Timing your business succession is crucial to creating the best environment for the best capital realisation. So how much time do you need to get your business ready for sale? When should you start the preparation process and what are the implementation steps?

Preparing your business for sale is a process, not an event. Business owners who deal with their succession as an event, that is something that they decide on at the spur of the moment, almost always dilute the value that may have otherwise been available to them. Based on the theory that sooner or later every business will be sold or die, it makes sense then that businesses should be developed with a view to its eventual sale from day one. In most cases this does not happen, so what is the next best alternative?

Where possible, business succession should be mapped and planned, three to five years before the business sale. When assessing the value of a business the majority of purchasers look for established trends. This means that most buyers and their advisers will want to review the financial performance of the business for at least the past three years.

So if you work on a three to five year time frame what are the critical steps?

Undertake a business diagnostic - this is a thorough review of your business warts and all. It is designed to assess where the business is currently at, a level of risk analysis, and identify the areas where the business could improve.

Complete a valuation - you need to put a stake in the ground and know what the business is worth.

Start on the housekeeping - often we see businesses where some of the history needs to be cleaned up. This is often reflected in the balance sheet and may take some time to sort through.

Business enhancement based on your diagnostic, start making changes in the business that will cause permanent and measurable improvement.

Create a reporting and results trail one that tracks the changes and the improvements achieved. At the same time build your forward budgets and estimates around the leverage that will come out of the change.

When you have worked through this and established your trends over a three year plus time period, then you are ready to go to market.

This brings us back to the timing issue. When selling your business you should work on window periods. These are the times within a succession plan when a sale will bring about the most ideal outcome. For most small businesses, the window is any time plus or minus eighteen months from the ideal sale date. Being open to a window period means that if the right buyer comes along before the time you want to sell, then you should still take the opportunity. Alternatively, if you need to wait an extra year for the right sale environment, then this should also be manageable.

Getting your succession timing right will ensure you have the right conditions in place to bring about the best value for your business. Aaron Wallace, is Principal Business Development, Hayes Knight, Chartered Accountant and Business Advisers. For comments or advice email aaron.wallace@hayesknight.co.nz