I don’t want to be the boss!!!!

You have started your business, grown your business and now having spent time being fully consumed in running your business you now find yourself thinking about what it would be like to sell your business and put your feet up.

In this, the third and final article in this series, selling your business is the focus.

Selling your business

You should be planning for selling your business well in advance of the actual event. It takes time to get your business in the best shape for sale. By best shape, what is meant in this context is the process of creating an attractive proposition to attract a buyer that will maximize shareholder value. This is, after all, why we wanted to sell in the first place isn’t it?

When should you sell?

Businesses are bought and sold for many reasons including retirement, health, family commitments in addition to just profit.

There is no right or wrong time to sell. Selling is subjective and the right time for one person may not be right for another so don’t worry unnecessarily about timing.

That said, you may wish to consider how the timing of a sale may influence value. Trying to sell a loss making business which has made losses for many months or years or one with a looming trading problem will be considerably harder and likely valued much lower than selling a business that can demonstrate strong profit, especially if this profit can be proven over a longer period of time and could be expected to continue.  

There are many businesses that sell for huge values even without ever making a profit. Such businesses tend to be able to persuade buyers that the potential profit opportunity in the future will be certain and more than enough to cover any losses to date and the business purchase price. These upside sales are rare but if you are convinced your business has a strong upside, be prepared to justify your valuations with a strong business case.

For businesses that may not be able to command such a premium, if you wish to sell for the highest possible price, an increasing trend of profits over many years combined with a strong management team to run the business without your input will attract the best price. This is because any buyer will more likely view your business as a viable opportunity which will continue to deliver profit once they have purchased it.

How do you structure for sale?

The first and most critical element of selling your business for maximum value is to ensure everything you require to run and manage your business is in order in advance of instructing solicitors to complete the contract work.

Once a sale is agreed, you are likely to have to prove many of the claims, statements and facts you have made during the sale process and negotiation. Once solicitors are instructed to complete the legal side of selling your business, they often start by circulation a document that contains the agreed Heads of Terms. This broadly outlines what you and the buyer have agreed and include such items as exactly what is being sold and purchased, the values involved and the timescales. Once these broad terms are agreed the detail involved in the process of due diligence and the sale and purchase agreement begins.

Due diligence is where the buyer will very likely be looking for ways to reduce the value of your business. This will happen even though you may feel the value has already been agreed. It will contain a lengthy list of questions and requests that will cover every element of your business.

Questions will relate to your employees, customer and supplier contracts, intellectual property, assets, liabilities, tax position, trading methods, premises, litigation and any number of other areas the buyer or the buyer’s legal advisors may wish to ask about. You may feel like the requests are far too detailed and sometimes even too personal but if you wish to sell your business and ask someone to pay good money for it, be prepared to have to disclose everything.

Consider this part of the sale process in the same way house surveys may identify a leaky roof and a buyer will look to reduce the sale price to cover the cost of a new roof. Due diligence is the process of looking in detail at what you are selling to ensure any claims you made were correct and not embellished to increase the value.

To help due diligence proceed as smoothly as possible, you must ensure you are up to date with everything that is relevant to running your business. As every business is different, it is impossible to map out everything that may be required. The process is time consuming even for the best organised businesses and the process will be considerably more difficult and expensive for you in relation to solicitors’ fees if you are unable to quickly substantiate the claims you made during the initial negotiations.

Working with an advisor who has experience of selling a business may help you structure for sale and save considerable legal fees. Advisors may appear expensive, but their day rates are often considerably less than a solicitor’s rate to offer very similar advice. A solicitor will be required later in the process but an experienced advisor can help you navigate the sale process from a position of knowledge and experience from the very start of the process and potentially help you maximise your sale value.  

What is my business worth?

A good starting point is the number contained as Shareholders funds on you balance sheet. A balance sheet is the snapshot of your business on a particular day. This figure is basically the value of your assets less your liabilities and what you would have left if you shut the business down and paid all your debts on that day.  

Businesses are often sold for amounts that are higher than this figure, sometimes by many times this value. This is usually when the buyer feels that by paying more than the assets of the business, the future opportunity your business offers will allow them to increase or continue profits to a point where buying at a premium over the actual net worth will bring them a bigger profit and greater return in the longer term. This may be because they feel they can absorb your running costs into their own operations and immediately increase your profits, or it may be that they feel that they can sell more of your product and service than you did and again increase profits.

Buyers make decisions on value based on how they can make a return from your business and it is now your job to help demonstrate why a buyer should buy your business rather than leaving their money to earn interest in the bank.   

