By Trevor Wilson, Founder, Financial Power
Leading financial sources suggest that nearly 75% of businesses are never sold when a business owner isn’t finished running the business. This is a pretty sorry statistic and one that Financial Power is keen to reduce. But it’s even more disappointing when you see businesses sold for way under their market value because business owners don’t know the right steps to take before putting their business on the market.
For example, if your business makes £100,000 a year EBITDA then it’s possible to sell it anywhere between two and 10 times this figure (or more in some cases) if you know what you’re doing and follow a proven exit strategy. Here Trevor Wilson, Founder of Financial Power, reveals the seven steps you should take to ensure your business is ready for sale when you put it under a buyer’s nose.
1. Good Financial Procedures
In many cases business owners take money out of the business in all sorts of ways, many of which are not in the best interest of the accounts. So you first need to make sure you’ve separated the personal financials from the business financials. There are legitimate ways to include personal expenses and put them against the business but be aware you want to show the business in the best light with the least amount of expense and maximum amount of revenue and profit. Secondly, make sure you’re following standards in terms of accounting. This will help further down the track when it comes to any due diligence a buyer may carry out. In other words you want to be able to have a documented process that you follow to produce the accounts on a regular basis.
2. Demonstrate Consistent Growth
When looking at the EBITDA growth you want to show consistency. Achieving this for a minimum of three years is what you want to aim for if you can. In saying that if you can only supply two years it´s not the end of the world. But big swings in the numbers don´t go down well and is a hindrance to selling for a higher multiple. It just makes people worry and should be avoided if possible when presenting the numbers.
3. Clear Client Contracts
When getting ready for a sale you not only want to show stable growth but you also want to demonstrate that the source of that growth is stable as well. Wherever possible you want to have long term contracts that lock in recurring revenue. Also don’t forget that even if a contract may have a decent term it will have much less value if it´s not transferrable. So be sure to have contracts that are easily transferable in case a client sells or changes management.
4. Strong Key Employee Contracts
Just as client contracts guarantee a buyer a proven revenue stream, you want to see your key employees and management team as part of your asset base. This is capital in human form and should be protected so a buyer is reassured everyone won’t be jumping ship the moment the business is sold. So be sure to have well thought out contracts that lock in employees with bonuses for performance and loyalty. For example, you can offer stock options that accumulate and vest over time as well as stretch the time in which these options can be redeemed so you increase the incentive to stay loyal to the business. And lastly, make sure you have non-solicitation and non-competition clauses written into your employees contracts in case they see the business sale as a chance to start up on their own or run off with the client list to a competitor.
5. Solid Systems and Processes
One of the big problems that small businesses face when they go to market is that their business is over reliant on people rather than process and systems. Now we’re not saying that you shouldn’t have key employees but at the same time if someone goes under a bus you don’t want the business to come to a grinding halt. By looking at the tasks people do and finding ways to systemise those tasks with solid processes makes it much easier to sell a business in the future. If you ask yourself “is the business at risk if this person is unable to work tomorrow?” and the answer is a definite ‘yes’, then you want to look at systemising that job as much as possible. For example, there are a lot of businesses where one person in a business controls how the invoicing is done and has developed their own way to do things that no one else really understands. This is something that you want to eliminate before you ever put your business on the market.
6. Low Level of Business Owner Dependency
A common problem that businesses suffer from is a dependency on the business owner to make the whole thing work. When selling a business this is something to be aware of and minimise wherever possible. This doesn’t mean that an owner isn’t important to the success of the business but it does mean that if you want to sell the business you need to prove it can work without the owner going forward. From working with small businesses for many years we’ve seen this problem lead to things going off the rails pretty quickly when it becomes clear that the business is not viable without the owner in place. The quickest way to test if this is an issue is for the business owner to start taking extended time out of the office. This process will highlight where the bottlenecks are and allow you to focus on fixing them with relevant people, skills and processes.
7. Systematic Sales and Marketing
The majority of owner managed businesses rely heavily on the business owner as the main provider of sales and revenue. This is a big ‘no no’ when selling a business and has to be addressed before putting an offer in front of a buyer. So begin to think about implementing systems for lead generation outside of the business owner’s contact network. Also build sales systems that convert leads on a consistent basis that don’t depend on the business owner. The main goal here is to demonstrate a solid sales and marketing process that generates a constant flow of new business that’s predictable.