If you’re considering selling your company within the next financial year it is important that steps are taken to ensure your company is ready for sale. In this article, we outline three steps that can be taken in order to help you get your company into shape in preparation for a sale.
Step One: Paying Dividends from Retained Earnings
It is often the case that due to cash flow constraints companies can build up large retained earnings balances which are difficult to extract through dividend payments. Further, in our experience, buyers of medium to large sized companies often make it difficult for these retained earnings balances to be paid out as dividends to the existing shareholders before, at or after the time of a sale as it is quite often a requirement that medium to large companies be sold with sufficient cash to meet ongoing cash flow requirements. On this basis, it is often advisable that medium to large companies ensure that as much as possible, free cash over and above the company’s normal or likely working capital requirements is used to pay dividends (subject to the taxation implications of doing so). This often enables the existing shareholders to extract the highest possible value from their company prior to exit which is clearly a good outcome.
Step Two: Sell Surplus Assets
It is quite common in our experience for clients to hold reasonable levels of surplus assets in their companies, which are defined as those assets not required for the ongoing day to day operation of the company. Those surplus assets could be plant and equipment, real estate or stock inventory. Quite often, buyers are reluctant to pay any premium for a company in consideration of surplus assets which means that if they are not sold to third parties (or related parties to the existing shareholders) prior to the commencement of a company sale campaign the value of those assets will not be realised by the existing shareholders. For this reason, it is advisable that steps are taken to sell any surplus assets in preparation for the sale of a company.
Step Three: Review Employee Records and Contracts
In our experience, it is imperative that all employee records and contracts are up to date prior to the commencement of a company sale campaign. Generally, employee records and contracts, including the pay rates of employees are given significant scrutiny by acquirers as this is generally a significant legal risk. On this basis, it is advisable that a thorough review of these matters is undertaken in preparation for sale to ensure that the company’s people are employed in a manner consistent with legal requirements
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If you are considering selling your company in the future feel free to contact us for a free confidential discussion about your circumstances and how we can assist.