Most owners decide to sell and then start getting the business ready. That order costs money, because almost everything a buyer pays a premium for takes twelve to twenty-four months to put in place.
Value in a private business is largely a function of risk. A buyer looks at your earnings and asks how likely they are to survive your departure. Every question they cannot answer comes out of the multiple, or turns into an earn-out that leaves part of your price hanging on things you no longer control.
A new financial year is the natural point to start. The books have just been ruled off, you have a clean baseline, and beginning now gives you two full years of tidy trading to show by the time you go to market.
Clean financials, and add-backs that stand up
The biggest destroyer of value in the SME market is under-reporting. Plenty of businesses run every possible expense through the entity and keep a portion of trade off the books. It feels like a tax win and is an expensive one at sale, because if a transaction is not in the books it does not exist. It cannot support a valuation, and nobody funding the purchase will lend against it.
Add-backs are legitimate, but only with evidence. A buyer will accept your above-market director’s salary, the personal vehicle, the family member on the payroll and genuine one-off costs being added back, provided each is separately identifiable in the ledger and traceable to a document. Add-backs asserted in a spreadsheet with no trail behind them get discounted or refused.
The practical steps are dull and effective: engage a competent bookkeeper, code accounts consistently across years, keep the business account separate from personal spending, and produce management accounts monthly rather than annually.
Reduce the dependence on you
Ask what breaks if you are unavailable for three months. That list is the buyer’s risk register, and it usually holds three things: customer relationships that sit with you personally, technical knowledge nobody else has, and authority, where nothing is quoted, ordered or approved without you.
- Move key customer relationships onto a second person, in meetings and copied into correspondence long before the sale.
- Write down what is in your head: pricing rules, supplier arrangements, the quoting method, what goes wrong on site and how you fix it.
- Appoint someone who can run the business day to day, with a clear delegation of authority. Be deliberate about what stays with you; keeping final say over payments and bank access is sensible while you still own it.
Doing this also lets you offer a credible transition. Staying on for a defined handover, or part-time for a season in a relationship-driven business, is a value-add for a buyer and a reasonable way to step back.
Lock in what the buyer is actually buying
A buyer is purchasing future earnings, so anything that could walk out the door between exchange and settlement needs securing.
Customer contracts. Handshake arrangements and rolling month-to-month terms are worth far less than documented agreements. Formalise your recurring revenue where you can, and check whether any contract has a change-of-control clause letting the customer exit when you sell. Find those now, not in due diligence.
Key staff. Current written employment agreements, sensible notice periods and enforceable restraints matter. So does giving your important people a reason to stay through a transaction, whether that is a retention arrangement or an honest conversation at the right time.
Supplier arrangements. Exclusive distribution rights, dealerships and favourable supply terms should be in writing and assignable. A verbal arrangement does not transfer.
Concentration. If one customer is 40% of revenue, expect it to be priced. Two years is long enough to broaden the base.
Tidy the balance sheet and the related-party arrangements
Buyers read the balance sheet for surprises, and related-party items are where they live: director loans in both directions, personal assets sitting in the company, family members on the payroll who do not work in the business, and leases with a related entity.
If you own the premises through a family trust and the company pays below-market rent, earnings are overstated; above market, understated. Either way, restate to a market rate so the numbers a buyer sees are the ones they will live with.
Lease terms matter where premises do. A buyer needs certainty they will not be forced to relocate soon after settlement, so aim for a long remaining term or clear options to extend, and confirm the lease is assignable.
Write off dead stock and aged debtors too, and dispose of plant that is not earning. A balance sheet full of assets nobody believes in invites scepticism about everything else.
Structuring and tax questions, including the small business CGT concessions and their conditions, should go to your accountant early rather than at the point of sale.
How your buyer will fund it, and why that is your problem
Very few buyers pay cash. Most fund a purchase through a mix of equity, borrowing, and vendor finance or an earn-out that keeps you exposed for a year or two after you hand over the keys.
That is why fundability is a seller’s issue. A lender assessing an acquisition looks at what a buyer looks at: consistent reported earnings, transferable contracts, a business that runs without the outgoing owner, and security for the debt. With the cash rate at 4.35% after three increases since February and no sign of near-term relief, serviceability is being tested hard.
If your business does not fund well, your buyers shrink to those with cash, and cash buyers pay less. If it funds well, you get more bidders and less of your price hanging on an earn-out.
Start with a dry run
Read your last two years of accounts as a buyer would. Where are the add-backs you could not prove? Which relationships sit only with you? What happens if you charge market rent and pay yourself a market salary? That tells you what to fix while there is still time.
Flexible Capital spend most of their time on the buyer’s side of these transactions, which is exactly why a conversation before you list is worth having. Knowing how a purchaser will be assessed is the best guide to what to fix first.
