We go through several stages, to break this guide down into manageable, digestible chunks of information, from ‘Preparing Your Business For Sale’ and ‘Timing’, to ‘Valuation’ and ‘Finding a Buyer’.
We also take a look at how you can protect the value in your business if it’s up for sale during a black swan event or global crisis.
So please read on, bookmark this page if you think it’s useful and, should you have any questions about the information below, please get in touch and ask us. We’d be happy to share some more advice.
Preparing Your Business For Sale
Always be preparing
The first bit of advice we can give is to always be preparing your business for a sale. That means from day one you take into account everything in this article and you make sure you’re dotting all the ‘i’s and crossing all the ‘t’s.
Even if your plan is to sell your business in five years, or 10, the earlier you start your preparations, the easier the process will be, and the more appreciative potential buyers will be of your efforts.
Financials
This one comes first because it’s by far the most important thing to take care of. Please, please get your accounts in order. This point cannot be overstated.
Buyers want to see how healthy your company is in regards to its finances, and the more complete and robust your reports are - reports that, critically, include monthly management accounts - the happier they’ll be and the faster they’ll understand your situation.
Nothing puts a buyer off more than a company with poor financial records.
Ben Mekie from Acuity Associates (Providers of interim Financial Directors and Financial Controllers) lists some of the requirements any buyers of your business will have.
"Buyers are looking for a comprehensive understanding of the business to mitigate the risk of buying it. The clearer the picture the easier it is for them to make a quick decision without looking to chip away at their offer price. Even though you may understand your business’ numbers intuitively - and have lived with them for the duration of the business - it is not necessarily so clear to a third party – who you are in negotiation with!
Here are some pointers of what a buyer will require to fully understand and be comfortable with your business:
- Up to 24 months of Monthly Management Accounts demonstrating a smooth growth and/or consistency through two years of revenue cycle (if your business has seasonal sales peaks for example).
- An integrated monthly P&L (profit and loss), BS (balance sheet) and Cashflow forecast model. The buyer will want to see what will happen to the business after they acquire it under different assumptions. So the model needs to be assumption-led and show what the future profits, cashflow and Balance Sheets look like 3-5 years ahead under different assumptions on activity.
- Customer analysis, revenue breakdown and margin analysis for last 3 years.
- Supplier agreements, customer agreements and contracts.
- Product analysis including strong performing products / services.
- Any capacity limitations.
- Capex analysis (what fixed assets do you have and how do they relate to the successful operation of your business).
- Statutory Accounts reconciliations. Do your management accounts tie into the Statutory Accounts filed at Companies House?
- Breakdowns of Working Capital requirements.
- Summary of “out of the ordinary” practices. Buyers don’t like surprises so it is better to reveal in a controlled manner any items that might surprise their due diligence team.
- Employee breakdown, employment contracts.
I hope this give a good flavour of what is required."
Growth
Is your business growing? Or has it stagnated? It goes without saying that a growing business will look much more tempting to a buyer, so it’s important that you keep that in mind.
But what do we mean by growing? Simply put, your business is turning over more every year and profits are growing. The percentage at which your company is growing is a factor too, but what looks good to a buyer changes depending on the industry you’re in.
As we’ll discuss in the next section, timing is crucial when it comes to a business sale so you may want to consider selling during periods of growth.
Goals
Buyers will want to see that you’ve got a plan for your business going forward, that you’re still passionate about its success and you’re not selling your business because you’ve lost your confidence in it.
Having a strategy and goals for the future of your business will go a long way to showing any prospective buyers that your business is prepared and that there are opportunities to grow and scale it further.
Team
How strong is your leadership and management team? Do you have one in place?
Buyers will want to see that once the business has been sold to them, and you as the business owner have left the company, that the team you leave behind is both invested in the future of the company, and more than capable of taking it forward.
Having a strong team in place will greatly reduce the impact on the business post-sale, and allow the business to continue largely as normal. That makes your company much more attractive to any potential buyers.