Valuations are subjective. A business is only worth what somebody is prepared to pay for it. Even if you have a large figure in the shareholders funds column of your balance sheet, if the bulk of your assets are intangible such as intellectual property, a buyer may discount this value and reduce their offer. If you business has physical assets such as property, the value of these assets is a little more certain but you can be sure that a buyer will want to pay as little as possible and you will need to be ready to justify your own valuation fully and negotiate.

There is an established TV series featuring businesses pitching for investment to a panel of wealthy investors. A feature of the show is the frequent gap between the business valuation from the current owner and the valuation of the potential investor and much is made of the investor asking the business owner to show how they reached their valuation. If your annual profits are only £1000, your business will be worth a fraction of a business with annual profits of £1,000,000.

Don’t fall into the trap of thinking that your business is worthy of a high valuation just because you pick a number out of the air and feel that to you the business is worth this amount. If you cannot justify your valuation based on facts you may leave your own sale process empty handed as many of the participants with unrealistic valuations leave the show.

An internet search for similar businesses for sale may help benchmark a value for you. There are numerous business sale brokers sites offering a wide range of businesses for sale and some information is quite easy to find, especially if your business is similar to others listed. The sale listings often contain business information and details of turnover, profit and asking price / value information. If your business is similar to others listed, the likelihood is that the sale value will be similar. Valuing your business at the top end or above similar businesses is fine, especially if your business has a unique element to it that will add value but don’t forget that if you found this information, a buyer will find it also.

Other businesses are considerably more complicated to value as they may be unique or trading in a market where sale and purchase transactions are either not as frequent or much more discreet. Your business may have many factors that will need to be considered during valuation and professional help through an experienced business advisor or accountant will be necessary to gain a realistic valuation.

Your business may operate in a sector where profit earnings (p/e) ratios have been used during other transactions which may be used as a guide but as there are many factors that influence the value of a business, any valuation is always a best guess.

This guess, however, like a house or vehicle sale, should be based on a realistic and justifiable value but remember, a business is worth only what a buyer is prepared to pay for it, regardless of the asking price. Be realistic in your valuation and be prepared to justify this valuation fully and to negotiate.  

Think like a buyer.

Now you have decided to sell, you now need to think like a buyer. Why should someone want to buy your business? What is in it for them? What would they want to know?

These questions will help you prepare your sale documents. Buyers will request information from you in the first instance and this is your chance to immediately demonstrate your valuation. There are many business brokers in the market who may be able to assist you if you feel you will require support with the process of positioning, marketing and then negotiating a sale but there is no reason why you cannot do this yourself and save the associated fees.

You may wish to discuss the process with an advisor who has sold a business themselves. They will be able to guide and support you through the process at a fraction of the fees that would be due to a broker or legal professional.

The first step towards selling is to prepare a document that will become your business advert. If can be referred to as a teaser or business summary.  

This document should be brief but catchy and contain information in relation to the business history, current performance and future opportunities. Buyers will need to be able to understand your business quickly to enable them to make a decision whether to investigate further or decline your opportunity.

The teaser is your initial advert and should not give away too much detail but clearly communicate how a potential buyer can obtain further detailed information. Once interest is registered, it is common to ask a buyer to enter in to a non-disclosure agreement to confirm they will not disclose to persons not involved the information about your business that you may not wish to be in the public domain.

Once the non-disclosure document is signed by all parties, you should quickly provide a further document sometimes referred to as an information memorandum. This document is also subjective in its content but should contain a more detailed overview of the business including assets, liabilities, employees, operational methods, financial performance in both historical and current positions, opportunities and anything else that will help you justify your valuation. It would be a good idea to have this document prepared in advance as a buyer will not want to wait for weeks once initial interest is stated.

Who may be interested?

A buyer can come in a variety of forms. It may be an existing employee or employees, a management buyout, a trade sale to a competitor, a supplier, a sale to an unrelated business, an IPO or it could be an investor / entrepreneur or venture capitalist or business angel. At this stage, you may not know who your buyer is, so you need to cover the fundamentals to remain as attractive to all the above!

The key to selling a business is to make it easy for someone to buy. Think about the type of information you would want to look at if you were being asked to buy a business and start your fundamentals here.

You will want to know about how much money the business makes, how much work you have, your debtors and creditors, your stock, borrowing and assets. All the elements that are contained within your financials that we looked at in the last article. It is critical your financials are accurate, up to date and kept up to date through the sale process.

Do they have any money?

Once you have an idea of the value of your business, you can now start to think about who could buy it. For many businesses, an existing employee may be best placed to buy the business from you especially if they are ready to take the step into business ownership and happy with the price.

