If you are looking to sell a business, there are often opportunities to improve its profitability and appeal to potential buyers before putting it on the market. Reviewing the business early can help owners identify areas where improvements may add value, as well as aspects that a buyer may be willing to develop further.
In this practical reference guide, we look at what to fix before selling a business, from pre-existing obligations to paperwork issues. We will also explain how to approach these areas when preparing for a sale, helping owners make the most of their business and debunking the assumption that every issue must be resolved before finding a buyer.
Why Business Owners Might Want To Sell Their Business
Business owners decide to sell for a range of reasons, including:
- Pursuing a new venture: An owner may want to move into a different industry or start another business.
- Reducing their workload: Some owners want to spend less time managing day-to-day operations or make more time for other commitments.
- Family or personal commitments: Family commitments or other developments in their personal lives may lead owners to consider selling.
- Realising the value of the business: Some owners decide to sell when they have an opportunity to benefit from the value they have built over the years.
What To Fix Before Selling a Business
Owner Dependency
If a business relies too much on the owner’s daily involvement, it may become harder to sell to buyers who want the business to operate independently. That said, owner dependency does not automatically make a business unsellable. Some buyers may be comfortable taking on an active role, while others may see an opportunity to improve the existing systems.
Some signs of owner dependency:
- Client relationships are solely managed by the owner.
- Important business knowledge has not been documented and is only known to the owner.
- Minor day-to-day decisions still go through the owner.
How to fix it: Start building systems and delegating responsibilities well before listing the business. Document key processes, appoint another point of contact for major clients, and train staff to handle tasks currently handled by the owner.
A business that can run smoothly under new management is more appealing to buyers and may help achieve a better sale price. If the business still depends on the owner, explain this to buyers so that they understand the responsibilities they may need to take on.
Undocumented Employment Contracts
Informal or undocumented employment contracts may complicate the sale process further. Without a proper contract in place, it is often difficult to confirm an employee’s entitlements, notice periods, or the terms under which staff are employed.
How to fix it: Review each staff member’s individual employment status and ensure there is a signed, up-to-date contract on file. The contract should cover pay rates, hours, leave entitlements, and any special arrangements. Where contracts are missing or outdated, seek appropriate advice about formalising them before going to market.
Customer Concentration and Reliance on Major Clients
A business that generates most of its revenue from one or two clients carries more risk in the buyer’s eyes. Potential buyers and their advisers may ask about customer concentration when assessing the business. However, established relationships with major clients can also be valuable, especially when they offer consistent revenue and potential to grow the customer base.
How to fix it: Where possible, look for opportunities to bring in new clients before the sale so revenue is spread across a wider customer base. For major clients that contribute a large share of revenue, consider how to maintain the relationship after the sale.
Where appropriate, arrange for the buyer to meet them before the sale is finalised and explain how the change in ownership will work. This gives clients a chance to get to know the new owner and discuss plans for continuing the relationship.
Financial Records That Do Not Reflect True Business Earnings
Financial records are often among the first things a buyer may review. If records do not clearly reflect the business’s actual earnings, it can raise questions and slow negotiations. Reviewing financial records can also help business owners to identify opportunities that improve profitability before selling.
How to fix it: Make sure financial statements accurately reflect the business’ profitability. Keep personal expenses separate from business accounts, and be ready to explain any add-backs to the buyer.
If the records still have gaps when the business goes to market, organising the available information and explaining any outstanding issues can help buyers understand your financial position.
Unclear Intellectual Property Ownership
Intellectual property, such as trademarks, business names, designs, and proprietary processes, needs to be clearly owned by the business itself, not by an individual or a separate entity. Unclear IP ownership can raise questions during due diligence and may need to be resolved before a sale can be finalised. However, the available options will depend on the current ownership arrangements and the type of sale.
How to fix it: Check who owns the intellectual property associated with the business. If any IP is registered in the owner’s name or belongs to another entity, get advice on whether ownership needs to be transferred or other arrangements need to be made before the sale.
Buyers need to know which IP assets are included in the sale and whether they can use them. If you can’t resolve the ownership issues before listing, explain the situation to buyers.
Contracts, Licences and Leases Held in the Wrong Name
Just like intellectual property, business contracts, licences and leases may be held in the owner’s name, a related entity’s name, or under an old business structure. Depending on the terms of the agreement, this can make it harder to transfer them to the new owner but not impossible.