Businesses that rely on their owners are businesses that don’t sell. If you are the owner of your business and you are crucial to its success, then you’re going to need to make some changes.
Essentially, the company needs to be able to run as successfully without you as it does with you. So think about who can take on additional tasks and responsibilities within your company, and how you can make yourself redundant.
Taking advice on how to prepare for sale well ahead of time – often 2 to 3 years may be required – and employing an experienced mentor or business advisor to develop a road map and to keep you on track can be invaluable.
Richard Murray, of Elephants Child, shares some advice around preparing for an exit.
"Performance, governance, compliance and risk are the key areas you need to understand and focus on with your business when it comes to a sale.
You need to understand how your company compares against your local and national rivals – benchmarking your productivity, profitability and growth is a worthwhile endeavour. This will give you an understanding as to where your business is currently and what your future goals could be to increase the value of your company.
We would also recommend including a neutral third party in the process as they can often be very useful in playing devil's advocate, and be able to see things from your potential buyer's perspective too, helping you come up with a realistic value for your business. Then, if the valuation isn't what you hope it would be, you can make the changes that are needed to get it to the valuation you want.
Finally, make sure you have a robust business growth plan (looking 3 years ahead) and an annual operating plan. This allows you to present a forward-looking business to your potential buyers."
Timing
Markets
Markets have a habit of changing their minds from time to time. Businesses that might look appealing at one stage may not the next, and it’s important to be aware of how the market is behaving at all times.
This means you need to keep an eye on it, or talk to people that do. Business brokers are an excellent source of information on market activity, so it could be worth getting in touch with one.
But nothing will beat having a strong understanding of the market yourself, so watch the news, read relevant blogs and publications, and stay on top of it all as much as you can. The more informed you are, the quicker you’ll spot opportunities.
News
As with market behaviour, It’s important to stay on top of the latest news, both pertinent to your industry and sector, and to the wider world in general. There are many things that go on both inside and outside the world of business that can have an impact on a person’s appetite to buy businesses.
Staying aware of what’s going on will keep you from putting your business up for sale at the wrong time or, in contrast, maybe convince you to put your business up for sale at a particularly opportune time.
Valuation
Figuring out a realistic price for your business should be your first step. Buyers are rarely sentimental, so it’s important to understand their motivations and what advantages buying your business can and can’t bring to them.
To come up with the right figure, you need to know how businesses are valued, the multipliers that are often used within your industry, and have a strong understanding of past and present performance, as well as future potential, and how that affects valuation too.
What affects business valuation?
Some parts of a business can be more easily valued than others. Tangible assets are much easier than the intangible ones, for examples.
Tangible assets would be things like stock, equipment, premises and land, whereas things like the business’s reputation and the business’s trademarks would be considered intangible.
It’s the intangibles that need to be presented properly to demonstrate their full value in order to get the best outcome on a sale.
Your ideal number and your walk-away number
It’s important, before going through the process of selling your business, that you have a very clear idea (based on solid reasoning, of course) of the ideal number that you’d sell your business for, and the number that would make you walk away from a deal.
What you’re aiming for is to land somewhere in between - a number that both you and your buyer are happy with. Knowing these numbers, and the reasons behind deciding on them, before going into the negotiations will help you.
Put together a strong argument for your valuation and be prepared to answer questions about why you think your business is worth what you think it is. Your business broker should be able to help you with this. Using evidence of performance, assets and discussing the potential of the business moving forward will help you here.
Valuation expectations always need to be based on what the business is likely to be worth. They should not be based on personal financial needs or a vanity figure. For many business owers, the purpose of an exit sale is to enable the next phase of their life; failing to sell will postpone your plans indefinitely.
Chris Symonds, Managing Partner at Coronation Wealth Management which is a Partner Practice of St. James’s Place gives a few tips on how to assess what you need from a deal.
