How to prepare your business for sale in New Zealand

Selling a business may be years away, yet the work that makes a sale easier often starts well before you speak to a buyer.

A prospective buyer will want to understand what the business earns, how dependable that income is and what they would need to do to keep it operating after you leave. They may ask for financial statements, details of outstanding debts, information about customers and evidence that the results you describe are supported by the records.

If those answers are difficult to produce, a sale can slow down just when you want it to move forward. You may find yourself reconstructing old figures or explaining issues you could have addressed earlier.

Preparing for sale is therefore a useful exercise even if you have not decided when, or whether, to sell. It helps you see the business from someone else’s perspective. It may also reveal changes that would make the business stronger while you still own it.

This guide focuses on the financial preparation a New Zealand business owner can do before a buyer begins detailed enquiries.

Begin with your own reasons for selling

Before asking what the business might be worth, consider what you want the sale to achieve.

Are you planning to retire? Move into a different venture? Reduce your involvement while retaining an interest in the business? Do you want to sell soon, or are you building towards a possible sale several years from now?

Your answer affects the decisions you make today. An owner hoping to step away gradually may be willing to remain involved for a transition period. Someone seeking a clean exit may place greater importance on having an experienced team and well-documented processes in place before going to market.

Think about your personal financial needs as well. What would you need to receive from a sale for it to meet your goals? What other obligations might need to be settled? An asking price and the amount you eventually retain are different figures, so discuss your objectives with your advisers before making assumptions.

Business.govt.nz notes that owners sell or step away for different reasons and encourages planning for both succession and business value.

Bring your financial records up to date

A buyer cannot assess the business confidently if its accounts are incomplete or difficult to follow. Start with the fundamentals: reconcile bank and credit card accounts, record outstanding invoices and bills, and make sure loans and other significant balances agree with supporting records.

Review recent financial statements and current management reports. Do they give a consistent picture of sales, costs and profit? Can you explain significant changes between years? Are there old balances on the balance sheet that nobody has investigated?

You do not need perfectly flat results. Most businesses have stronger and weaker periods. What matters is being able to show what happened and why.

For example, a decline in profit might be linked to a deliberate investment in new systems. A sharp rise in sales might include a large one-off project that should not be treated as recurring income. Clear records allow those distinctions to be discussed openly.

If your accountant needs to make substantial corrections each year before preparing the accounts, address the underlying bookkeeping process. Reliable records make it easier to run the business now and easier to answer questions later.

Understand what the business really earns

Annual profit is an important starting point, but a buyer will usually want to know more than the final number on the profit and loss statement.

Look at revenue by customer, product or service. Which income is repeated regularly, and which came from unusual projects? Have margins held steady? Are costs increasing faster than sales? Is a strong result dependent on the owner working long hours that a buyer would need to replace?

Consider a business that reported higher profit after its owner stopped drawing a regular salary. The result may look attractive at first glance, but the work still needs to be done. A buyer will want to understand what it would cost to employ someone to perform that role.

Likewise, if an owner pays some personal expenses through the business, the transactions need to be correctly recorded and explained. Do not attempt to improve the picture by simply leaving costs out. The aim is to produce figures that are accurate and easy to understand.

Your accountant can help you identify one-off items and explain how they affected a particular period. Keep the original records and a clear explanation of any adjustments used in discussions about performance.

Affinity’s article on business valuation beyond profits explores why the earnings figure is only one part of assessing a business.

Reduce reliance on the owner

Ask yourself what would happen if you took a month away from the business.

Would the team know how to manage customers, place orders and resolve ordinary problems? Could someone produce a reliable quote without you? Do key clients deal with the business, or only with you personally?

A buyer may see greater uncertainty if all the important relationships and decisions depend on the current owner. Even strong profits can be difficult to sustain through a handover if the knowledge behind them has never been shared.

You can begin addressing this well before a sale. Document how key work is done. Make responsibilities clear. Introduce other team members to important customers where appropriate. Ensure essential information is held in business systems rather than only in your inbox or memory.

These changes are useful whether or not you sell. They can make your business easier to manage, help staff work more independently and give you more flexibility as an owner.

Check customer concentration

A business with a loyal major customer may appear secure, but it can also be exposed if that relationship changes.

Review how much revenue comes from your largest customers. Has that proportion increased over time? Are the relationships supported by written agreements or a long record of repeat work? Would those customers be comfortable continuing with the business under new ownership?

Do not assume that a signed contract alone removes all uncertainty. A buyer may ask when it ends, how prices are reviewed and whether a change of ownership could affect the arrangement. Have relevant agreements available for your advisers to examine, while taking care with confidentiality.

If a large share of income comes from one customer, you may decide to broaden the customer base over time. That is a commercial choice, not a box to tick just before a sale. It may take sustained work to build other reliable sources of revenue.

Review debtors, stock and other working capital

A profitable business can still place pressure on its owner’s cash if customers pay slowly or too much money is tied up in stock. These issues matter during a sale because buyers need to understand what resources are required to keep the business operating.

Look at your unpaid customer invoices. Which are overdue, and why? Are there old balances that may not be collected? Review stock for items that have not moved or may need to be discounted.

Then examine what the business owes suppliers and how payment timing has changed. A strong bank balance may be less reassuring if it partly reflects bills that have been left unpaid.

You do not need to make every balance disappear before speaking to buyers. You do need accurate information and a clear explanation of normal trading patterns. A seasonal business, for instance, may carry more stock at one time of year than another.

