One of the main exit strategies for business owners is to sell their shares to a third party and walk away with the cash reward for their hard work over the years.
As most business owners will only ever sell one business in their career how do you make sure that you get maximum value?
If you have always planned to grow your business enough to sell it and retire on the proceeds there are a number of key points to understand about the process:
1) The process of getting the business in good shape can take years. Making sure that it has the right systems, processes and accurate finances in place is equally as important as just showing a profit each year.
2) Finding the right buyer is key and this is usually NOT someone in the same industry, or a competitor.
3) Getting out at the right time is key – leaving it too long means you have often emotionally sold and want to get out ASAP, leaving you open to accepting too low an offer.
4) Understanding that you can sell the business assets, or you can sell the shares.
Getting the business in shape
During any sales process, there will be an element of due diligence done by the potential purchaser. How detailed this is will depend on the size of the sale but in essence they will want to see detailed information on the company’s finances, future order book, explanations of debtor balances and information on loans in the business, plus whether the company is up to date with all payments to HMRC.
Poorly managed finances, or errors in key management reports will have a negative impact on the sales price. This is simply because the purchaser can’t get comfortable that the numbers they are looking at are robust and there won’t be any nasty surprises if they go ahead and buy the business.
It is absolutely key to have robust numbers to maintain credibility and therefore maximise the price someone is willing to pay.
Poor trading results can be explained and may even present an opportunity for a purchaser to improve the business if they buy it; however, being able to demonstrate that the company has written and robust procedures in place for cash collection, paying suppliers, and buying stock etc will add value.
Get into the habit of running monthly management accounts off – and then actually reading them! Many business owners feel that if they have cash in the bank and sales orders coming in then that must be fine but ask them how much profit the business made and they haven’t a clue. If you don’t understand the numbers, then you risk missing opportunities to improve your results and thereby improve the sales price.
Finding the right buyer
Avoid discussing your potential sale with ‘friendly’ competitors, or your biggest customer as they will always be interested but they will never pay the top price. Instead, you need to market your business for sale to a wider, more serious, audience to bring an element of competition to the process.
Using a reputable sales agent may seem expensive but they will introduce a properly managed sales process, with a large database of serious parties that have been pre-checked and have the funding to complete a sale. The price you pay to the sales agent will pay for itself when you exceed the sales price you wanted for the business.
Case study – sale of a wholesale sweet business
Our client had operated as a wholesaler in the sweets and chocolate industry for a number of years and when they decided to sell, they used a sales agent we recommended to take them through a thorough process that took in excess of 12 months. The upfront fees paid to the agent covered in-depth analysis of the finances to iron out any queries that may have come up during due diligence, pre-checking potential parties, using their in-depth knowledge to offer the business for sale to parties in different industries and managing the sales process, meetings held and sale contract negotiations.
The business finally sold for more than three times the original figure that the business owners had anticipated, and was sold to a wine merchant who could see the opportunity that buying this would bring to its own portfolio. The fees paid at the beginning were totally eclipsed by the uplift in the final sales proceeds.
Case study – sale of IT business to an overseas buyer
Our client operated two IT businesses, one offering managed services and the other offering hardware for legacy systems. After spending 10 years building the business up the owner engaged a corporate finance house to help him find a buyer.
We were retained to assist with the financial due diligence, which proved extensive, and supporting the owner in providing the information in a confidential manner.
The end result was a properly managed sales process where our client achieved maximum value for his business which was in excess of £5 million.
Getting the timing right
Understanding how long it might take to get a business in shape for sale, undertake a marketing process, go through due diligence and ultimately agree a sale can take between 6 months to 2 years typically. Therefore, it’s important not to leave things too late. If you leave it until you are tired, fed up or had enough then you risk accepting the first offer and selling for less than the business is worth.
It is a situation that you would find yourself regretting once all the dust is settled, rather than enjoying the rewards from all your years of hard work. So having conversations about the potential future sale of your business need to take place 2 -3 years in advance of you being ready.
Understanding what you are selling
Typically, business owners will sell the shares in their business, rather than the assets and understanding this point is key to understanding the basis of the agreement and what tax relief is available on the sale proceeds. Your solicitors will also need to know so they can draw up the right sale agreement.
If you are planning to sell your business, you should plan ahead and understand the steps that you need to take as well as the timescales you will be working with so that you can factor this into both your business and personal plans. You should also allow time to ensure that your business is in the best shape it can be so it is presented in the best light possible.