Selling your Business

Owning your business is ultimately a means to an end. That end may be to achieve a comfortable retirement from selling the business or it may be something else such as passing the business down the family chain.

All too often however owners fail to maximise the end returns either by poor planning in advance or by poor execution of the sale itself.

 

There are broadly three stages to selling a business – the planning process, embarking upon the actual sales process and execution of the sale. Without a proper focus on the planning stage, it is unlikely the other two will prove as straightforward or fruitful as they should.

 

Let’s be honest here. Most of us spend our time and energy focussing upon the day to day running of our business and don’t consider the exit strategy until pretty much the point at which we actually want to sell. That’s simply too late and virtually guarantees a below expectations outcome. Ask yourself the question, “When did I seriously spend the day strategizing about exit…..?”

 

Taking the time to plan for sale well in advance can be the difference between success and failure. And it really needn’t be onerous – half a day once a month just to think and consider simple things you can do that will get your business into far better shape for that eventual sale.

 

As you would expect, we often play a pivotal role in the transactional process itself. However, we also have enormous experience of helping business owners shape their business for eventual sale so do please contact us to see how we may help you start along that path today.

When is the right time?

You’ve worked hard for many years to get your business to where it is today. You will almost certainly only sell it once so it’s vital you get it right first time. 

So just when is the right time to embark upon what is ultimately an emotional and time-consuming task albeit one that done well should provide the reward at the end?

Is it now?

Is it two to three years hence when you’ve had time to plan and ready the business for sale?

Logic tells us that it’s the latter and we’ll look further below at why that’s almost certainly the case. However, there can be a number of good reasons why selling the business now shouldn’t be over-looked. These may include:

  • The economic cycle

  • Adverse changes to your particular industry

  • Ill health or other family circumstances

  • Upcoming tax changes

  • Loss of key staff or relationships

Whilst any or a combination of the above may be reason to sell the business as soon as possible, for business owners not forced into such action, selling too early is a common mistake. Ask yourself this simple question, “If I had time to plan ahead would I be able to get the business into better shape for a potential buyer AND increase my exiting options?”

Make a plan

Decide when you want to sell. Draw up a plan and timeline for doing all those things you think will give you the greatest chances of selling and the highest value for your business.

 

Make each of these items an objective and have a deadline for each of them being in place. The majority of items will be those identified from the ‘getting ready for sale’ checklist you draw up when looking at what you need to improve in the business to make it ideal for a buyer, (see below).

 

Your plan should end with the final goal and be dictated by the answers to questions such as ‘What date do I want to sell the business by?’, ‘How much do I want for it?’, ‘Do I want to continue in the business post sale?’, ‘Do I want to minimise personal tax liabilities?’

Increasing your exit options

Broaden your thinking as to who might buy your business. It is very common that we look little further than our direct competitors. In reality, a vast number of business sales do not involve direct competitors.

Rather than simply looking at your market horizontally, look up and down the food chain. If you are a web design company, don’t just consider other web designers. Perhaps the creative marketing studio that wants to expand its general marketing offering might be interested? Perhaps the IT company servicing hundreds of customers wants to enhance its cross-selling opportunities by broadening its offering?

 

Consider a management buy out. This has many advantages not least that the buyer(s) already has an intimate knowledge of the business allowing negotiation and due diligence to be kept at a minimum. If there is not a suitable buy out team already in place then part of the plan could be to recruit them with a view to the end goal.

 

And what about an Employee Ownership Trust? This is a separate legal entity vehicle that purchases your shares and holds them in trust on behalf of the employees.

Getting the business ready for sale

You will obtain the best price for your business if a buyer perceives it is taking on little risk, has to make relatively few changes to the running of the business and has confidence in everything presented during due diligence.

 

You should therefore focus primarily upon:

  • Financial stability and growth

  • Watertight contractual and legal formalities

  • Having sound processes and systems in place

  • Assets in good condition

  • Knowledgeable and competent staff running the business

Every business is different and only you will know precisely what measures need to be taken in order that your business can tick all of those boxes at the time of sale. You want to show a buyer that the business is profitable, cash generative and growing, that information is accurate and can be found quickly, that you have formal contracts in place with all key customers, suppliers, employees and important stakeholders and that the staff can run the business without your input.

 

Achieving these outcomes doesn’t happen overnight but with a little thought you should be able to get there in the timeframe you set yourself.

 Getting your business ready for sale

Achieving the maximum amount of money for selling your business will only happen if the sale has been prepared for well in advance. This doesn’t mean a month before; an optimum outcome is almost always the result of several years pre-planning.

