Many owner-managers would seek an exit if they felt they could maximise the value locked up in their businesses. They recognise it as strategically beneficial and an excellent route to achieving real time and capital wealth. Sometimes, however, today’s market value is not quite enough for your personal aspirations. After all, there is no point in selling and struggling.
Getting your business ready for sale can improve pricing and reduce the time to complete a transaction, but there are two other compelling reasons to begin grooming your business:
- most of the steps you will take are, in fact, good business practice
- you never know when you may be forced to sell the business, either because of ill health or injury.
Grooming your business for sale takes time, which means that you need to get started well in advance.
Could You Sell Your Business Today?
Most business owners would instinctively answer yes to this question without considering whether they would be able to maximise the value of their business. Unless you can answer yes to most of the following questions, you aren’t ready:
- Can you respond if a strategic purchaser makes an unsolicited approach to buy your business? Do you have a team of sophisticated advisers available to negotiate with a prospective strategic buyer?
- Can you show a buyer a business plan that articulates your growth strategy and prospects?
- Do you feel good about the prospect of walking a prospective buyer through your premises?
- As the business leader, are you critical to day-to-day operations?
- Is there a contingency plan so that the business can continue without you if your personal or family circumstances change suddenly?
- Does the plan address short and medium-term issues to preserve value through any transition?
- Is your management capable of filling your shoes?
- Do you have a clear understanding of what your business is worth today for a range of different types of purchasers?
Begin the Grooming Process Now
The following outline summarises the areas you should focus on to prepare and improve your business.
Understanding What You Want
You obviously have to understand what you want out of a business sale before you embark on the process. Your objectives from a transaction could include:
- Maximizing the total value received for your business
- Maximizing the cash element of the deal
- Receiving support for strategic growth initiatives
- Achieving financial security
- Securing long-term employment
- Pursuing a new venture or a hobby
- Retiring early (or late)
- Preserving the well-being of existing employees, customers, and suppliers
Grooming Issues – Financial and Operational
If you do not already have one, you should prepare an annual business plan, including a detailed three-year financial projection. You should then use this budget to drive the financials of the business. The more a buyer can count on expected future revenue e.g., a contract backlog, the better.
Part of the business plan should be a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. A buyer will want to know not only your strengths but also your weaknesses. A good analysis of opportunities and threats can tell the buyer a lot about how problems can be solved. You shouldn’t be afraid to point out the negatives to a buyer as it will provide the buyer with further rationale to buy the business and implement improvements.
You should implement a root and branch review of all expenditure the business is likely to incur with a view to minimising or eliminating expenditure which does not add value. However, if you have a three-year or shorter exit timeframe, don’t neglect to spend money which will improve the long-run prospects of the business – you may not be able to achieve your exit timeframe and may have to deal with the consequences of historical underinvestment.
Pay attention to the adequacy of your accounting systems as they will come under scrutiny during the due diligence process and a shaky accounting system can significantly reduce the value of a business as a buyer may not feel able to rely on the information being provided. In addition, prepare proper management accounts and review these monthly to ensure that cost minimisation goals are being progressed. A buyer will be encouraged to see a business being properly financially managed.
It goes without saying that you should have your financial statements properly audited. Even with the raising of the cap on audit exemption, buyers will want to see audited financial statements signed off by a reputable firm of accountants.
Grooming Issues - Management
You should evaluate your management team members.
- Do they possess (or show potential to develop) the skills to step into your shoes after the sale?
- Think about how they can achieve their potential, and develop individual plans to help them get there.
- If you can’t see a strong future for a team member, consider replacement.
For key members of management, you should formalise relationships through employment contracts.
Grooming Issues - Staff
You should identify employees who are key to the business and attempt to predict their reaction to a potential sale of the business. It makes sense to consider ways you can encourage key staff members to stay with the company post-sale. This is obviously especially important in a service business.
Grooming Issues - Third-Party Relationships
In most sale transactions, the most important issue the buyer faces is what percentage of the targets customers will remain with the business post-sale and whether there will be any margin erosion.
The vendor needs to ensure that any contracts with third parties are in place and current, particularly those with key customers and suppliers. The vendor would also consider whether non-contracted customers will stay with the business and how best to manage that process.
Grooming Issues - Other
There are likely to be a myriad of other issues which should be addressed in a grooming exercise. Some of these might include:
- Protect intellectual property through patents, trademarks, or copyrights.
- Ensure premises are clean, neat, and well organised.
- Organise inventory and sell obsolete or slow-moving items.
- Ensure equipment is well maintained.
- Sell or remove redundant or obsolete equipment, machinery, and parts.
- Document key processes, procedures, and methodologies.
- Document any public relations initiatives you have undertaken to build your company’s reputation.
- Gather positive customer testimonials.
- Summarize any past, current, or pending litigation affecting your business, and show how you are handling any risks.
- Ensure compliance with all regulatory requirements, including environmental. Have documentation of regulatory compliance available to reassure buyers.
When grooming your business for sale, consider it through the eyes of a prospective purchaser. This will help you show your business in the best light possible. The decision to sell your business will be driven by your personal and financial objectives. However, it’s good business sense to recognize that life and business are unpredictable and that events and opportunities may mean you find yourself pursuing a sale earlier than you had planned. The investment you make in planning will be well worthwhile and give you the peace of mind of knowing that you are able to respond to events quickly and from a position of strength.
We have extensive experience of helping businesses maximise their value prior to sale and would be happy to put a plan together for your exit.
If you would like more detailed information on grooming your business for sale please contact:
Tel: 046 943 7900
Mob: 086 608 8869