By Will Cookson, Director, Harbour Key
For many people who set up their own business, the ultimate goal is a successful sale for the maximum possible price before moving on to pastures new. Doing this requires three key factors: planning, preparation and above all patience.
Market conditions generally dictate when a business is sold. The best indicators should be the financial climate, potential buyer profiles and market trends. Early planning will ensure you have the right structures and processes in place to maximise success. Start with price and when you want to sell, then work backwards to how you are going to get there. The aim is to create a business that is viable and attractive to potential purchasers, and therefore valuable. This means getting the basics right:
• Brand and reputation
• Sales and clients
• Processes, procedures and infrastructure
• Profits and cash flow.
These can be improved by selecting and incentivising a good management team, who can both add and assist with preparing for sale in the following ways:
• Develop the basics e.g. a sales director can target clients and improve sales; a finance director can improve financial processes and cash flow and oversee expenditure.
• Provide the new owner with continuity after the sale, ensuring existing client contacts are maintained.
• Enable the owner to exit earlier. He or she will usually remain for a time after the sale, but the stronger the management team remaining to run the business, the earlier the owner can exit.
• Provide a potential purchaser: the management team could acquire the business itself with funding assistance from, say, a venture capitalist.
• Prevent the business being damaged while the owner works on the sale.
Bear in mind that your business is only worth what the highest bidder will pay. Your view may be very different from that of a prospective buyer, and a business that is heavily dependent on one person, product or customer may be difficult to sell. If you, as the business owner, are seen as the business i.e. it revolves around you, the business becomes less attractive and less valuable. A strong management team supported by a strong brand and reputation show a strength and depth which is attractive to potential buyers.
Although historic accounting facts are important, the keys to price are current profitability, future earnings and potential risks arising from change of ownership e.g. loss of customers. A business that relies on a few clients can be considered high risk and therefore less valuable, so look at your client base. Spend time improving profitability, minimising risk and working on future earnings forecasts.
As the proposed sale window approaches, review every facet of the business and remedy any problems that might arise or could devalue the business. No-one will want to acquire a business with an outstanding VAT enquiry or employment tribunal issue, at least without a price reduction. Carry out your own internal due diligence and resolve any issues.
Remember to look closely at your ownership. Many people assume they will only have to pay a rate of capital gains tax of 10%, as entrepreneur’s relief will apply. It is important to remember that shares in trading companies can be tainted for entrepreneur’s relief purposes by substantial non-trading activities such as owning investment properties or active management of surplus cash.
As part of the review, look at non-trading activities that may need to be stripped out of the business. Look at share ownership: for example, a shareholding spouse who does not work in the business will not be entitled to entrepreneur’s relief and a multiple shareholder base (particularly where some are no longer involved in the business) can often affect your ability to react to changes and ultimately to negotiate a sale.
The most important part of selling a business is patience. It is important to continue to operate the business as if it was not for sale, and to understand that businesses do not sell overnight and many deals fall through. The more prepared your business is for sale, generally, the faster it will sell and, if it doesn’t, the less impact the sale process will have on your input into day to day operations. It’s very easy to have your head turned by what may turn out to be empty promises – it has been known for parties to deliberately disrupt a competitor’s business through a protracted sale process which ultimately they have no intention of honouring.
Many owners put in a lifetime of hard work building their business only to throw away some of the rewards by failing to consider properly how they will sell their business. Use the three Ps as a guide and you should achieve the optimum value for your hard work.