Preparing your business for sale: what to do 12–24 months out

Most owners start thinking seriously about a sale when they are ready to stop. By then the things that move the price most, such as clean numbers, a business that runs without them and a tax position planned in advance, take longer to fix than they want to wait. Starting 12 to 24 months out gives you time to fix them and to show a buyer at least one full year of the improved picture.

Why the lead time matters

Buyers and their advisers look at history. A single good quarter after years of messy records reads as a story, not a trend. Two clean financial years, prepared the same way, with the owner's personal costs taken out, read as evidence. The same is true of reduced owner dependency, a renewed lease or a wider customer base: these only count once they have been in place long enough for a buyer to see them working.

Tax is the other reason. Some of the most valuable outcomes for a seller depend on how the business is held and on tests measured over time. Discovering a problem three weeks before settlement usually means it cannot be fixed.

Get the numbers buyer-ready

The financial statements are the first thing a serious buyer asks for, and the first place confidence is won or lost.

• Separate personal and business spending. Family cars, phones, travel and private expenses run through the business make profit harder to prove. Every one becomes an "add-back" a buyer has to take on trust.
• Reconcile everything. Bank accounts, BAS lodgements, payroll and superannuation should agree with the accounts. Gaps between what was reported to the ATO and what is in the ledger are among the red flags buyers find.
• Use consistent policies. If stock counts, depreciation or revenue recognition changed from one year to the next, a buyer will want to know why.
• Produce monthly management accounts. They let a buyer see seasonality and recent trading, not just the year-end snapshot.
• Pay the owner a market salary on paper.

Reduce your own importance

A business that depends on its owner is worth less, because the buyer is paying for something that may leave at settlement. Over the next year or two, aim to make yourself less necessary.

1. Write down the processes that live in your head: quoting, ordering, pricing, month-end, key supplier terms.
2. Move important customer and supplier relationships to a second person in the business.
3. Develop or hire a manager who can run day-to-day operations.
4. Take a real holiday and see what breaks. Fix those things.

If a buyer can see the business ran well while you were away for a month, that is worth more than any assurance in a sale document.

Tidy the legal and commercial foundations

• The lease. A buyer and their financier will want security of tenure. If your lease has less than a few years to run, talk to the landlord about renewing or extending it, and check whether assignment needs the landlord's consent. Your lawyer should review the lease well before a sale.
• Key contracts. Customer, supplier and franchise agreements may have change-of-control or assignment clauses. Know what they say.
• Intellectual property. Make sure the business name, trademarks, domain names and software are owned by the entity being sold, not by you personally or a related party. A lawyer can confirm ownership and register anything missing.
• Employment records. Employment contracts, award classifications, leave balances and superannuation payments should be accurate and up to date. See our article on employee entitlements when a business changes hands.
• Compliance. Licences, permits, safety records and any disputes should be in order and documented.

Look at your structure and tax position early

How you sell, and what you keep, depends heavily on how the business is held: as a sole trader, a partnership, a company, a trust, or a mix. It also depends on whether the sale is of assets or of shares, which we cover in asset sale vs share sale.

The small business CGT concessions can significantly reduce or eliminate tax on a qualifying sale, but eligibility turns on tests about turnover or net assets, how long assets have been used in the business, and who controls the entity. Some of these are measured over many years, and some can be affected by decisions you make in the lead-up to a sale. Our overview of the small business CGT concessions explains the basics. The point here is timing: get advice before you restructure, before you take money out, and before you sign anything.

Restructuring shortly before a sale can create its own tax costs, so consider any change with your advisers well in advance.

Work out what the business is worth to a buyer

An early, realistic view of value helps you decide whether to sell now, wait, or invest further first. It also shows which improvements will matter most. If the business is valued on a multiple of maintainable earnings, every dollar of sustainable profit you add is multiplied. As an illustration only, if a buyer applied a multiple of three to a business, an extra $50,000 of reliable annual profit could add around $150,000 to the price. Our article on how much your business is worth explains how this works.

Plan your own next step

Owners who have not decided what comes next often hesitate at the last moment. Think about:

• what you need from the sale to fund retirement, the next venture or family goals;
• whether you would stay on for a handover period, and for how long;
• whether you would accept part of the price later, through vendor finance or an earn-out;
• how the proceeds will be invested once you have them.

Knowing these answers lets you negotiate with a clear floor and a clear shape of deal.

A simple timeline

1. 24 months out: review structure and tax position, start cleaning the books, begin reducing owner dependency.
2. 18 months out: address the lease, contracts and IP ownership; build a management layer.
3. 12 months out: get an indicative valuation, finalise a full year of clean accounts, gather due diligence documents.
4. 6 months out: prepare the information memorandum, settle on price expectations and deal terms, line up your lawyer.

The work that most improves a sale price is done long before the business is listed, and most of it cannot be rushed.

How we can help

Kainos works with business owners in the years and months before a sale: preparing buyer-ready accounts, reviewing structure, estimating value and planning the process. When the time comes, we advise and represent you through negotiations and due diligence, working alongside your lawyer. If you are thinking about selling in the next couple of years, contact us or read more about our business sales and purchases service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.