“When and how should I exit from the business?” is a question we are being asked much more frequently than ever before.
There are so many ways to exit a business that this brief note cannot cover them all, but here are a few issues and options that should be considered.
What is your business worth?
This is a very difficult question to answer with any accuracy. The only true valuation is the sum actually paid between a ‘willing buyer’ and a ‘willing seller’, so any assessment prior to that is at best an educated guess. Some businesses may have more tangible assets than others, such as care homes and hotels, where a big portion of the value can be more accurately assessed, or the level of profits may be much more stable such that a goodwill figure is easier to justify than for a more volatile business.
However, it should be possible to establish an approximate value that makes decisions in principle possible. I.e. if you decide that you need £5m for the business to be able to pay off any debt and have the retirement you want, knowing that the business is worth only £2m or £3m, or perhaps £7m or £8m, is sufficient to know whether to proceed to exit or adopt a ‘heads down and carry on’ strategy. So start with a ball park valuation and see how realistic your exit plans are.
However, don’t just make this judgement yourself. In our experience, many business owners’ estimates of their business value can be wildly adrift from reality. Occasionally they are a bit pessimistic and might guess half of the potential value, but more often their estimates can often be significantly higher than the reality! Invest in a valuation from an independent valuer so you are able to plan with a better degree of certainty.
Is it ready to sell?
There are two elements to preparing a business for sale. The first is often referred to as ‘grooming for the sale’. Spending a few years making sure that there is an upward trend of profits, very careful control of costs and a good presentation of the future potential of the business. Cleaning up problems such as removing difficult employees or dealing with overdue debts etc. It is surprising how much impact a careful campaign of preparing for a sale can have on its value and saleability. The problem is that this takes time, and the vast majority of sellers seem to reach a decision to sell and then want to get to the end point as quick as they can. If you can set a 3 year plan in place, you are much more likely to achieve the end result you want.
The second part is being ready for the Due Diligence (DD) process. When a buyer agrees to buy a business, they, or their advisors will need to check that they are getting what they expect. This will include legal due diligence on the business structure, property ownership, historic disputes and a wide range of potential risks they will not want to take on. Financial due diligence will seek to confirm that your reported financial performance is accurate and that the assets and liabilities reported on the balance sheet are correct. A seller can expect a DD questionnaire to include many hundreds of questions about their business, and this can be a time consuming, expensive and distracting process. It is also a little adversarial, as it feels like everyone is trying to pick holes in your business and that they assume you have told a pack of lies. But this is just a more complex version of buying a house where you may get a surveyor to check there is no subsidence or dry rot and a lawyer to check that they actually own what they are selling and that the garden they say is theirs isn’t actually a neighbours!
If you are planning to sell, soon or in a few years’ time, you can do a huge amount of work in preparation that will make the DD process much easier. This may be simply having all the data marshalled ready for the question, or it may be that getting prepared uncovers a problem that you can then fix in advance and avoid the buyer getting concerned.
Understand a sale takes time
Even if a buyer has all the cash needed to buy your business, the DD checking and legal processes will probably take a minimum of two months. If the buyer is borrowing money, or the values are high, or your business a bit complicated, this could stretch to 6 months or even longer.
The length of the process affects three things…
- The longer it takes the more it costs (both sides)
- The longer it takes, the lower the chance it will actually complete (circumstances change)
- The longer it takes, the less money you are likely to get (see below).
The key problem with a drawn-out sales process is that the seller often starts to switch off from running the business. They are distracted by the time being spent on DD questionnaires, meetings with lawyers and accountants and with the buyer and their team that will take over the business. Whilst that is happening, it is common for sales to dip, key employees to leave or any number of issues to arise that gradually undermine the value of the business agreed. The seller also gets frustrated by the process and starts to picture themselves lying on a beach and not having all the pressures of running the business in the future.
So 3 months in to discussions, the buyer is getting a little concerned that current performance is dipping, there is a loss of focus etc. or perhaps they were always planning to play hardball, and they ‘chip’ away at the agreed price. “We love the business, BUT…”. The seller simply cannot consider losing the sale and having to go back to running the business and starting a new sales process with a new buyer, and they agree to a reduced price for what seem like entirely reasonable adjustments.
Unfortunately we have seen many businesses that end up selling for a price well below the minimum they would ever have entertained at the start of the sales process.
The key to avoid all this is to be completely ready for the sale and the DD process by having all the right information prepared in advance. The quicker the sale happens, the less it costs, the greater the chance it happens and the higher the price paid.
How do I find a buyer?
There are many options for the potential buyers of your business. That includes your family or your employees or management team, competitors, suppliers, simple investors looking to own a good business etc. Each will have different issues that concern them, and different approaches to the purchase.
For a seller the big concern is letting people know a sale process has begun, in case this becomes damaging to their business. Customers or employees may choose to leave, competitors may use the news to disturb key customers etc. Controlling who knows what, when, is critical.
You can make approaches to potential buyers yourself, but the odds are you have never sold a business before and won’t really be sure how to do this well. There are business sale agents out there that can do this for you, and as you might expect the calibre of these firms vary enormously!
If selling is something you want to look at, speak with your Accountant and get their input on the options and approach.
What will you do next?
Let’s suppose you do find a buyer and sell for a decent price. Very few people really consider in advance what they will do next. It is a bit of a cliché that many middle aged men retire with a big pay out from selling their business and end up dead on a golf course within a year. But there is an element of truth in this. Many have been running flat out for decades, with the pressure and stress of managing a business something they are used to and can manage to a great extent. When you go from 100 miles an hour straight into a 20 mph ‘retirement zone’ the stresses are different but can be even greater.
If you are thinking of selling, you must think about life after the sale. What will you do? How will you keep busy and maintain your sense of self-worth? Moving from Boss to Pensioner can be a huge culture shock (regardless of how much money you have in the bank). You may think you can indulge you weekend hobbies full time (golf, sailing etc) but that will be boring within a few months.
You also need to consider the financial impact. We have many clients taking say £150k a year or more to live on. Will the proceeds of the business sale (after tax) enable them to earn that sort of income in retirement? Spending out of income you generate year after year is much easier than spending out of capital that will run out one day.
There is however a natural point when a business owner should exit from the business. It is the whole point of building the business, so that it can provide the retirement you want and be passed it on to others for it to continue beyond you. Much better to be in control of the process, planning ahead, preparing the business in advance and being ready to run a sales process as well as you have run your business all those years.