"One of the top questions that we get asked is “Can I afford to retire?”. For many business owners their business is their means of retirement which makes it even more important to seek advice and have a plan for retirement and exit from their business.
The business owner should speak to both their business advisers and financial advisors to plan their exit strategy which can help to ensure that they maximise their business value at the point of sale and also help to ensure that the value is enough for their requirements.
Cashflow forecasting can really help to get a grasp of a business owner's current financial position and then project forward to establish their future financial position based on certain financial assumptions.
It will give the business owner peace of mind to know that the exit value is enough based on their personal circumstances and that their money is not likely to run out in their lifetime."
Getting a higher multiplier
A number of things will help you increase the multiplier that leads to your business valuation.
For example, a business that isn’t dependent on its owner will be more valuable than one that is. If bespoke software or hardware has been developed that the competition does not have, that will also lead to a higher multiplier.
Higher multiples could be obtained through bringing new product ranges to market, creating new distribution channels that bring new clients to the business and if the business can prove that it is scalable and could be rolled out nationally or globally.
Finding a buyer
High net worth investors with industry experience
These buyers are often business owners in their 50s and 60s who have recently sold businesses for substantial amounts. Left with time on their hands, they are typically not people who want to retire early. They are therefore looking for a smaller business in the industry they know, to which they can bring their experience, contacts and financial backing.
We typically see this scenario with the precision engineering sector. Such buyers are looking for engineering companies turning over £1m to £4m. Often they are looking to acquire 3-4 companies in order to build a group with a turnover of £10m to £15m.
Trade / Strategic buyers
These buyers are existing companies in similar or aligned industries looking to expand and/or diversify. Whilst direct competitors may be interested in acquiring their competition’s client base, they do not tend to offer the highest value.
The best trade buyers are those who have a strategic objective. For example, to extend the coverage of their service into another geographic region or to add a complimentary service to their existing business and open up the opportunity to cross-sell to the merged client base.
Most of the trade sales we have completed have been for professional B2B service sector businesses, such as IT support companies, marketing agencies, and accountancy practices. With these types of businesses, buyers need to have specific industry knowledge and capability.
Private equity with management buy-in
These buyers are usually looking for businesses with annual revenues of over £5m and a net profit of over £1m. There is a growing number of small private equity firms looking at a variety of industry sectors and the smaller end of the market. They look particularly at the growth potential and obviously the return on their investment and often have a pool of management buy-in (MBI) candidates with the relevant industry knowledge to take charge of the business post-acquisition.
We are often approached by such niche private equity firms who focus on buying businesses in the engineering and B2B service sectors we specialise in, as well as MBI candidates themselves who are already backed by an appropriate private equity firm.
SME Investment Buyer
These buyers often look for companies smaller than the £5m+ companies that typical Private Equity firms look for, as mentioned above. They’re also often a lot more ‘hands on’ with their approach and look to build a modest size portfolio.
Entrepreneurs with spare cash of £200k to £1m
These buyers fall again into two categories:
A) those who have built up their cash reserves during a successful career, for example in the city or a large corporation. Having left the corporate world they are looking for something more interesting to invest in and manage than the alternative of property or leaving the cash in the bank.
B) Serial entrepreneurs who build businesses over a period of 3-5 years with the purpose of selling and starting again on a new venture. Either way, these buyers tend to be looking for small, sub £1m turnover, highly niche businesses.
Where should you look?
Attend your industry’s trade shows and expos
There’s no better way to build your industry network than to attend trade shows. They’re often packed with large numbers of relevant people and they’ll be an excellent place to scout out both companies and contacts.
Read industry news and related business press
Keeping up to date with the movers and shakers within your industry is always a good idea. Reading relevant industry news and publications could highlight companies or individuals that are active buyers and therefore a potential target for you.
Subscribe to the email newsletters of the merger and acquisition (M&A) advisors that specialise in your industry
These newsletters will be a great source of information on people and companies that are looking to buy, as well as the types of businesses that are looking to sell.
