use. In other words, show your marketing and sales processes and systems. If you require salespeople to get customers, then their processes and systems need to be documented as well. It just gives the buyer comfort that they're not going to have to learn how to do all this marketing and selling stuff. If you've got it well documented and it's working well at the moment.
So number three is a good customer list. I tell business owners all the time, the gold is in the list, you know, you want good regular customers, obviously, it depends on the business and your type of products that you're selling. But in a business, the customer list can be the gold, sometimes a strategic buyer will buy your business and pay more for it, just to get a hold of the client list, because they may already have products or services that are related to yours that they can sell to your database to your list. So usually, this comes in the form of a CRM, that's the best place to have a client list the customer database, don't just rely on your accounting package. Accounting packages aren't marketing tools.
The list, obviously should contain contact information about your clients, but also what products and services they purchased, how long they've been with the business if they have repeat customers. And again, there's more value in repeat customers than one off customers. What recurring revenue spend they have, all of this is very, very valuable for a buyer, it will give them an idea of the types of customers you have and the potential for ongoing income and growth. Remember, the value of a business often most times is based around the likely ongoing profit to the owner. So when you show a good client list with good recurring revenue, then that's a big plus to selling your business. Again, not possible in all businesses.
And number four, inventory. You know, if you have a physical store or sell products, it's important to provide an accurate inventory list. And this should include the quantities values when purchased so that a buyer can see how long things sit on the shelf, what was the cost to get it into store. And if it's a warehouse type situation, or lots of shelves and where items are located, again, just makes it so much easier for a buyer to see how the business operates and how quick their products turnover, et cetera, et cetera.
Number five employee information. Buyers will want to know about your current employees, including the job titles, duties, length of service with the business, any entitlements they've accrued, all those kinds of things. You should have also in information on employee benefits, policies that are in place. Are there any noncompete restrictions in place for employees? That can't be important for some buyers? Do you use contractors? And if you're using contractors or remote workers in the business? What are the agreements that you have with them? What documentation can you provide around working with them?
How are you going so far? We're halfway through now we've done five out of the 10. So how many of them? Can you say? Yes, I've got all that. It's all up to date and all ready to go.
So number six contracts. What contracts do you have with suppliers, with vendors with customers? It should all be included and documented. All those contracts may need to be up to date, they need to be current contracts around products and services, lease agreements, do you have any equipment on lease? Are the premises on lease? Do you have any non disclosure documents in place? And getting back to the leasing document? Again, if your business is location dependent, then the lease you need to understand the terms of the lease and be able to explain them and have them available to show to a potential buyer. You know, how long is the left to go on the lease? What options are there? What pricing is there a rent review and all that sort of?
So number seven, this is an interesting one intellectual property. Now intellectual property can be information, it can be product, it can be various things. It's a very interesting topic all in its own right. And I'll do a podcast on it because I've been asked to to, but if your business owns any patents, trademarks, copyrights, then you'll want to be able to provide the documentation for these as well. Because this thing could include very registration documents, legal agreements,all kinds of things associated with intellectual property. Very important and quite often overlooked. And again, when we talk about business values, the most common way is to value a business on its profits and its financials. But a business can be valued and big, much more valuable, have a strategic value based on the intellectual property, client base, and things like that.
You know, Microsoft buy businesses like they bought LinkedIn, not because LinkedIn was making a fantastic profit. In fact, I don't think it was even profitable at the time. But Microsoft paid billions for it, to get the client base, so that they could sell all their Microsoft products through and monetize the database. Dollar Shave Club that started out selling razor blades through mail around the world, got bought out. Unilever bought Dollar Shave Club for a billion dollars. Because up until then Unilever, only sold through traditional retail outlets, this was a way for them to get global mail marketing, business going. So intellectual property can be a key part of your business value needs to be well documented.
Number eight physical assets, a list of the physical assets of the business equipment, vehicles, real estate, anything that's going to be sold with the business needs to be in some documentation. So have a description of value location of each asset, its age, purchase price, all those sorts of things help. In Australia, we have a thing called a personal property securities register, where sometimes if people have, you can check it to see if the only one has security over the property. So if you're a buyer, you can check to see if the owners actually only the asset,
And nine of course, documentation wouldn't be complete without legal documents, such as any any legal documents that relate to the business. We've already talked about lease agreements, but think about any partnership agreements, shareholder agreements, operating agreements, articles of incorporation, all these sorts of things. Sounds obvious, you would have these documents, but again, are they current, up to date, and easily available.
And finally, anything else really that should be documented, like insurance policies, any warranties or service agreements, service level agreements you might have with clients. So you know, just have them all available. And really, in conclusion, it's just makes good business sense to have good documentation in place. For all of these things anyway, whether you're selling or not, you know, good, thorough organised documentation.
Documentation is an essential part of the process of selling a business. And by providing detail, and an up to date documents, and any other relevant information, you can increase the value of your business, you can make the selling process a whole lot smoother and quicker, and you'll be prepared.
And as you know, there are different ways to sell a business. There's a business that sells by shares the actual entity. And there's businesses, mostly small businesses under about five mil, the majority of these it's the assets of the entity, that sell: the goodwill, plant and equipment and stock. Saleable stock. And how you sell your business can again, affect the documentation you need to have ready but if you cover off all the things that I've mentioned in this podcast, then you'll be pretty well prepared. And if you want more detail, and you want to get into understanding more about all the things you need to do to have your business ready for sale, then go to Johndenton.com.au. Check out my website.
Look out for my workshops online and in person, workshops, do my business, saleability checkup. As a starting point, sign up for my newsletter, read my blog posts. There's lots of information there. And of course, subscribe to the podcast so that you don't miss future episodes. And go back and check out some The past episodes.
I hope this has been good for you. I hope you learned some things from listening, you've got some actions to take away. And hopefully, I'll be talking to you on my next podcast. So for me, John Denton, Johndenton.com.au it's bye for now.