At this time, you should consider whether the potential buyer has any money or has access to the money needed to pay your agreed selling price. Selling a business to a buyer who has no money and cannot get any money is unlikely to result in you being paid very much on the day of sale and you will probably still need to pay the legal fees required to sell the business. Of course, you could agree to weekly or monthly payments, but you will be letting go from the date of sale and handing over the business very much on trust and this is a very risky path to follow.  

If you prefer a lump sum payment for your business, your choice of buyer may need to be considered so that the buyer can make a payment at the time of the sale. Of course, everything is negotiable so you may consider a transaction that pays a lump sum now and some additional payments called deferred consideration, over a period of time thereafter.

Do they have enough money?

If your business has a substantial value, an employee may not have or be able to raise or borrow anything like the amount of money to purchase your business. This may then restrict your buyer options and force you to look elsewhere.

If your business is going to be worth a substantial amount of money, ask your advisor to obtain proof of funds from any interested buyer to ensure you do not waste time and money on professional fees just to find the buyer cannot raise the money to pay you. Think of this request in the same way an estate agent checking a potential buyer of your house to ensure they have their mortgage offer in place.

Make yourself redundant!!!

Sounds odd but one of the key factors that may substantially increase your business value is if your employees can run the business without you working there. Although you may consider yourself central to everything in your business, if you have all the customer or supplier relationships and do everything yourself, a buyer may reduce the value of their offer to factor in the unknown implication on profits of you no longer being the face of the business.

A simple example of this would be a hairdresser where clients request the owner only to cut or style their hair. If the owner changes, clients may not want the new owner to cut or style their hair and go elsewhere, but if the owner had perhaps trained another stylist to do the same cut or style and managed the client to use this stylist over a period before the sale, the client will continue to visit and value is retained in the business and not with the owner.

Succession planning is a great way to make yourself redundant. Perhaps you have an employee that is capable of stepping into your role. With a period of guidance and training, this employee becomes far more important that you to the business and any buyer will immediately see the additional profits that may be generated once your bonus, salary and dividends are removed.

Quick tip to find a buyer.

Network, network and network some more. Networking is not an easy activity, but it can be invaluable when you are looking to sell your business. Network with your competitors, suppliers and customers and peers. Network with similar business owners and entrepreneurs at any opportunity. Accept invitations and keep an open mind to who may be interested in buying your business as it is very possible that your buyer may already be known to you or known to someone you know. 

Competitors may be interested in buying your business to increase their market share and profits. Suppliers may be interested to increase their sales potential for their own products or services by selling more of your products or services. Customers may be interested to take control of a product or service that they require to fix prices, supply options or just to be able to manage the whole of their customer offer.

Conversations cost nothing and may lead to the sale of your business. Trade shows are an excellent forum for networking and conversations can quickly progress in this environment.   

The role of your accountant and other advisors

Once you have decided that you are ready to sell, discuss this with your accountant and advisor. Your advisor or solicitor may be able to give you some pointers towards the type of information that will be required during due diligence which could help you prepare your teaser or information document. The advisor may also be able to help you prepare this document.

Your advisors may be able to make introductions to other advisors or professionals who may be able to help sell your business. Your advisors may network with other firms who have clients who may be interested in your business.

Loosing buyers

Just because you have agreed to a sale does not necessarily mean it will happen.

Due diligence may highlight issues that result in a buyer reducing their offer value or worse still, walking away. Until you have a contract in place, anything can and often does go wrong.

Don’t make it easy for a buyer to reduce the value of their offer or walk away. Do not embellish your performance beyond that you can prove. Do not overstate orders or profits, this will be found out. Do not try to hide litigation. If you have a problem, you are best advised to resolve fully before the sale process starts.

Buyers are suspicious of everything. They will not trust you to tell the truth, they will want proof to back up your claims. They will want to ensure all is in order before they pay and take over so your role once you decide to sell is to attract a buyer, retain a buyer and them conclude the sale.

Keeping up performance

Your focus will be diverted once you decide to sell. It is easy to dream of putting your feet up or the holidays you plan to take but until your sale is complete, anything can go wrong.

Ensure your trading performance continues. Due diligence will quickly identify issues or downturns in performance. Ensuring your business continues to trade at the expected level of profit is critical to retain a buyer.

What next?

Part of the sale process may be that a buyer wants to retain your expertise in the business. You may be asked to continue working for a period of time. This period can be weeks, months or even years and your final sale price may be linked to future performance of the business and the continued profits.

Alternatively, the buyer may be happy to pay you a lump sum and you walk away.

Whatever you decide, if you have reached this point, it is likely that you have succeeded in your goal to start, grow and sell you business. This is a huge achievement and one you should be very proud of.

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Author – Andrew Kime, February 2020

www.adkconsulting.co.uk

www.linkedin.com/in/andrewkime