Engage a business broker
We’re biased, of course, but engaging a business broker to help you find the best buyer for your business really is one of the best decisions you can make with it comes to selling your business. Business brokers are there to help you find the right people, get your business ‘sale-ready’ and answer your questions. The only thing you have to do is find the right one!
Due diligence
Is everything as it should be?
Every potential buyer of your business will go through a due diligence process to evaluate your business and make sure everything is as it should be.
You can help speed this process along by collecting certain information that buyers tend to ask for ahead of time. Below is a list of the common things potential buyers will ask you to show them. Exactly what you get asked for will depend greatly on your business and industry, as well as your buyer, but you can consider the list below a good starting point, and there’s certainly no harm in collecting more information than you need to.
When it comes to due diligence, you can’t be over prepared.
Organisational information
You should have your formation or incorporation documents, any bylaws or operating agreements, as well as agreements between owners of the equity interests. Up-to-date board minutes and notices for equity owner and board meetings are also useful to collate.
Financial records
These include detailed profit and loss statements, balance sheets, and annual reports. You should also be able to provide management accounts on a monthly basis that includes profit and loss statements, balance sheets, aged debtors and aged creditors.
Material contracts
Material contracts include customer contracts, supply agreements, insurance policies, loan and other financing agreements, and employment contracts as well as any marketing and advertising agreements.
Employment
You will need to share information regarding employees, their wages, any benefit plans, bonus compensation, vacation, sick time, and any policies. It is also important to comply with GDPR so no names of employees should be given the documentation supplied to buyers until the deal is complete.
Intellectual property
If you have documentation supporting any copyrights, trademarks, trade names, or patents then make sure you have them to hand.
Honesty is the best policy
This one is pretty obvious, we know, so it should come as no surprise that we believe being up front and honest throughout the process of selling your business is absolutely the best policy.
Apart from the fact that it’s unethical, buyers are savvy people, and they’ll likely find out any truths you’re hiding throughout the due diligence process, anyway.
Negotiations
Be firm but flexible
Negotiation is one of the biggest stumbling blocks for any potential business sale. Why? Well, in the beginning, both parties tend to have differing opinions on the value of a business. The owner will likely believe it’s worth more than the buyer, and that can cause issues.
As the owner and prospective seller, you can mitigate this issue somewhat by understanding that you need to be flexible with your valuation. As we discussed earlier in this article, make sure you have an ideal figure that you’d like to sell for, have a figure you’d be happy with, and have a walk away figure.
Knowing what these figures are and being firm both in your mind and throughout the negotiating process, will make your life, and your potential buyer’s life, much easier.
You must be prepared to be flexible with some of your goals, understanding that you won’t get exactly the deal you want if you’re unwilling to negotiate properly. Here’s where a good broker earns their money, helping sellers deal with the finer details of a sale, and advising them when to be more flexible, and when to stand their ground.
Understanding where the value is in your business is also key. Knowing what that value is worth will help when it comes to arguing your case for a specific price, and help your potential buyer understand why they should pay it.
Concessions will often have to be made in negotiation, but they can yield positive results. Take some time to consider what you’d be willing to concede, make sure you let the buyer know you have given up something of value when you do, and let them know how the favour can be returned to get something back from them.
Work with your buyer, not against
Successful negotiation happens when both parties work together, rather than against each other. It can be easy to see a potential buyer as an opponent over the negotiation table, but the simple fact is, both of you want the same outcome.
You want to sell your business to the other person, and they want to buy your business from you.
Both parties want the sale to happen. So get to know the potential buyer of your business. Why are they interested in your business? What are their long-term plans? Will you be able to share any wisdom or advice to help them? Really get to know and understand who it is you’re dealing with.
Completing the deal
Reaching heads of terms – i.e. an agreement in principle subject to due diligence and drawing up of contracts – is normally the fun part of the process. Signing Heads of Terms gives the potential buyer exclusivity whilst they conduct due diligence and draw up contracts. At this point, everyone is keen to get the deal over the line.