How to fix it: Review all key contracts, licences, and leases to check whose name they are under and whether they can be transferred to the buyer. Where changes are needed, check the transfer requirements and get appropriate advice well before the sale process begins.
Checking these details early gives you time to deal with any transfer requirements and lets buyers know which agreements can be transferred. You may not need to change every agreement before listing, but it’s better to know what needs attention before the sale progresses.
Lease Issues That Could Affect the Sale
For businesses operating from leased premises, the lease may affect a buyer’s decision. Potential buyers usually want to know how long is left on the lease, whether it can be renewed, and what is involved in transferring it to them. A short lease or upcoming expiry is not necessarily a barrier to a sale, as some buyers may be willing to negotiate new terms or consider other premises.
How to fix it: Review the lease before putting the business on the market. If it is due to expire soon, speak with the landlord about extending it or agreeing on a new term. Check whether the lease can be transferred to the buyer and whether the landlord’s consent is needed.
If the existing lease cannot be extended or transferred on the expected terms, ensure potential buyers understand the situation, and be ready to offer alternatives.
Personal Guarantees and Outstanding Obligations
If the current owner has provided personal guarantees for business debts, equipment finance, or lease agreements, these should be addressed as part of the sale. Selling a business does not automatically release the owner from these obligations. While this may require additional planning, it does not necessarily prevent a sale from proceeding.
How to fix it: Identify all personal guarantees connected to the business. The buyer and seller may need to work with lenders, landlords, or other relevant parties to arrange the release of existing guarantees or put alternative arrangements in place.
Reviewing these obligations helps potential owners understand their ongoing financial exposure and also identify what may need to be negotiated as part of the sale. Where guarantees cannot be released before the sale, parties may wish to seek advice on how best to address them.
Unpaid Superannuation and Employee Entitlements
Buyers may look at unpaid superannuation and employee entitlements when assessing a business. Unresolved amounts can also raise compliance issues during due diligence. Identifying and resolving these liabilities early can help owners understand their current position and prepare for questions from potential buyers.
How to fix it: Review superannuation records and confirm that all required payments have been made, and address any missed or late contributions in line with ATO requirements. Reconcile accrued leave balances for all staff to ensure they are accurate and up to date.
Disorganised Records and Missing Business Documentation
Buyers and their advisers may request a wide range of documentation during due diligence. If these records are scattered, outdated, or incomplete, it can take longer to review the business and resolve questions about its operations. Organising documentation can help owners prepare for this process and give buyers a clearer understanding of how the business operates.
How to fix it: Organise the necessary paperwork well before taking the business to market. This may include:
- Financial statements and tax records
- Employment contracts and payroll records
- Supplier and customer agreements
- Insurance policies
- Licences or permits required to operate
The exact documents required will depend on the nature of the business and how it operates. Having these records organised can make it easier to answer buyers’ questions and identify any gaps before the sale progresses.
Not every document needs to be perfect before the business is listed. Your main priority should be to understand what information is available, identify anything that may need attention, and be prepared to explain any outstanding issues during the due diligence process.
How Business Brokers Can Help
Preparing a business for sale takes time, especially when the owner still needs to keep daily operations running. A business broker can help identify areas that may affect the sale, highlight opportunities to improve the business, and advise on what needs attention before approaching buyers.
A broker’s understanding of the market can help owners set realistic expectations for the sale price and timing. They can also help owners assess which improvements may be worth making before the sale and which issues can be explained to potential buyers as part of the process. They can handle discussions with potential buyers, assist with negotiations, and maintain confidentiality where needed.
Key Takeaway
Knowing what to fix before selling a business helps owners identify opportunities to improve profitability, strengthen buyer appeal, and prepare for the sale process. Owner dependency, financial records, lease terms, personal guarantees, and outstanding entitlements can all affect how buyers assess the business’s value, but they do not automatically prevent a sale.
The goal is to understand the business’s current position and decide which improvements are likely to add value before going to market. Some buyers may prefer a business with well-established systems and organised records, while others may be interested in a business that offers opportunities to make changes and grow. Being clear about the strengths, obligations and areas for improvement can help owners present their business to the right buyers.
If you are considering selling your business, Stockbridge Business Brokers can help you assess its market value and plan your next steps. Contact Stockbridge for a confidential, no-obligation appraisal today.