How to fully prepare for selling your business
There's a lot of preparation that goes into selling a business, a lot of it psychological
Selling your business is quite possibly the biggest thing you will ever do – financially, emotionally and in terms of the impact it will have on your lifestyle.
Most of you will only ever do it once, so there’s little margin for error if you want to get it ‘right’.
The problem is it’s very hard to find good, independent advice – which is why we’ve decided to devote a whole section to the subject. We’ve rounded up the leading experts in the field as well as a clutch of entrepreneurs who have sold their businesses and have a multitude of insights to share.
Over the next 14 pages you’ll find their practical advice distilled into five special features covering the process, as well as in-depth focuses on valuations, responsibilities to staff, maximising your earn-out and the inside track from eight entrepreneurs who have experienced it all first hand. You’ll also find the inside story of Linda Bennett’s decision to sell her up-market fashion chain LK Bennett on page 64 and some snapshots from columnist David Lester on page 22, who only last month sold another part of his current business.
We won’t leave it there either. At this time every year we’ll run a selling your business report to ensure you have access to the most up-to-date information. So, read on, and if your sale is imminent, good luck.
For the best results, prepare
To sell a business you’ll need the help of a few advisers. Depending on the route you choose, a corporate finance specialist or a professional broker may well be necessary, although you may prefer to handle much of the process yourself or simply employ an accountant and a lawyer.
In order to get the maximum value from your advisers, however, you must let them know about your plans to sell as early as possible. If you plan to retire at 60, for example, don’t start putting arrangements in place when you’re 59-and-a-half.
This is true whether you’re planning a trade sale or a partial sale involving venture capitalists (VCs). Equally, a management buy-out (MBO) may present itself as an option. It’s a process that can often take even more time to complete and secure backing for.
Few directors can stump up the kind of cash it takes to buy a successful business, so in almost all cases they will turn to a VC house. But no VC worth its salt would finance secondrate management, so it’s imperative that you build up the strongest team possible.
Preparation can also help you decide when to sell your business. Even the canniest of entrepreneurs will admit that it is hard to judge when a company is ripe for sale. The best time is when the company is performing well, yet retains potential for future growth – the catch, of course, is that this is also the best time to hang on to it.
As Howard Leigh at Cavendish Corporate Finance advises: “A golden rule is that you should sell your business when you feel you don’t have to. When it’s on the way up – not at the top of the cycle but when the business still has some potential.”
Gary Partridge, corporate finance partner at PKF, says it is a case of theory versus practice. Ideally, you should spend years recruiting the best team, sort out your accounting structure, ensure operational processes run smoothly, judge for economic trends and build a solid sales base.
But for many entrepreneurs the decision to sell comes as a response to the onset of boredom or a slowdown in turnover – or both. It goes without saying low morale and a poor performance chart will detract from a company’s value.
The nest step
To improve the chances of a successful sale, you should be clear about your goals. Do you want to wash your hands of the business completely, retain a reduced role as a non-executive or simply raise cash for investment? Who will you sell it to? And how much will you get for it?
These questions must be resolved right at the start of the process and it’s a good idea to involve your advisers from the word go. You don’t want to come up with a sale price only to be told later on by a broker that it’s far too high.
Partridge says that in some cases owner-managers initially name prices that are twice or even three times as much as they eventually end up with. “Sellers are always optimistic,” he says, “so it’s important to get a professional valuer on board before you get your hopes up”. This doesn’t have to mean a formal valuation, however.
Partridge recites the example of a deal in which an American organisation offered $90m for a UK-based com- pany. Despite other stakeholders being happy with the deal, the chief executive insisted it was worth more and turned the offer down. A few months later the team walked away with $150m from the same buyer. Rules of thumb go only so far in this process and there is almost always an exception to the law.
Next is the ‘grooming’ phase, which is most important and exhaustive. Once you have picked your advisers and instructed them as to your requirements, you will need their help in making the business ‘lean and mean’.
Achieving the company’s highest possible valuation will take hard work. You will need to demonstrate strong accounts, healthy prospects and solid operations – right down to your IT equipment, payroll and health and safety practices. (Turn to page 46 for a full guide on how to maximise your asking price.)
Ideally, you should have several years’ worth of figures to prove your business is a strong prospect. If you’re a serial entrepreneur, don’t expect too much interest if your latest venture has only been trading for 12 months – no matter how well you’ve done in that short space of time.
Crucially (and this may prove painful for some), you must make clear that your business will do well without you – that you are not the essential ingredient that makes it do well. Instead of boasting that ‘I built this business up from nothing’, think along the lines of ‘I just couldn’t have done it without the team behind me’.