So keeping the momentum going is absolutely key.
If you have not instructed a lawyer already then now is the time to do so. The order of events is then,
- to provide answers to the buyer’s due diligence questionnaire (or if you have pre-prepared dataroom, share this with the buyer and their advisors),
- for the buyer’s lawyer to draw up the first draft Share Purchase Agreement (SPA) for your lawyers comments and amends – this is an iterative process which needs to be handled carefully. As when negotiating the headline deal value and structure in the heads of terms, you will need to be firm but flexible in agreeing the finer points of the SPA; warranties and indemnities are often a sticking point.
- To draw up ancillary agreements such as consultancy agreements for your handover period, transfers of leasehold and a disclosure letter to ensure you formally informed the buyer of the current status of the business.
Choosing an experienced commercial lawyer is very important. Whilst there to make you aware of the risks, they also need to understand the benefits of getting the deal done in a timely manner.
Luke Rees from Langleys Solicitors LLP explains here what to look for when selecting a corporate lawyer:
"Many business owners may have worked with a trusted solicitor on private or business matters for a very long time. However, it may well be the case that this trusted advisor is not able to handle the sale of the business effectively, because these matters are complicated and so engaging a specialist corporate lawyer who has experience in such matters is absolutely crucial.
When choosing a lawyer do not be afraid to ask what experience they have in business sales and acquisitions. Ask them for recent examples of deals that they have worked on and get them to talk you through the process of the transaction and how it works, as it will give you a sense of their experience level.
It is always a good idea to get your lawyer involved at an early stage. Good corporate lawyers will add value during the negotiation stage and provide useful input to assist in the negotiation of the deal and the Heads of Terms if necessary. They can also assist in putting in place valuable protections in the form of confidentiality or exclusivity agreements to protect important information about your business and its use during the sale process.
Most corporate lawyers should have the appropriate level of technical expertise to deal with the legal issues in a business sale transaction. The good ones also have a high level of commercial awareness. This is valuable as it means that they are able to think logically in the heat of a deal to come up with solutions to issues that may arise as the matter progresses.
The last thing that a seller needs is a dogmatic lawyer who sticks stubbornly to black and white legal principles, as it may cause a deal to stall unnecessarily. This leads on to another important factor. A good corporate lawyer should be an approachable person who you can get on well with. Selling your business is a huge thing for any owner- it is a complicated matter and it is essential that your solicitor is approachable and that they can communicate things to you effectively and free of legal jargon.
There should also be a fair amount of transparency from your solicitor about what your legal costs are going to be. Business sales are complicated and so they may attract some pretty chunky legal costs.
Most solicitors will provide you with an estimated range of fees, but this does not really give you a clear idea of exactly how much your legal fees will be. Whilst it is of course tempting to go with the solicitor who quotes the lowest fee, you should evaluate this carefully and take into account how much lower their quote is.
If it is the lowest by far- why is this? It may well be an early sign that they are not a specialist in business sales and that they haven’t grasped what is involved. Business sales are complicated and if the legal side of things is not dealt with properly it could leave the sellers with considerable potential liability in the future.
Bear this in mind and don’t just go for the lowest quote. Look for an experienced, personable, and responsive person to act on your behalf and if they are the right person then they will add value during the process."
Black Swan Events
It’s all well and good telling you how you can be more successful when planning to sell your business during good times. But what happens when the world is hit by a black swan event? How can you mitigate the effects of such an event, and how can you retain as much value in your business as possible? We share some advice on that below.
Remember that cash is king
Many business owners we meet take pride in having no bank debts, having paid down any start-up loans years ago and often having built up significant cash reserves in the company. Often this cash is earmarked for extraction for the shareholders benefit on exit. However, during a black swan event, that cash can also provide a war chest to enable the company to trade through difficult times.
