A 5 minute read
How to successfully sell your business
Any business owner knows that it takes time, commitment and patience to grow a business. These are the elements which are also needed when selling a business.
At the outset, many people set up a business not knowing whether it will be a ‘lifestyle’ business with a particular income to enable living their chosen lifestyle. The opportunity to sell your business and create capital value is often a surprise as against a calculated strategic aim at the start-up stage. Either way once the decision is taken to take steps to sell a business there are some important considerations that if addressed can ensure that capital value is protected and even enhanced.
This article provides tips to help prepare a business and secure a successful sale.
Plan, plan, plan your exit strategy
You will have a timeline in mind for a sale, but timing is generally dictated by market conditions. The best indicators of when to sell are the financial climate, market trends and personal circumstances. Early planning will ensure that you have the right structures and processes in place to maximise success when conditions are right and tracking sales of businesses similar to yours can provide valuable intelligence.
So how do you know when the time is right to sell your business?
Begin with your ultimate goals – the price you wish to achieve and when you want to sell – and then work backwards to how you are going to get there. You are going to need to engage with professionals to generate this intelligence and so picking those advisors will be crucial … much in the same way as a building project benefits from a Project Manager. And much like an episode of Grand Designs, be aware that selling a business can take longer than first imagined!
Choice of professional support is all part of the planning. An experienced professional capable of providing holistic advice through this process is not only relevant but crucial to the prospects of adding value. Professional input is likely to come from solicitors, accounts, corporate finance, tax and financial advisers. This will require coordination. Early advice will help to set expectation of a realisation from a proposed sale, so take advantage of the help and support from suitable professionals.
Once a decision has been taken to sell a business, focus has to shift towards developing the business such that it is viable and attractive to potential purchasers by maximising its value. In that regard getting the business basics right is essential. You will need to have a focus on sales and customers, brand and reputation, processes and infrastructure all of which must provide a potential purchaser with a positive feel and where needed, results to back up claims made. This includes current and projected success such as contracts secured or repeat business expected.
A strong management team, who can both add value to a business and assist with preparing for sale are important. The business needs to maintain a level of performance through this period whilst your focus will inevitably shift towards the sales process. This infrastructure should give you more time to work on the sale and prevents the business from being damaged due to a lack of attention. The same team will also provide the new owner with continuity after the sale, which should enable you to exit quickly and smoothly. A strong management team can also extend the likely suitors and raise the prospect of a management buy-out.
Bear in mind that like an investment property, your business is only worth what the highest bidder will pay.
Your view of this may be very different from the view of a prospective buyer, and a business that is heavily dependent on one person, product or customer may be difficult to sell or at best its value heavily discounted. If the business is seen to revolve around you as the business owner, it makes the business less attractive and less valuable. A strong management team supported by a strong brand and reputation shows a strength and depth which is attractive to potential buyers.
Retaining good individuals requires a considered incentivisation package both pre- and post-sale. This will depend on the industry sector, the size of the business and the individuals themselves. Some will prefer cash bonuses, which can be expensive. A less expensive alternative is a share option plan, which is only available to limited companies. The most common is the Enterprise Management Incentive Scheme (EMIs), a highly flexible and tax efficient scheme designed specifically for smaller companies, with recipients selected at the employer’s discretion. The development of a matrix identifying who will benefit from the sale will also give focus to the involvement of people within the process and develop out the Sale Plan which will co-exist with a wider business plan. It is imperative that where required these two separate plans have overlap providing for a consistency in operations and management that will see both plans achieved.
Tax planning should be at the forefront of considerations when preparing for sale. The ownership structure will be relevant as to whether entrepreneur’s relief will apply. It is important to remember that shares in trading companies can be tainted for entrepreneur’s relief purposes by substantial non-trading activities such as owning investment properties or activity management of surplus cash.
Preparing your business for sale
Historic accounting facts are important but the keys to the sale price are current profitability, future earnings and potential risks arising from a change of ownership. A business that relies on a few customers can be considered high risk and therefore less valuable. Spend time improving profitability, minimising risk and working on future earnings forecasts.
As the proposed sale window approaches every facet of the business should be reviewed. More importantly any issues arising should be addressed. Such an exercise has two major benefits.
- Firstly, it will root out any problems that could occur during the sale process or could devalue the business, whether legal, accounting, tax or environmental issues. No-one will want to acquire a business with an outstanding VAT enquiry or employment tribunal issue, at least without a price reduction or significant indemnities.
- Secondly, an up to date response to a request for information will prevent any lengthy due diligence developing deal fatigue. In this regard attention should be paid to ensuring that where possible control of the sale process and its time frame rest with you. If this is given up to the buyer then there is an increased risk of the buyer using that leakage of time to chip away at the purchase price.
To avoid such pitfalls the early development of a Data Room setting out buyer relevant information would be recommended. After all you cannot be sure despite good planning as to when the right offer might come in for the business.
Issues arsing from the review should be addresses as soon as practically possible.
Have patience with the selling process
Be patient … preparing for sale takes time. It is important for you to continue to operate the business as if it was not for sale, as well as to understand that businesses do not sell overnight and many ’deals‘ can fall through.
That said it is my firm belief that the more prepared your business is for sale, generally, the faster it will sell.
Beware of this common pitfall: many owners put in decades of hard work building their business, only to throw away some of the rewards by failing to plan thoroughly, considering the sale process properly and becoming impatient to sell.
Business planning: next in this series: is your business ready for investment? Should you approach a bank or a business angel and what would they be looking for to convince them to provide financial support?