In many cases, however, it’s best just to leave it to the experts. Peter Farrant, director of Churchfield business brokers, says owner-managers are too emotionally attached to the business to negotiate effectively.
“It’s rare that you can pick apart someone’s business and tell them that it’s not worth as much as they think it is without them getting offended,” he says. “It’s better to let people with no emotional attachment handle the deal. You say what you’re prepared to accept and they do the bargaining.”
When you know the parameters of the deal, draw up a sales memorandum outlining your company’s strong points and how much you and your advisers think it is worth. Then you can begin targeting potential suitors.
“Advertising is a delicate process,” says Rob Donaldson, corporate finance partner at accountancy firm Baker Tilly. “You should avoid letting other companies know about the process informally.” Advisers will vet potential buyers and contact them individually, letting them know about the sale and gauging their appetite for it, without giving revealing the identity.
Discretion is the watchword, adds Donaldson, as buyers and competitors can be tempted to contact your staff or customers if they know who is up for sale. While not particularly ethical, he assures that it does go on.
Once interest is confirmed bids will be invited and an auction- style process will ensue, keeping up a ‘competitive feel’ by juggling bids and pairing off interested parties against each other to encourage the best possible offer.
If and when you accept an offer, the ‘heads of agreement’ will be worked into a document that is legally binding. But before this can go ahead, the buyers will want evidence that your business is all that you say it is: cue due diligence.
This entails all the normal checks regarding your company’s turnover, profit, clients, employees and infrastructure. Advisers are again the key to this process – they’ll organise between themselves what gets looked at and when, but prepare for a frantic few weeks of getting your house in order.
When the legals are finished the lawyers draw up a purchaser’s agreement and the process is completed. Hopefully, this is where you walk away with armfuls of cash, reassured that its new owners will take your business from strength to strength.
Anyone planning to sell a business must become a skilled manipulator of people and circumstances. The successful seller will learn to solve apparently contradictory problems and do so with the lightest possible touch. So dig out your kid gloves.
A natural sticking point stems from the fact that you’re odds-on to sell the business to a former competitor. Say three companies are interested in a deal. One will pocket it, while the other two – probably rival businesses – will walk away having enjoyed a free look at what it has to offer.
Higher up the scale, ‘fishing trips’ become very popular. The term describes the act of feigning interest in a business so as to gain access to its secrets. Speaking to Growing Business, one corporate finance specialist admitted that in a previous role at a blue chip company he was routinely sent to snoop around rival firms.
Thankfully, this kind of behaviour (which is frowned upon by the industry) is rare, but is nevertheless worth keeping in mind when you’re doling out information. Ironic as it sounds, you run the risk of making the business a less attractive prospect if you give away too many details about it to too many parties.
Another area of the sale in which ‘softly, softly’ really does ‘catchy monkey’ is handling your employees. Unfortunately, in most cases you can’t take them with you – so a sensitive approach to their feelings is a must. (Turn to page 45 for a full guide to handling staff without jeopardising the sale.)
The temptation to spill the beans about your future plans will probably be overwhelming, and this is especially true for owner-managers. Many of you will have cultivated and nurtured your workforce personally, and will feel a strong commitment to people right down the pecking order.
Nevertheless, it is imperative that this heart-wrenching aspect of the transaction is handled as subtly as possible. “Staff shouldn’t be told until the last minute,” says Farrant, “you don’t want them to jump ship so you might have to give key people a higher wage or some other incentive to stay on. Of course, once due diligence starts then they will know that the business is being sold.”
Be careful too if you are planning an MBO – if the negotiation between you and your managers turns sour and collapses, then they probably won’t be in the mood to greet subsequent bidders with toothy smiles. If you are leaving it open and an MBO or trade sale are possibilities, you might want to think about incentivising the management team for the trade sale scenario, so that either way they will ‘win’.
The whole process is a balancing act in which diplomacy, mediation and discretion are vital credentials. Getting it right requires a long-term view, an understanding of your market, intimate knowledge of your business and a strong idea of what you want out of the sale.
Put these together; add a few well-selected advisers, a level of patience and tact a saint would boast about, and you’ll stand a good chance of getting what you want.
STAGES OF SELLING
? Before deciding to sell, ask why you want to do it and whether any alternatives to a trade sale might be preferable.
? Do you want to leave the business behind or retain a more ?hands-off? role?
? Get some advisers on board ? they are in a better position to judge your company?s worth and what it needs to improve for the sale to be a success.
? Let your lawyers know what you?re planning and keep them updated.
? Draw up a sales memorandum describing who you will target for the sale and how much you expect to get for it.
? Your advisers will set up an auction, keeping up a ?competitive feel?.
? ?Heads of terms? and due diligence come once you find a buyer.
? Your lawyers will draw up a sales agreement and complete the transaction.