26 October 2012
Press ReleasesThe team at James Cowper Kreston Corporate Finance make no claims to be experts in any particular business sector but we are experts in selling businesses.
Our team have over a hundred years of experience of selling businesses and have hundreds of successful transactions as credentials to support our claims.
That experience means that we really do know how to maximise the sales proceeds for a business. We don’t take a one process fits all approach but we do know that the following steps are critical:
The first of these steps "Preparing the business for sale" is covered below and steps 2-5 in a series of articles over the coming months. In the meantime we are running interactive workshops where you can explore the issues relevant to the sale of your business in order to understand how you can maximise the proceeds from the sale of your business. Full details about the workshops can be found here.
This is a tough subject to cover in an article or talk as each company is different. However, the objective is clear - to ensure the business is presented to potential buyers in its best possible condition. Consequently there is a grooming process that can be applied to all companies:
1. Start early
2. Set your objectives
3. Research the market
4. Review your business
5. Review your people
6. Review the business structure
1. Start Early
As with any value orientated process the earlier you start and the longer you allow the more value will be generated from it.
In reality two years is a good timescale in which the majority of entrepreneurs can generate additional significant value from their business. Two years is enough to make structural change and see the improvements flowing through and thus persuade the buyer to pay for them. Any longer and shorter term decisions might come home to roost and any shorter risks the benefits of the process being unproven.
In the latter case whilst buyers may be prepared to recognise the potential improvements in a business they are most likely to seek to structure the deal with an 'earn out' rather than pay cash up front.
If two years is not available before the sale, significant value can still be added through good preparation but inevitably the opportunities are more limited.
2. Set your objectives
It is key to set realistic objectives for the sale process. Whilst maximum sale proceeds is usually at the top of the list of objectives; entrepreneurs often include objectives, around timescales to their exit and the legacy they will leave.
One way to set a financial objective – particularly in a retirement sale, is to work backwards. How much do you want to have to live on? £1m per year, £500,000 per year or some other amount. From that figure it is fairly easy to work back to the proceeds that the sale needs to achieve.
| £ | ||
| Required Income per Annum | £200,000 | |
| Existing pension available | £50,000 | |
| Additional Income required | £150,000 | |
| Expected return on investment | 5% | |
| Capital sum required to generate Income required | £3,000,000 | |
| Industry norm EBITDA multiple | 7.5 | |
| Required EBITDA to achieve exit value | £400,000 |
Of course we will seek to find a strategic buyer willing to pay a price which more than meets your objectives but plan for the downside and then overachieve the objective.
Setting sensible timescales is also important as it stops you making sub optimal decisions due to time pressures. In the current market deals are unfortunately taking longer to complete than was the case in say 2007. Allow at least a year for the actual sale process after completion of the preparation of the business for sale.
The desire to leave a legacy is laudable but is often exploited by buyers as a weakness and may mean you leave value on the table for the buyer. Try to leave this honourable ambition behind when you enter the sale process.
3. Research the market
A key task for your advisers is to review the market. No sensible new product launch is made without good market research – why take your business to market without knowing the market. The minimum information required is:
For those in the IT and Marketing Services sector our quarterly M&A update might be of interest.
4. Review your business
The information required from the market review can be readily gathered by good advisers and will give you and them the ability to properly benchmark your business against others in the market. This will ultimately allow you to decide how your business can be prepared to be most attractive to the buyers.
Of course any decisions in preparing the business for sale need to be consistent with your ongoing commercial objectives and a balance has to be struck between short term and long term benefits but often simple things can be done which make a significant difference to value.
In recent years James Cowper Kreston Corporate Finance have assisted a number of businesses to prepare themselves for sale. In one example the process involved the review of new branch openings. Market intelligence showed that a concentrated geographic spread of branches equating to higher market share in a smaller market would be more attractive to buyers than branches more widely spread. With two years to go before sale, the Company was able to refine its strategy to accommodate this. In another example it was clear that buyers valued higher gross margin businesses over those with greater turnover but lower margin. A simple tweak of the sales team commission structure meant that more higher margin value business was secured significantly increasing the value of that business.
5. Review your people
Rarely do buyers simply want a product or customer list. In 99 out of 100 purchases buyers want to acquire a strong management team and retain the people who are driving the business forward. For the entrepreneur this could mean that they are forced to stay with the business for a number of years rather than exit and hit the beach as they might have hoped.
To avoid the need for the extended handover period the entrepreneur needs to use the time prior to sale to build a business where they are not seen as the sole decision maker. Of course this is difficult as the risks are obvious but the benefits are equally as obvious.
6. Review the business structure
Some examples of the business structure to look at include:
Of course for many entrepreneurs this is administration and whilst we have great sympathy for that, we have seen examples where poor administration has cost shareholders dear. In one example when acting for a buyer, the shareholder of the target business had unfortunately registered some of the shares of his company in his children’s name. This fact was not discovered until late in the due diligence process and the subsequent delay in completion led to a significant renegotiation in the price paid for the business as its trade temporarily suffered during this period of uncertainty.
In another example poor tax compliance contributed to the announcement of a tax enquiry. The buyer who had offered a premium price decided not to wait for the conclusion of the enquiry and instead purchased its second choice acquisition target.
At James Cowper Kreston Corporate Finance we have extensive experience preparing businesses for sale. We offer a cost effective pragmatic service with proven results.
Please listen to the podcast available here or from iTunes and read our "Guide to Grooming your Business for Sale" and attend one of our interactive workshops to understand what improvement you can make to your business prior to marketing it in order to maximise its value.
