A Guide To Selling Your Business
Selling your business is likely to be the most important financial transaction of your life, so it’s important to get it right. Given the herculean effort that most people put into building their businesses, it’s amazing how many of them fail to plan their exit, but careful planning is crucial!
Your exit will be your final chance to be rewarded for all your efforts, so let’s consider the steps you need to take.
1. Preparing for sale
The best way to prepare your business for sale is to consider what buyers and their advisers will be looking for when they come knocking on your door. If it’s not available they’ll lose confidence. If they lose confidence, the deal will either collapse or you’ll end up on the back foot, compromising on your terms or accepting a lower price.
People buy businesses for all sorts of different reasons, so it’s important to think about who might buy yours and what’s likely to be important to them. It might be that you’ve got some unique IP, a great sales team, or some valuable contracts. Imagine, then, what will happen when your buyer discovers that your IP is largely or even completely unprotected, or that your sales team is actually outsourced, or that your valuable contracts are about to expire. With the benefit of forethought, much could have been done to resolve these value-busting issues.
What things look like on the outside may not be well represented on the inside. The challenge is to get them both aligned.
We're now in an environment where due diligence is more onerous than it's ever been. During the due diligence process people look for reasons not to do a deal rather than reasons to do it. And if you are difficult or you're not ready or you won't supply data, you enhance your chance of not doing a deal.
Here are some thoughts to help you prepare for exit:
Plan well in advance of the sale. Typically business owners don't allow long enough. David Molian of Cranfield School of Management says that if you're going to sell your business you should expect at least two years between the decision to sell and the actual sale taking place.
Identify your potential acquirers. Non-obvious buyers are rare, so think about who might want to acquire your business and why. Know who you intend to sell to and their strategy going forward. Evaluate those suitors and their potential reasons for buying you. Read up on what public information you can find.
Give yourself time. As a minimum, selling your business will be a part-time job and can even become full-time.
Focus on your trading. Consider how the business will be run during the sale process to demonstrate strength and hit targets.
Organise your data. Have systems in place that provide transparency to the buyer. Pull together the leases, asset registers, insurances, staff and customer contracts, accounts and business plans etc. Consider setting up an online (or ‘virtual’) data room.
Normalise costs and investments. Make it easy for the buyer to understand your trading performance. Where possible, your accounts should be the guide, but these are often clouded by one-off, experimental or even quasi-personal expenditure. It can get messy trying to pick out costs that won’t recur and if you’re selling your business on an earnings basis, remember that any unnecessary costs will reduce your price by a multiple of their value.
2. Maximising capital value
In simple terms, the acquisition of a business gives a buyer the right to its future profits and cash flows. These may be generated by the target itself (from your point of view, the better and more valuable scenario) or through synergistic savings or efficiencies. The buyer will therefore be thinking about the prospects for realising these profits and cash flows, as well as sustaining them in the future.
It’s difficult to generalise, but most trading businesses are sold on an earnings basis. This means that their value is calculated as a multiple of their profits (or EBITDA/ EBIT). The clue is in the word ‘multiple.’
If you’ve got a business making £2m pa, and the multiple used for the purchase is 5, your business will be sold for £10 million. However, if the business is making £1m but the multiple used for the purchase is 10, the sale value will still be £10m.
Too many entrepreneurs focus on profits, paying little attention to the impact they can have on their multiple. To maximise your value, you need to focus on both.
Here are some thoughts on how to maximise your capital value:
A strong management team. It’s highly likely that any purchaser will place fundamental importance on the ability and retention of your key management.
Profitability and stability. In an ideal world, your business will be able to demonstrate steady turnover and profits growth, along with low volatility and efficient systems and processes.
A stable workforce. A well-motivated and incentivised staff is less likely to jump ship on a change of ownership.
A scalable business model. Scalability creates value. If a buyer can identify realistic opportunities for exponential growth, he will value your business more highly.
A growing sector. Keep up with the times. A business that positions itself to access an emerging or growth sector will be more attractive than one which operates in a saturated or declining market.
A strong brand. Consider opportunities to raise awareness of your brand and become more prominent in your sector. Write articles, make videos, become a thought leader, attend and speak at industry events. Businesses that get noticed get bought.
Gather case studies and testimonials. Ask your customers to attest to the benefits of working with your business. Publish their comments in marketing materials and blogs.
Back office. Don’t skimp on HR, finance and administration, but don’t create unnecessary bureaucracy. Streamline processes and avoid the build up of annoying and unnecessary rules.
Get good advisers. Choose advisers who have been there and done it before. Ask about their track record and experience. Assess their suitability for your sector and, if appropriate, their international capability. Above all, seek rapport and get them on board early.
3. Market timing
As if there wasn’t enough to think about, timing your sale is critical to maximising your value and achieving a successful outcome. Trying to sell your business in the depths of a recession, when prices are low and finance is hard to come by, is probably not the best idea.
Market dynamics and activity can ramp up a company’s perceived value and present a window of opportunity which can be seized before the buoyancy in the sector diminishes.
Economies and the markets within them always move in cycles. Selling towards the peak of the cycle in your particular sector should ensure a string of interested buyers and an opportunity to create competitive tension.
The best time to sell your business is when you don’t need to. So, if you are being approached and the marketplace is creating an opportunity, you should sit up and take note. On the other hand, business owners sometimes have no choice in the matter. There may be financial, health or family reasons which precipitate a sale.
4. Doing the deal
If the timing feels right and you’ve got your advisers on board, it’s time to prepare your Information Memorandum (IM). The IM is the primary source of information for potential buyers, describing the business, its products and services, its markets, its management and its financials, plus any other relevant information. Both you and your advisers must be happy that the IM is correct and credible in all respects and contains sufficient detail to enable prospective buyers to put forward their proposals.
With the IM in hand, it’s just a matter of finding the right buyer and convincing him to pay the right price!
For further information on preparing to sell your business contact Guy Rigby on 020 7131 8213 or email email@example.com.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.