The basic principles of selling are the same whether you are selling branded mugs or the business that makes them. Of course the details are much more complex than sending a quote and signing off an order form.
So let’s explore some of the key principles to selling a business for the best price possible.
1. Why are you selling?
Start by being crystal clear on your motivation for selling.
If you think the business is distressed or heading towards big challenges, you may want a quick sale before these things hit. If you want a big cheque to reflect your life’s work, then it may take longer to find the perfect buyer. If you want to ‘cash in’ your chips and live off the money, then consider where you would invest that and what returns you might get. If you are simply exhausted or have age or health concerns, then there may be more focus on the timing of the sale than the value.
Do you want to exit completely, or remain partially involved? What will you do with your time afterwards? Travel, Golf, Sailing?
What will your lifestyle cost to support? Is there a big mortgage on your house to clear, do you plan to take 10 holidays a year?
We see many business owners look to sell without any thought to what their life would be like after the event, or without thinking through the values they expect or need to be able to achieve their future plans.
30 years ago, the vast majority of business sales would be a 100% disposal to a single buyer for an immediate lump of cash. Sellers then invested that cash for double digit returns and lived off the passive income that their capital could generate.
Interest rates and investment returns have completely changed that dynamic.
So don’t go any further with the selling process until you are 100% clear on the reasons you are selling, your post sale plans, and the financial realities for your future. It may be that selling is the wrong answer!
2. Who might want to buy?
The most obvious buyers are competitors that want to grow their market share and take out some competition in the process. They want economies of scale by cutting out duplicated costs and getting better buying deals.
It may be a supplier looking to add another link into the supply chain, and increase profit by offering a wider service to customers.
It could be your management team who are ready to step up and buy you out, or a management team buying in that think their management skills can improve your business.
It could even be an entirely unconnected buyer that just sees a good business with profit potential. As investment returns have plummeted, there are many more investors with cash that want the better returns they can earn from a well-run business rather than passive investment in the stock market.
Again, it is really important to consider who the most likely buyers of your business are and what their motivation for buying is. This might be a list of your 10 biggest competitors, or largest suppliers, or an honest assessment of your management team’s ability to run the show.
Who you are selling to will affect how you sell and how you prepare the business for sale.
3. What are you selling?
This may seem obvious, but there are some really critical issues to consider.
Are you selling all the business, a small part of it, or a majority stake but hanging on to a slice? Are you selling shares in a company, or the trade and assets of the business? Is it a simple generator of profits, or do you have something people would buy for strategic reasons (a branch network that dovetails with theirs, a trademark or patent they want, or a customer list they would die for?).
These issues will affect the tax you pay, the expectations of the buyer, and of course the headline price.
Get external input on these elements as those running a business often see all the flaws rather than the positives, or don’t have a wide enough experience to know what the market place values in the business.
These three critical aspects should all be clearly understood long before you go out looking for buyers. In many cases it will change completely how you take the business to market, and in quite a few it may even mean you don’t seek to sell now, or at all!
But let’s just explore some of the practical things that can be done in advance of a typical sale to help with the process.
There are two important aspects to understand.
Firstly, if you improve what you have to sell, then more buyers may be interested and a higher price may be achieved. Some of this is real and some cosmetic. If you are selling a house, you should certainly fix a leaking roof and deal with any damaged parts of the building, as these may turn away many potential buyers. But a good declutter and a good clean will also improve the initial impact and keep more interest from more people.
The second point is that the longer a deal takes to get done, the greater the chance it falls over before completion. Delays may mean the buyer’s circumstances change, funders may pull offers of finance, or better deals may come along instead of yours.
So whilst preparing your business for sale is partially about presenting it in a favourable light to attract more buyers and maximise value, it is also about trying to make the buying process simple so a deal can be done quickly.
Here are a few bullet points any seller should consider…
- Buyers want your turnover to stick around. The cleaner the list of customers, the better you are at staying in contact (and demonstrating that), and the more who are locked in on annual sales agreements or retrospective incentive schemes, the better.
- People are a huge part of any business. Is there a clear list of people, roles, salary packages and performance grades? Are the contracts of employment up to date and compliant? What notice periods do they have, and how locked in are they with bonus schemes and benefits packages? Have a very clean set of people data that a buyer can review and check easily.
- A good financial pack. Historic accounts for the last 3 years, up to date Management accounts, and other Key Performance Information (KPI’s) that report underlying information (such as occupancy rates in a hotel or quality rejects in a manufacturing business).
- The fixed asset register should be a clear list of all assets owned, and where they are. Many businesses find that accounting records of fixed assets show no relation to the reality of actual assets. Computer equipment that has been replaced may still be in the accounts at some written down value.
- Good supplier lists and details of any negotiated buying deals may be really important to a buyer. Can supply be maintained on the same terms under new owners?
- All legal matters are resolved. If there are any complaints in progress, resolve them. If there are any employment issues of concern (recent dismissals, discrimination complaints etc.) resolve them or make sure they are clearly documented. If you own property make sure you have all the legal title issues resolved (we often find historic anomalies in older businesses where restructures have occurred but detail not properly followed through).
- Do a tax review. Any basic due diligence process (the buyer checking what they are buying) will uncover any tax concerns, such as whether required tax elections are in place, or the need to evidence the tax values of assets bought many years ago. If there are any grey areas on tax, the buyer may want you to indemnify them against any HMRC action, so try and clean up the situation before the due diligence process finds it.
If you do find a buyer wishing to proceed, they will almost certainly ask their advisors to do a ‘due diligence review’. This is the process of them checking that what you say you are selling is in the condition you say it is and that you own what you say you own. That process is quite standard, and it may therefore make sense to do a due diligence review on your own business before you take it to market.
Flush out all the potential issues that may reduce the price or make the buyer nervous, and resolve or clarify any that you can. Even if an issue can’t be fixed, a clear explanation of the background, the risks, and the current situation, may be enough for the buyer to simply ask for you to provide a warranty that you will sort it (and pay) if it blows up later. Buyers are frightened by the unknown, not by risks.
As you can appreciate from the brief guidance above, selling a business can be complicated and take time. You should ideally be looking at least a couple of years ahead of an exit to try and manage the reported results to demonstrate a good trend of upward performance, and have the time to do all the tidying up on critical issues.
So if you are thinking of selling at any point in the future, have a plan. Set deadlines and milestones. Prioritise key issues and get expert advice from people who have done it before. Getting this right may mean + or – 20% on any deal value, but can often mean the difference between ‘deal or no deal’.
Peter Hill
Director
Mark Holt & Co