Being able to actually sell a business is an essential skill if an owner manager wants to ensure that all of their years of hard work do not go to waste, writes Mark Lane.
The most successful entrepreneurs are adept at it: they get the timing right, they price things correctly and then execute the deal with ruthless efficiency. I’m talking, of course, about selling a business.
For the serial entrepreneur it may well be a regular occurrence, something they get to practice. For your typical owner manager, however, this is very much not the case. The vast majority of business owners only ever sell one business which means that, essentially, one of the biggest financial decisions they make in their life will be something they have to do cold. Get it wrong and they will fail to properly capitalise on many years of hard work.
Yet in the current economic climate, it is quite easy to get it wrong, especially as more and more businesses are finding it harder to sell. Such sentiment is backed up by new research which shows many UK SMEs can no longer afford to retire.
A new global study of SME owners by SellabilityScore.com reveals that four in ten owners over fifty have delayed their retirement. The survey included 1,245 respondents from around the world. The study's lead author, John Warrillow, founder of The Sellability Score, says: “The [economic downturn] has had a profound impact on SMEs across the UK. Older business owners are delaying their retirement desperately hoping for better trading conditions ahead."
The Sellability Score is a cloud-based software application that allows business owners to evaluate the “sellability” of their company. So why is there a need for such a service? John Warrillow tells Business Today: “[Our research shows] roughly three quarters of business owners expect to sell their business in the next ten years yet just one in ten have an exit plan. There is an urgent need in the business market for owners – in particular baby boomers, thousands of whom turn 65 every day - to focus on how they are going to get out of their business.
“Most owners have the majority of their net worth tied up in their business, which is the equivalent of holding the majority of your pension in one illiquid stock. To enjoy a successful retirement, owners need to understand how to migrate their company from a valuable but illiquid asset, to a liquid asset that can be sold to the highest bidder.” So, how do you ‘value’ a business? This is a question which often leads to a heated debate given that there are so many variables. This isn’t a black and white issue – one potential buyer, who wants to buy a business to remove a competitor for instance, might put a completely different value on that particular business to another.
Warrillow says: “When an acquirer buys a company, they are not buying the company name or the client list. They are usually buying the legal rights to a future stream of profits and they estimate the value of that future cash flow by estimating how much money will flow from the business in the future and how confident they can be in their estimates.
“Factors that drive up their confidence level (and the corresponding price they are willing to pay for a business) are things like a company’s proportion of recurring revenue and diversification of customers…2 of the 40 factors we measure with The Sellability Score algorithm.”
Paul Byett (right), managing partner at UHY Peacheys and UHY Hacker Young in Bristol says: “Most business valuations are based on a multiple of profits. The actual multiple will vary between various industries; however in the current market for the majority of industries a multiple of three to seven is appropriate. This is a very calculated way of looking at valuation and there are, in most cases, other factors to consider such as the value of a brand or what value owning it would bring to the potential buyer.”
While pricing is a major issue in selling a business and worthy of a book on its own, closely related is the issue of timing. In short, you need to time your sale well to maximise the value of your business.
One man who knows more than most about this is Dave Symondson (below) a leading business advisor and coach for SMEs with a particular passion for exit strategies.
He says: "Timing is critical when selling up and can make an enormous difference to the financial outcome. Most growth businesses will go through several different stages of growth and it is critical to exit at the maximum value point – this is whilst going through the advanced growth cycle. Ideally exiting at the mid point of this cycle will achieve maximum exit value. Most people think it is best to exit at the top of the cycle but of course in reality, businesses either flat line or fall back rather than continue into further growth. Therefore it’s important to understand the cycle, recognise where you are and plan for an exact exit.”
Symondson adds: “Having grown and sold two multi million pound businesses, hindsight is the biggest facilitator of learning…there are several things I would do better next time around.”
But hindsight is, of course, everything. While it is something we don’t have, the next best thing is bringing in people who have been through the process before.
Says Symondson: “To reduce uncertainty and stress whilst getting the best financial outcome, I highly recommend taking advice early on from someone that has been through the experience of selling a business. It is staggering to think what a difference that could have made to the net sale amount that was received at the end. The ideal time to bring an advisor on board is a good two years before exit, to ensure everything is put in place right first time to maximise value.”
Of course, many people get it wrong when selling up. In the interests of offering a few pointers to others who may find themselves ready to sell, I asked our experts what they most common mistakes they came across.
Roger Buckley (right), corporate finance partner at BDOLLP, says: “Inadequate planning is the most obvious mistake, and one made because owners can underestimate the value uplift that proper planning can give to their business.
“The most successful and smoothest of sales are well planned from an early stage. If you have an end value in mind, you can mould your business into the ideal shape for your exit. You can create a time frame to work towards and set targets along the way to ensure market conditions work to the benefit of your business.
“As an example, the management team could maximise the benefit of making the business known to ‘buyer targets’ or engage in dialogue well in advance of the ‘for sale’ sign going up. Investing in specific marketing and PR for 12– 18 months prior to a sale is often a good tactic to use.
“Then there is the time to ‘clean out’ the business in readiness for sale, for example reviewing the tax affairs of the business, using the audited accounts, ensuring patents and IP are fully protected. It is also worth stripping out personal assets and considering selling off non-core divisions or property. This is not just ‘house cleaning’ but essential preparation to retain value; no acquirer wants to find skeletons in the business or poisoned pills in the balance sheet.
“Owners need to think of their business as a gift box. It’s better to present it to a potential buyer fully wrapped, with the ribbon tied and bows in place, rather than in an unattractive state of disarray, torn and tattered.” Paul Byett cites two common mistakes made by businesses owners looking to sell, generally stemming from the personality of an entrepreneur.
He says: “Those artistic entrepreneurs with a great idea tend to get the value of their business wrong due to lack of costings and market analysis. This can mean great ideas don’t achieve their true market value because too much time has been spent making continuous improvements rather than concentrating on pricing and driving marketing expertise to ensure sales.
“The second common mistake occurs when entrepreneurs focus too much effort on clinical administration, setting up systems and procedures suitable for a multi-national Plc rather than effectively marketing their product. These systems make the business clumsy in order that it loses its competitive edge of being able to out-manoeuvre the competition by being small simple and savvy.
“Before considering a sale a company should ensure the business model is pinned down, understand the market, and understand the competition and then look to set a price.”
This article first appeared in Business Today, Issue 10.