Whatever your company’s cash reserves, our view is that business owners should take full advantage of any Government support that is available.
You should also consider R&D Tax credits, particularly if you are redeveloping or re-orientating your products and services to adapt to the new market conditions. You should consider R&D Tax credits anyway, but especially during a black swan event where the tax relief may be particularly welcome.
Finally, in our experience, it’s cash rich companies that will be offered more favourable deals when the black swan event is over and you come to sell your business.
Review your products and services
When will things get back to normal? Will life and business return to how it was before? What will be the new normal? These are legitimate and proper questions to ask yourself during a black swan event.
At the start of such an event, it is difficult to tell what the impact will be on the future. But a slowdown in business can give you an opportunity to reflect on what works well, what could be improved, what your market really needs and what other sectors your company can provide for.
Gaps in the market may open up that your company’s capabilities can fill. For example, during the Coronavirus crisis, 3D printing businesses were able to demonstrate their speed and agility in providing much needed masks and PPE for healthcare workers in amazingly quick order.
Whilst this has often been done on a pro-bono basis, it has opened up a new market for many of these companies and there may be many other products to be designed and produced to address a myriad of challenges faced by the healthcare sector.
Identify and look after your key staff
In good times, developing a management team so day to day operations and client relationships are no longer dependent on you is fundamental to achieving a successful sale. Assuming you were well on your way to achieving this before the black swan event, keeping these key players in your business will not only see you manage and adapt through the downturn, they will be invaluable to you when it comes to the process of courting buyers for your company further down the line.
Identify those with key skills at all levels in your organisation and use the downturn in activity to nurture and train them. This will put your company in pole position to get back into action when the recovery comes.
It could be worth accessing any Government support that may help your business keep a hold of these key staff if the black swan event has a major financial impact on your business.
Continue but adapt your marketing activities
For most businesses, ploughing on with the same marketing messages as you were a month or so ago before the crisis will likely not work, and in many cases could be counterproductive and insensitive.
As always, marketing messages need to be credible and valuable to your audience and target market so that your company maintains awareness of its products and services, and continues to develop credibility and authority in its brand.
Yes, the market requirement for your product or service may have reduced, whether temporarily or for the long term, and yes, cutting expenditure and conserving cash in a downturn is very important, but so too is maintaining the visibility of your company.
When a black swan comes along, there will be areas in which you can save costs and keep your powder dry for when the recovery comes – but you must also carry on promoting your company profile in your community and across your target audience and client base.
Plan for the recovery
Contrary to intuition, many insolvency practitioners report that they are most busy when the economy starts to recover from a downturn – not when a recession starts. Having battened down the hatches and ridden the storm, business owners are often caught off guard when the recovery comes. More work starts to come in, but cash reserves to buy in materials and labour are low, clients may not pay for 60 days or more, and things build to a crunch point.
To avoid this paradox, you need to plan ahead. Monitor your income and expenses on a weekly basis so you can get finance and funding lines in place ahead of time and hit the ground running when things pick up again.
And finally - Keep objective records of the impact of the black swan event
Unless there is a temporary closedown of a company in which case the impact is pretty clear, keep records of which customers have ceased trading, the order volume reductions from specific customers, the cost saving measures implemented through furloughing staff, grants received and overhead reductions.
All of this will help when it comes to selling your company in the future and will demonstrate to future buyers that the black swan event was the reason for a drop in sales and income. If there is a rapid rebound in activity in your sector, business valuations should rebound in quick order too.
Need help?
We completely understand that we’ve just thrown a lot of information your way. But we wanted to make sure we covered everything, so you’re aware of what you need to know when it comes to selling your business.
And, of course, we’re always here in case you have questions, so please get in touch and grill us if you’d like - we’d love to hear from you and we’d be happy to help further. So please give us a call on 020 8090 9380 or, if you prefer, send an email to ask@hornblower-businesses.co.uk.