As a business owner, you too need to be prepared when opportunity strikes. The two most common reasons owners sell their business are getting approached with an unsolicited offer and having a health scare. Either way you’re not in control of the timing, but you can be in control of how prepared you’ll be when opportunity knocks or necessity strikes.  Here’s 7 things to do right now to get your business ready to sell

1. Make sure your customer contracts include a “survivor clause,” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business.

2. Cultivate a group of a dozen “reference-able” customers that an acquirer could interview. When you sell, the buyer will want to speak with your customers; so you need a group of people – customers who are also friends – that would be willing to say good things about your company. In particular, the acquirer will be looking for assurance that the customer will keep buying after you leave, so make sure your reference-able customers are loyal not just to you but also to your business.

3. Keep in mind your elevator pitch to a potential acquirer. Writing your elevator pitch now will crystallize the important attributes of your company and ensure you focus on the right metrics in the coming years. It should the Who, What, Where When and Why of your business:

• Who: describe why your management team is a winner. 
• What: describe what you sell and why customers choose you.
• Where: where are you located and what is the potential to expand geographically? 
• When: how long have you been in business? 
• Why: What are the strategic reasons someone would want to buy your company? Do you have a niche? Is your product a world-beater? Make decisions for your business now through the lens of how the results of your decisions would be perceived by a potential acquirer down the road

4. Identify 10 companies with a strategic reason to buy your business. Once you have a short list of potential buyers, study their M&A activity. What do they buy? What do they list as the strategic reasons for their acquisition in their media releases? Who are their lead corporate development executives?

5. Do business with your short list. Once you have a short list of potential acquirers, try to do business with as many of them as you can. Companies buy companies they know; so if you can find a way to work with a potential acquirer (either as a partner, supplier or customer) it’s a chance for them to become familiar with your company.

6. Professionalise your financial management – there’s nothing that freaks a buyer out more quickly than disorganised accounts.

7. Stop doing the selling. If you’re the rainmaker, nobody will buy your business without a soul-crushing earn out. Keep in mind that sales people take time to train and to hit their stride. Depending on your industry, it may take them a year or even two to start cranking out deals, so now is the time to hire and train them – not six months before you want out.

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Last year I met with the owners of an engineering business because they had had an approach from a possible buyer for their company. It was a good business, and the owners liked the people who had approached them. At the same time they were wary of business brokers (having previously signed up a big company which had charged up front fees yet achieved nothing) and of the perceived disruption of a sale process. They also felt that their business had an intrinsic value that the buyer was bound to appreciate and to pay.

I can understand their reservations – but the idea that a buyer would blithely cough up the “business value” – even if it could be known – is dangerous. This ignores the huge amount of the exit value which is down to a good exit process.

How a business is sold has as much to do with the eventual value obtained as the characteristics of the business itself. If you are selling a house you can get a good idea of what it’ll go for based on the other houses on the street, you can even do this yourself using Zoopla. That makes selling a house much more about finding the buyer rather than extracting the value. And yet some business owners believe their business has given value and once the right buyer comes along, a deal will get done at their price. Alas nothing could be further from the truth, for a number of reasons:-

1. Business value is much more subjective than property and other assets. You can’t go and get definitive comparables for businesses. The packaging and process play much more critical roles when selling a business.
2. The “best” buyer for your business might not be “on your doorstep” nor a close trading partner or competitor. If you have a decent sized business the best buyers might be scattered all over the world. Appreciation of business value is pretty subjective and so you will need to court multiple motivated buyers. This takes a lot of specialised knowledge, skill and perspiration.
3. The devil is in the detail in most M&A deals. Many companies for sale will have amongst their circumstances a few potential deal killers. A skilled advisor is essential for avoiding these “unexploded bombs” and getting the deal done.
4. Selling a business is a sales process. Without good comparable sales data (i.e. competing offers), it becomes a negotiated process.
5. Most business buyers know what they’re doing and are intent on buying low and out-negotiating their adversary on the deal terms. You need to at least match their knowledge of the art of the deal to can maximise value for the seller.

