In an ideal world, the right buyer for your business arrives exactly when you want, with an inbuilt understanding of how the business works and where they want to take it. In reality, selling your business can be an exhausting process. We regularly assist businesses to buy and sell, so we know a bit about what makes a business attractive for a purchaser. You can usually apply these rules whether the business is a local cafe or a large company trading domestically and abroad. We set out three concepts for you to keep in mind – revenue, intellectual property and a small pool of shareholders.
Revenue is arguably the most important factor a buyer will consider when determining whether to buy your business. It is a measure of how well the business is doing and the chances of it continuing to grow. If you’re considering selling your business, make decisions which strengthen your revenue. For example Temple & Webster, the seller of online homewares and furniture, acquired Milan Direct (another online furniture retailer) ahead of a planned initial public offering to boost revenue. The addition of another business to the core offering immediately increased capital, making Temple & Webster a much more attractive prospect ahead of the IPO.
2. Having a Small Pool of Shareholders
Many new businesses and startups can offer shares to employees as an incentive, substantially increasing the number of shareholders. Buyers, however, don’t want to deal with such a large pool as appeasing everyone is time-consuming and complicated.
This can be problematic if you’re a startup and don’t have the cash reserves of a bigger company to dish out bonuses to top-performing employees. Having an Employee Stock Ownership Plan (ESOP) in place is a great alternative to providing shares, where an employee has options instead of shares to incentivise them.
3. Strongly Protected IP
A service based business may have built a strong reputation around their business name and registered trade mark. So, a buyer will want to purchase the mark to leverage and commercially exploit the established reputation and goodwill. A software business, for example, might have a valuable piece of code that earns significant revenue. The buyer will then want to purchase the code (the intellectual property).
A buyer will check carefully during due diligence that the business holds all rights and registrations. If you are considering selling a business, you should conduct an IP audit to make sure that the business owns all your IP.
On your checklist:
- Employment contracts: Do you have them? Do they state that all IP created by your employees is automatically assigned to the company?
- Trade Marks: Have you registered yours? Does the company own them?
- Third Party IP: If the business uses third party IP, is it licensed? Does the business licence its own IP to third parties? Are there contracts?
- Infringement: Check that the business is not infringing any copyright or other IP.
Preparing your business for sale can be time-consuming as you work to show a potential purchaser that your business is worth buying. If you start a business with the goal to sell, then three of the most important concepts are boosting revenue, strongly held IP and a small shareholder pool, so that a potential purchaser won’t be put off by the need to bargain with an unwieldy number of shareholders. If you have any questions, get in touch with our business lawyers on 1300 544 755.