5 ways to prepare your business for a successful sale
Looking to sell your company? Follow these steps and Russell Horton of elitetele.com says you'll maximise your business' value...
Since their rapid decline in the 2008-2009 economic downturn, the number of mergers and acquisitions in the UK is now broadly stable.
The third quarter of 2016 saw an upturn in mergers and acquisitions activity, and the number of successful completed domestic acquisitions (with a transaction value over £1m) increased to 72, with an average value of approximately £44m.
The IT and telecoms acquisitions market in the UK, following a short slowdown post-Brexit, is now an active market once again. There are several well-funded acquirers and a regular stream of businesses coming to market to sell.
But selling your business is not easy and there is a good deal of work, and indeed pain, for many owners in trying to sell their business. The market data also doesn’t inform us of whether the transactions were beneficial to the seller or not.
Anecdotal evidence shows that less than 50% of acquisitions are successful at paying earn-outs in full. So, how can you prepare your business for a successful sale?
Having, over a period of 20 years, sold businesses as a shareholder, acquired businesses, and managed businesses during earn-outs, here are my recommended five most important actions, if done upfront, that will pave the way for a successful sale and earn-out.
1. Do your own due diligence
We hear much about the due diligence process that the purchasing company will go through to assess your business but, to make this process run smoothly, you need to do your own due diligence first.
Have copies of all your customer contracts. Know how much of your margin is in long-term contracts, and be able to identify lifestyle costs to show separately so they don’t impact value. Be able to show you are following standard accounting policies for revenue recognition; that all employees have robust contracts of employment and the business is meeting its customer SLA’s (which are measurable).
Doing this yourself first will flush out gaps that would have lowered your value, which you can then correct before going to market. This will also give a potential purchaser confidence that you have a well-managed business and less scope for them to chip price during due diligence.
If you haven’t considered hiring a corporate adviser prior to going to market then do; by helping you do your own due diligence they can materially improve your exit value.
2. Be clear and realistic on your personal objectives and hence deal structure
If your ultimate goal is to sell your business, you should be thinking about what the minimum value you would accept for your business is. You need to be clear on whether you are prepared to work in the business for a period post-exit. Or do you see high growth potential in a bigger company and therefore want an upfront, and an upside via earn-out? What role and control do you want post-exit, and what do your fellow shareholders want? If you haven’t talked to them about this then you need to; it will also help clarify your own thinking.
Perhaps one of the main concerns of many owners is what will happen to their staff in a sale. Do you want to leave a legacy and look after your staff, even if that doesn’t give the highest exit value? There are some tough decisions to make when it comes to selling your business. So knowing your options and thinking them through beforehand is key to ensuring you make the right choices in negotiations.
3. Dress your business for sale
No, this isn’t as simple as wearing the right suit and tie to meet your potential purchasers. You need to identify what is great about your business.
Do you have any IPR that could be scaled? Are you out-performing the market in any areas? These can add 1x to your multiple, and presented and pitched correctly make you a more strategic purchase.
Again, your corporate advisers can help with this but don’t underestimate what a difference presenting your best attributes as a business can do for the sale price.
4. Create competitive tension
Maybe you have a potential purchaser in mind or have been approached by an interested party. My advice is not to sell to the ‘first’ bidder but create some competition. By engaging experienced corporate advisers you can have competing buyers that will ensure the best value is achieved for you. They can also present a range of different options that give choices such as how long to stay in, plans for your most loyal staff, upside earn-out versus maximum upfront.
Some buyers will see your business as a synergy play, looking to take as much cost out as possible. Others will see you as a complementary play bringing products and skills that they don’t currently have, and hence will look to invest and grow your business. Know which option you prefer or whether you just want to sell to the highest bidder.
5. Hire a good legal firm
A good firm will support you personally on the sale and purchase agreement (SPA). They are critical to achieving the right value for your business and meeting your personal objectives. A successful post-acquisition earn-out is always based on a well-written and negotiated SPA, as this is the key document that sets and agrees expectations, governance and balance of risk. Making sure you hire the right legal firm is, therefore, critical to a successful sale. Ensure they have a good track record and understand your field of business, and preferably obtain recommendations before embarking on any relationship.
If you prepare your business for sale in the right way there is no doubt you will have a smoother ride, and ultimately be more likely to maximise the value you take out of the business. In this case, a little preparation really does pay.
Russell Horton is COO at elitetele.com, a unified communications provider increasing efficiency, reducing costs and delivering return on investment for businesses.