 

Ask yourself what acquirers are most interested in. Any list will invariably include amongst others: strong management team not reliant upon one individual, annualised sales and profit growth, broad customer base, efficient processes and systems, protected intellectual property, low staff turnover, minimal risk of contingent liabilities, well kept financials. No doubt you can add your own choices to the list.

 

The point is that none of these can be achieved overnight so start planning for sale and readying your business towards that end goal now.

Before deciding how to get the business in a position to sell, you will need to determine precisely what you want from the outcome. In order to do this, ask yourself the following questions:

  • Do I want to have an ongoing involvement with the business or get out completely?

  • Do I ideally only want to realise a part of my investment in the business?

  • What impacts on others such as staff or key customers are important to me?

  • Am I constrained as to what I can do in any way by other shareholders or directors?

  • How will a buyer value my particular business?

  • What do I think will happen to market conditions over the coming years?

  • Are there any industry specific changes envisaged?

You will then need to consider more generic questions in order to ‘shape’ the business:

Once you have the answers to these questions you are in a position to steer the business towards the shape that will give the best sale outcome. As a simple example, if you are in the construction business and perceive that there will be a housing crash in three years, then you know you ideally want to sell the business within two years and need to start bringing on the management team almost immediately.

Contact us for a detailed analysis of the steps you should take to start readying your business today.

 The Selling Process

So you’ve shaped the business for sale and now it’s time to press the ‘sell’ button. What actually happens?

 

The first step, and a good adviser can be a real help here, is to identify:

  • Realistic value ranges

  • That it’s absolutely the right time to exit

  • The best tactics to employ

  • How to optimise the value

  • Tax implications

Your first major decision is then whether to employ an agent or broker to undertake the process on your behalf or whether to go it alone using a trusted team, e.g. your company lawyer and accountant, around you.

There are a multitude of agents and corporate finance houses out there vying for the business. Each will typically charge an upfront commitment fee plus a percentage of the sale value. The great benefit of using an agent is that they can save a huge amount of your own time by undertaking much of the research, document drafting and negotiation on your behalf but you will have to judge whether the cost - likely to run into tens of thousands of pounds - is worth it from your own perspective. Remember that you will still inevitably have your own lawyers and accountants fees to pay albeit they may be reduced to some extent. Your existing team will also know your company and your goals better to start with.

If you feel, for example, that you probably already know any likely buyers from relationships you have within your own industry, you may feel that you can undertake and run the sale process without the need for an agent. You must be prepared to accept the amount of your own personal time the negotiations will take though – it is almost always far more than may be imagined.

The next major decision is determining the deal structure you would be comfortable with. Structures normally take the form of one or more of the following:

  • Cash on completion

  • Deferred payments

  • Earn outs

  • Investment / elevator deal

Whilst the natural instinct of most people is to want cash on completion, this deal structure is relatively rare for many reasons, e.g. level of risk to the acquirer, your own desire to continue working in the business, etc.

Whether you’ve decided to employ an agent or not, the typical sale process will proceed along the following lines:

 

Preparation of a Sale Memorandum

 

This is a document that will be circulated to potentially interested parties and outlines why the business is being sold, its financial history, the operational environment, the key assets, market positioning, new initiatives and future trading forecasts.

 

Indicative Offers

 

It is usual to ask for indicative offers by a deadline. These are totally non-binding and the reason for so doing is really two fold: (a) to narrow the field to serious parties only, and (b) to gauge whether final offers are likely to be in the desired value range.

 

Heads of Terms

 

From the indicative offers one potential acquirer is generally selected and Heads of Terms drawn up agreeing the basic principles between the parties such as the deal structure. Again, this is non-binding and subject to due diligence being undertaken. Commonly a period of exclusivity will be agreed upon at this stage whereby you will not talk to other potential acquirers.

 

Due Diligence

 

The buyer will do extensive checks on your business to ensure it is as stated in the Sale Memorandum and to reduce any potential risk. Typically, due diligence will cover legal, financial and commercial aspects.

This is where you need to have ensured that you have done your work before hand and that it is as accurate and watertight as possible! Nothing turns a buyer off more than unearthing incorrect information.

 

Legal Documentation and Deal Completion

 

The terms from the Heads of Terms adjusted for anything that may have arisen from due diligence and further discussions with you, will now be drafted into a formal Sale and Purchase Agreement which, once signed, is legally binding and completes the deal. There may also be supplementary documentation such as a Service Agreement if, for example, you are to continue in the business for a period of time.

 

Contact us if you’re considering selling your business or wish to know more about the process in general.