Alas some folk, like the owners of the business I spoke to last year, try to do it themselves or delegate it to their lawyers or to the local accountants. Even if the seller thinks he’s done well, money has probably been “left on the table”. Selling a business is complex. There are a lot of moving parts and many business owners and, and especially accountants, don’t quite realize it. They think that because they’ve been tangentially involved in a few deals they can run a process and manage it effectively.

Selling a business for maximum value is the realm of the specialist. Company owners fail to hire one at their own risk.

Business sale value upon exit is made up as follows:

What you get for your business = Enterprise Value + Packaging + Process + Deal-Maker Skill

Enterprise value is the intrinsic value of the business. In theory this might be obtained by the DIY business owner/seller or the novice business broker (if they can sell it at all).

Packaging is putting together the Information Memorandum. Skilled packaging can in itself make the difference between a sale and no sale.

Process includes both process design and execution, and it’s about locating the highest and best buyers and working them all at the same time.

Deal-maker skill is the secret recipe. It’s the skill, knowledge and experience of the individual (or team) running the process through to closing.

In short, there is real benefit to be had from working with a specialist M&A adviser, a specialist in company sales. Look for someone with demonstrable experience, plenty of credentials to be found on the internet, and someone who will help you get the deal across the line. Ask your peers for references, talk to your existing lawyer or accountant, search the Internet.

If y ou are thinking of selling, which you will surely have invested lots of personal and financial capital into, then its worth getting the right people working alongside you to make it happen.

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Is Now a Good Time to Sell Your Business or Buy a New One?

EXIT STRATEGIES FOR FAMILY FIRMS

We’re often asked how to achieve succession within family businesses.  For this type of business Business Exit Strategies mean how to pass it on and not how to achieve a trade sale of the company.  Very often this will be done in the form of a Vendor Initiated management buyout, particularly if those who are to succeed are not just family members.   The VIMBO or succession buyout structure can also work well in a family deal, if Mum and Dad want full value rather than gifting the business, and if they need some sort of carried interest or ongoing income.

SIMPLEST CAN BE BEST

That said simple is often best.   And particularly in small deals variations on the share buyback theme can be useful. 

SHARE BUYBACK

We recently helped a family business in Suffolk achieve succession using this type of structure.   It wasn’t a huge business, but was sustainedly profitable, and had grown to have branches in Essex, Norfolk and Cambridgeshire.   Mum and Dad had been running their business as a company for many years, but had involved their two sons in the business as full time directors.  As the sons took more responsibility in the business they felt that it was time for them to take control.  The aim was to achieve the transfer and for the parents to have the profits which had accumulated in the company to be paid out to them tax efficiently.    If the arithmetic stacks up this can be done using a buyback of shares.  

The tax legislation which gives favourable tax treatment to an individual when a company purchases some of its own shares provided certain hoops are jumped through.   In outline the steps are:

• The sons get given some shares (a 32% minority holding) in the company a few years before Mum and Dad were ready to fully hand over the reins.  Result = no tax charge for parents or children due to the availability of tax reliefs - it qualified as a trading company.
• More recently, when Mum and Dad decided to retire, the company bought back their shares.  This was done     correctly and so the proceeds will be taxed as capital receipts for the sale of their shares (and not subject to income tax).  Entrepreneurs’ Relief should be available as both the individuals and the company meet the conditions and so the tax charge is only 10%.
• The company then cancelled the shares so that the shares held by the next generation are the only shares in issue and they all of the company.

