The main exit strategies for business owners include selling the business to a third party, selling it to their employees or management team, or winding it down and selling the assets.
The ideal solution for most sellers would be to sell the business for the maximum value to a third party. This is likely to generate the best return for their hard work and effort over the years.
Most business owners will only ever sell one business in their lifetime, therefore it’s vital to get it right. If you are considering selling your business, then read on to learn more about the process and things you should be thinking about.
Or you can join our free seminar.
You will probably only ever sell a business once so what do you need to know?
Most business owners will only ever sell one business and there are some important things to consider in the months and years leading up sale to understand and get right.
The process of getting the business in good shape can take years, and it isn’t something that you can start a few weeks before the sale.
To get the best value when you come to sell requires more than just showing a profit in the accounts.
Making sure that you have accurate and robust numbers, up to date systems and documented processes is equally as important.
The numbers
It goes without saying that you need robust numbers both for your own benefit when operating the business, and also to pass accurate financial information to a potential buyer.
The numbers you are producing now are the ‘historic’ numbers a buyer will see if you sell in 3-5 years’ time. Therefore now is as good a time as any to tidy up a few things.
Buyers want to feel confident that they can rely on the numbers, and any errors that are found can make them nervous about how robust the business is. Errors in the numbers leads to a lack of credibility and provides the buyer with an excuse to reduce the overall price.
Reducing revenue risk
Customer concentration is a big issue for a buyer. Imagine if you bought a business where 50% of the orders were placed by one customer and a few weeks after the sale completes that customer walked away. You would be left with half the business and a sour taste!
Buyers will look at any business and typically ask to see top 10 customers by value so they can assess the risk. If the buyer feels there is a sizable risk, they are likely to reduce any offer they make to counter that risk.
Once you understand how a buyer will see those risks you can start taking steps to make the changes you need to reduce the risk. For instance, if 50% of your business is with one customer you will need to identify new customers or even offer new product lines to diversify.
None of this takes place overnight and relationships can take months if not years to build therefore focusing on reducing risk in this area should be on the agenda now, not just when you’re ready to exit.
What’s the opportunity for the buyer?
A buyer wants to understand what their opportunity is if they buy your business. Perhaps they can bolt on your business to their own and offer complimentary products and services. Perhaps they can see how economies of scale can make them more profit.
It’s a good idea to have a growth plan in place, perhaps a forecast for the next 12-24 months so you can show a buyer the opportunity they are getting if they buy your business.
You can demonstrate how the business is going to grow in revenue, whilst also factoring in realistic costs such as the cost of a new sales person, so the buyer knows the forecast growth is achievable.
Structure & people
You don’t have a business if there’s just you, you have a profitable job. A buyer wants to see that the business can survive without you therefore a question you need to ask yourself is ‘what happens if I take 2 weeks holiday now. Can the business carry on as normal?’
Getting the right people on board can take longer than you think, not to mention handing over key relationships with customers to ensure that the business works when you’re not there.
Having the right team in place will be of value to a buyer. The opposite is also true. If you have people in your business that are under-performing or have a history of grievances and disciplinary action, a buyer will be cautious about taking on this responsibility.
Buyers tend to legally inherit the employees on sale, including their service history. Whilst a long serving team may look attractive on the outset, the buyer will carefully scrutinise any HR issues and factor in any potential risk to the price they are willing to pay.
Therefore it makes sense to have those difficult conversations now if you need to, rather than when you are ready to start the sales process.
Systems & processes
Generally, people find themselves ignoring the ‘boring bit’ around the documentation they will need on sale.
It’s a time-consuming job to document systems and processes, so this tends to get overlooked until you have reached a deal and then suddenly receive a long list of questions from the buyer’s solicitors.
It’s important to note though that lack of documentation that you should be able to easily put your hand on, leads to a due diligence process dragging on for months longer than it needs to. The knock-on effect is that people lose energy and eventually lose interest and you risk the buyer walking away.
Summary
If you are planning to exit your business by way of a sales process you need to be realistic about the timeframe that might take.
You also need to recognise that leaving the preparation to chance is essentially leaving money on the table when it comes to a sale.
We can help you achieve this. From helping you understand how the process works, including how we would value your business, through to support during the due diligence process, and completion of the sale.
We can help you take the right steps to get the maximum value for your business and support you so that you don’t make any costly mistakes during the process.
If you are thinking about selling your business in the next few years and would like more information you can
join us at our dedicated seminar at Bowcliffe Hall on 9th September.
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 company in a completely different industry 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.