Tracking these movements over time will help you describe what level of working capital the business usually needs. It will also help you identify cash that could be released through better invoicing, collections or purchasing decisions.

Make sure assets and obligations are clearly recorded

Prepare a list of the significant assets used by the business and check it against your accounting records. Depending on the business, that might include vehicles, machinery, computers, stock, software arrangements and intellectual property.

Clarify what the business owns, what it leases or finances, and what belongs to the owner personally. A buyer should not have to guess whether a critical piece of equipment is included in a proposed sale.

Review outstanding loans, leases and other financial commitments too. If an asset is subject to finance, obtain the current information and discuss with your advisers what may need to happen as part of a transaction.

This is also a good time to identify important arrangements that are not obvious from the financial statements. A premises lease, major supplier agreement or software subscription may be essential to continued operation. Your lawyer can help review the contractual position when a sale becomes more concrete.

Think about the type of sale before negotiating terms

There is more than one way to sell a business. A transaction may involve selling company shares or particular business assets, among other possibilities. The structure affects what the buyer receives and can have different tax and legal consequences.

Discuss the possible structure with your accountant and lawyer before agreeing on headline terms. Inland Revenue notes that the tax treatment of buying or selling business assets or shares can be complicated and recommends early professional advice. The allocation of a price among assets and the GST treatment of a transaction may also require careful consideration. 

Do not assume that every sale of an operating business has the same GST treatment. Inland Revenue explains that a sale of a business as a going concern may be zero-rated when the relevant requirements are met. Whether those requirements apply to your proposed transaction needs to be checked. 

The practical lesson is to involve your advisers while there is still room to shape the deal. It is much harder to resolve a significant tax issue after you and the buyer have already agreed on a price and structure.

Prepare for buyer enquiries

Once a serious buyer is interested, they are likely to ask detailed questions about the business. You can make that stage more manageable by organising the information in advance.

Depending on the nature of the business and the proposed deal, this may include:

• Recent annual financial statements and current trading reports

• Tax and GST information

• Details of loans and other financial commitments

• Aged lists of customer invoices and supplier bills

• Information about stock and significant assets

• Key customer, supplier and premises agreements

• Records that explain unusual transactions or changes in results

The exact information shared, the timing and the confidentiality arrangements should be agreed with your sale advisers. There is a difference between preparing documents internally and giving unrestricted access to sensitive business information.

As you assemble the records, note any questions you cannot yet answer. That list gives you a useful preparation plan. It might show that an asset register needs updating, an old debtor balance needs resolving or monthly reporting needs to be more consistent.

Affinity has written about the financial due diligence a buyer may carry out. Reading it from a seller’s perspective can help you anticipate the questions your own records may need to answer.

Keep running the business well

Preparing for sale takes time, but the preparation should not displace the work that makes the business valuable.

Continue serving customers, monitoring margins and keeping records current. Be cautious about making a costly change solely because you think a buyer will like it. A new system or additional hire may be worthwhile, but assess its effect on the business in its own right.

If you have a longer timeframe, set a few measurable goals. You might aim to reduce overdue invoices, improve reporting, broaden the customer base or train staff to manage work currently dependent on you. Review progress regularly rather than waiting until you decide to put the business on the market.

When an owner can explain not only the results but also the systems that produce them, buyers have a clearer picture of what they are considering.

Get advice before setting expectations

An asking price should be informed by the business’s circumstances and the market for it. Book value, annual sales and one year’s profit each tell only part of the story.

Speak to advisers with relevant experience about valuation, potential transaction structure and the practical steps involved in a sale. An accountant can help you understand financial performance and prepare reliable information. A lawyer can advise on agreements and legal obligations. A business broker or other sale specialist may assist with the sale process and potential buyers.

Business.govt.nz describes selling a business as a specialist area and recommends getting suitable help with preparation, valuation and finding or negotiating with buyers.

Seeking advice early also helps you test whether a sale now is likely to meet your goals, or whether you would benefit from improving parts of the business first.

Prepare early, even if the sale is some way off

You do not need a buyer at the door to benefit from this work. Clean financial records, more predictable cash flow, clear asset information and a capable team make a business easier to understand and easier to operate.

Start with an honest review. What could you show a buyer today? Which questions would take weeks to answer? What depends too heavily on you? Then prioritise changes that will strengthen the business while you own it.

Affinity Accounting & Advisory Limited provides accounting, tax and business advisory services to New Zealand businesses. If you are considering selling or stepping back in the future, contact the Affinity Accounting team to discuss your financial position and the preparation that may be useful before a sale.

Frequently asked questions

When should I start preparing my business for sale?

Start before you need to sell, if possible. Bringing records up to date can be done relatively quickly, but reducing owner dependence or broadening a customer base may take much longer.

What financial records will a buyer want to see?

The answer depends on the business and the proposed transaction. Recent financial statements, current trading information, details of debts, unpaid invoices and stock records are commonly useful to prepare. Agree with your advisers what to share and when.

Does a profitable business automatically command a good sale price?

No. Profit is important, but buyers may also consider the reliability of earnings, customer relationships, owner dependence, assets, risks and what it will take to operate the business after a handover.

Should I speak to an accountant before agreeing on a sale price?

Yes. An accountant can help you understand the financial results and discuss potential tax implications. Speak with a lawyer as well before agreeing to transaction terms or signing documents.

What our clients say

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