19 July 2017
Every business owner requires an exit plan even though many may not think it, and for many this will revolve around eventually selling the company that they have often spent a significant proportion of their life developing and growing. It’s easy to underestimate the amount of groundwork required to achieve a successful sale and maximise a company’s value, so it’s no surprise that the best exit values are achieved through careful planning and long term preparation.
It is never too early to think about a long term sale and putting the foundations in place well in advance, even if you never actually end up selling. Having the basics in place is good business practice and as we all know it’s impossible to predict what the future holds, be it health related or an attractive offer suddenly arising for the business. If you have already done some planning everything will be a lot less stressful and the likely price enhanced.
One of the most important aspects in any business sale is how it will function once the current management/owner pass over the baton of ownership to an acquirer. This can also be one of the most difficult aspects to get right, but with the right grooming can deliver exceptional value to both buyer and seller. The vast majority of buyers will expect to see a strong management team in place that can run the business with minimal input from the shareholders, so an owner-manager who can effectively make themselves redundant will have a much better chance of securing a higher price. This is sometimes a hard decision for an active owner to make, however in the long term it will deliver significant returns.
A simple test of this is to look at how the business functions when the owner goes on holiday for an extended period. If they spend their downtime glued to their phone, Skyping the office and having to continually make decisions and reply to emails, it’s clear that a lot needs to change before most buyers will consider it. Those owners who can take a break from the business and it runs smoothly with little interruption have a much better chance of achieving a premium and not falling foul of a due diligence process.
What is becoming more and more common is a pre-populated data room which will have all of the information a potential acquirer should need in order to fulfil their due diligence and complete the transaction. This could be historic financial records, to staff details, to property details to shareholders agreements. Having a pre-populated data room is not only good business practice as you have a bible of your key company documents held safely but also saves a significant amount of hassle when absorbed in a sale process.
Another key consideration is how working capital and net debt will affect the overall transaction price. During the sale, the buyer and seller will often have very different views on how much working capital should be left in the business. The buyer will want sufficient working capital to enable them to continue to trade without having to invest more money, but for the seller, the lower the amount of working capital left in the business, the higher their net proceeds will likely be. Presenting this upfront to a buyer is always useful as it avoid any nasty surprises down the line and also the potential price chip at the last minute. Calculating the average working capital requirement of the business over a specified period is often a good way of convincing a buyer.
Finally, in most cases, profitability is the key consideration for buyers so this has to be as healthy as possible, which can take several years to get right. This means driving efficiencies and looking at where costs can be reduced well in advance of a potential sale. It should also be noted that maintaining profitability during the sale process is key – many times we have seen owners get distracted by the sale process and take their eye off the ball which then has a detrimental impact on profitability and ultimately the price someone may be willing to pay.