Someone told me never get into a business venture unless you know how you are going to get out of it! For most entrepreneurs defining their exit strategy early on, is a critical part of achieving business success. Strategies will differ, but for all there will come a point where they want to exit the company. This normally means passing the business on to a successor, winding it up or selling your business.
For many business owners, real value is only achieved when they sell their business. For entrepreneurs, this is their reward for the hard work and dedication put in to building a successful business.
Selling your business – here are our tips on preparing:
Timing of the sale
Think about when you want to exit the business. You may plan to retire at, say, 60, so work backwards to set yourself a timeline from now to that exit point. Once you have a time line in mind consider carefully the industry you are in. Think about what trends will impact the industry both positively and negatively between now and your exit point. The big influences will be the financial climate and state of the overall economy. It is well known that mergers and acquisitions activity dips in times of recession.
Also consider whether a potential buyer would want to keep you on as an employee or a consultant for a period of time. This is becoming more and more common as buyers know that by retaining you the odds of a successful integration are improved. Consider the timescales for the sale itself. Even with motivated buyers and sellers and good legal teams, the sale time for a £1-£4m business would usually be 3-6 months. If the business is large or complex, this can be pushed out further.
The Price for your business
Valuing and setting a realistic price for your business is an important step and should be based on sound economic arguments. Remember your business is worth what somebody else is prepared to pay for it. But it is important that you set a realistic price and can justify the valuation to a prospective purchaser. Once you have this figure in mind you have an objective. It is important that you stick to this figure as you move through the negotiation process.
When selling your business, it is well known that businesses with sound processes achieve higher valuations. If someone bought your business could they come in, follow the processes that are in place and achieve success? If the answer is yes, your business becomes much more attractive and is then a ‘turnkey’ business. The more work a potential buyer must do to get the business processes working, the less attractive the proposition. Think about putting written processes in place for all activities – marketing, HR, operations, finance and sales. If all departments have well understood, documented processes that staff follow routinely, you convey to the buyer organisation and discipline.
Critically you need to consider your management team if you are selling your business. A positive team will make the sale process far more straightforward. However, a suspicious, negative team could potentially scupper a deal. Normal protocol is to only tell people on a need to know basis in the early days of negotiation and due diligence. Try to understand from the buyer what their intentions are for your management team. This will allow you to set better expectations with them on what the future holds. In most cases the buyer will be keen to retain good managers so use these positive messages to your advantage.
Identifying potential purchasers and marketing your business can be tricky, particularly if you are trying to keep things discreet. It is especially hard if your potential buyer is in the same or competing industry.
To identify potential buyers, start to build a book of companies that could be interested. Consider your whole supply chain; your supplier, your customers also your competitors. For each, consider the purchase of your business from their prospective. Consider their ambitions and their financial health by researching their companies. Companies are more likely to make acquisitions when their cash and balance sheets are strong. You can go through brokers if you do not feel confident contacting potential buyers direct. Once an expression of interest has been made ensure non-disclosure agreements are signed to help avoid any leaks.
If you are going down a normal ‘sale and purchase’ route you will need a written contract. Select a legal team that is experienced in this area. I would recommend that you approach at least 3 legal firms – ask for case studies where they have represented clients in similar situations. Ask for referrals to previous clients and don’t be afraid of following these up. Get a detailed written quote. Great care should be sought to get like for like quotes so you can make a proper comparison. A common area where legal quotes differ will be around aborted deals. Say you got 90% into a deal but the buyer then walked away, how much will you pay? It is also important that you select a legal team that can balance pragmatism, skilled negotiation and good communication skills. Without these negotiations can quickly stall.
The taxation issues arising from selling your business can be complex and have an impact on personal and business taxation. Proper advice in this area could save you a considerable amount of money. Your financial advisor should be able to recommend good tax accountants who will advise on structuring the deal, ensuring it is tax efficient. Entrepreneur’s Relief is a great tax incentive for entrepreneurs selling their business, so make sure this is considered when selling.
Financial advisors and accountants
Good financial advisors should be engaged at the outset when selling your business. They will help structure the deal to get the best price and payment terms. They will also be able to negotiate on the financials and commercial aspects of the contract. Good advisors will negotiate by demonstrating to the buyer, the value in the business and how the deal represents a sound investment opportunity.
The sales process when selling your business
Once prospective purchasers have been shortlisted the negotiations begin. If you have more than one interested buyer in the initial stages keep the process open to all. This encourages competition amongst the buyers.
It is important that you handle the negotiation with skill to ensure your buyers can see the value in the business. Highlight key attributes and achievements. If there are historical issues with your company be up front. Describe the issue and how you overcame it. Buyers will have more faith if you have told them about issues upfront, rather than discovering them during due diligence. Identify what information you are prepared to share with a prospective buyer. You need to give enough information for them to form a sound judgement on your business.
However, bear in mind at this stage some buyers may not be credible and are simply fact finding. Be on your guard and do not share any sensitive information. It is common place when selling your business to a competitor that sensitive material relating to clients’ customers and products is only shared once the deal completes.
Contracts and due diligence
Once you have progressed with early negotiations it is normal to go to ‘heads of terms’. At this point the legal team will draft up the main elements of the contract. This will include; the price, the deal structure and any key considerations which have been agreed to date. Often the purchaser will seek exclusivity at this point. You as the seller, however, may want to take two companies forward to heads of terms. This maintains the element of competition through the contract negotiation process.
Contract negotiation and due diligence would usually then commence in parallel. The due diligence process is where the buyer’s legal team will produce a due diligence checklist of all the information they require. The seller then supplies this information in a controlled way into a ‘Data Room’ where the buyer can access the information. Data rooms are now more commonly online storage portals, although it is still possible on some deals that a physical data room is used.
There may be reverse due diligence undertaken on the buying company at this point. The seller may seek assurances that the buyer is credible and can meet the commitments that they are about to undertake.
How are these types of deals structured?
There are several ways deals can be structured when selling your business:
Cash – a straightforward cash sum is offered. This may be in a lump sum or phased overtime.
Deferred Payments – usually cash payments which are phased and made over a period of time. If payments are phased or deferred it is important for the seller to have adequate securities and protections in place should the buyer default on a payment.
Performance related payments – here some or all the money will be linked or dependant on performance of the company.
Earn outs – here the seller usually obtains additional money (or other reward) in the future if the business achieves certain financial goals. These are usually stated as a percentage of gross sales or earnings.
Share swaps – a stock swap occurs when the selling company’s shares are exchanged for shares of the buying company. For this to happen each company’s shares must be accurately valued to determine how much has been ‘paid’ for these shares.
We recognise that selling your business can be a life changing experience so getting it right is critical. For an informal, confidential chat please contact us today to see how we can act as your trusted advisor through the sale process.