THE GROUND RULES

In all deals there are some company law rules to be observed, or the danger is that the purchase of shares is an invalid purchase with unfortunate consequences.  As ever there are also tax rules to follow – and they’re often not quite so clear cut.   In this case the two keys matters that had to be established were that the company was a trading company for the purposes of Entrepreneurs’ Relief and that the purchase of shares is for ‘bona fide commercial reasons’.  The ability to “clear” this with the revenue in advance is helpful.   Of course there is usually a financing issue too.  In this case the company had the cash to payout. But what if the company doesn’t have enough cash?    There are ways round this – and indeed this might be a cue to consider a Newco buyout structure.

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How - and why - to value your company - a practical approach to Business Valuations

Business valuation can be complex but the underpinning of any good valuation assessment is the answers to four simple questions:

What is being valued?

The first step is to clearly define what is being valued. If it’s a going concern – i.e. an ongoing trading business - then it is the income stream of the business that is being valued.

A business is nothing more than a group of assets – people, ideas, processes, products, intellectual property (especially in technology companies), and equipment that together produce an income stream.  If there are any assets not used in the generation of profits, they get excluded from the valuation (and added back separately if you’re valuing the shares of a company for example).  A good example might be a surplus investment property held in a company.  Conversely if there are assets not owned by the business but used in generating profits, they must be contributed to the business by the owner or the cost of acquiring the assets needs to be taken off the valuation.

You also need to clarify if you’re valuating the assets or the equity of the business. An assets valuation assumes the seller retains all non-working/non-interest bearing liabilities of the business and, in a hypothetical sale, pay them off with cash received from the purchaser of the business. If the equity of the business is being valued, it is assumed the hypothetical buyer would get all assets of the business and assume all liabilities as well.

Value to Whom?

The answer can be an individual, investment group or another company. Once this question is answered, all the factors adding to or detracting from the valuation need to be factored in.   So a strategic buyer who sees potential in the business will value it at more than a similar buyer without any special reason to be interested in it.   I’ve seen some Cambridge technology businesses valued for well above their asset value, or any reasonable assessment of an income multiple – simply because their technology had true strategic value to the purchaser.   For example we advised on the sale of a pre-revenue business where the North American purchaser had decided to invest in a particular area, and purchasing my client meant that they would save around 2 years “time to market” over developing the technology in-house.   They thus had a pretty well developed idea of what they were prepared to pay for it.

What Definition of Value?

An alternate value definition is fair market value. Selling a business for maximum value can be a frustrating task. First, what is the maximum value of a business? Actually nobody knows – and any broker, corporate finance house, or M&A adviser who offers you a guaranteed price needs to be challenged.  How will the seller know if a particular offer he receives is the best he can get?  And would he get more if he waited?

This can be a difficult judgement for business owners who are thinking of selling – and it really helps to have an experienced M&A adviser giving input to what would be a realistic price given the nature of buyer, seller and the market.  Add the possibility that the maximum value might include some vendor financing, in some form of earnout perhaps, then the seller needs to consider, assuming the buyer’s ability to pay will in part come from future profits of the business, whether the buyer will do a good job of running the business once he takes over.  Faced with the “what is maximum value” dilemma, in practice sellers need to make a reasoned assessment of fair market value before embarking on a sales process.  We always invest time and resource in helping business owners to reach a thoughtful assessment of what would be a realistic “price expectation” ahead of a sale process.

Fair Market Value

What is “Fair Market Value”?  It’s the price at which an asset would change hands between a willing buyer and willing seller, both of whom are suitably knowledgeable of the facts and neither are forced to do the deal.  It’s a simple definition, but of course the technical process for estimating fair market value can be pretty complex – it’s an art AND a science.  

Value as of What Date?

The fourth question to be answered before a business can be valued is “value as of what date?” And it’s not always “valuation as of today” that’s relevant.  In litigation or tax driven valuations we’re often asked to produce a valuation opinion as at a particular date in the past. Conversely, in finance it’s often a requirement to predict what the value will be at some date in the future, perhaps as part of a strategic planning exercise.

If you'd like to know more about business valuations have a look at PEM Corporate Finance Business Valuations - valuing businesses in Cambridge, East Anglia, London and beyond.

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