The things that go wrong when you sell a business – and 7 solutions!
Get closer to a pain-free exit process by following these seven essential rules
Sorry to be the bearer of bad news, but these are the exceptions, not the rule. As part of our survey of some of the UK’s most successful entrepreneurs, carried out in conjunction with chartered accountants and tax advisers haysmacintyre, we asked our post-exit Young Guns what they felt affected the valuation of their company.
41% said that an unclear ownership structure affected the valuation they achieved. The same number pointed to the fact they were deemed ‘integral’ to the success of the business, while the remaining 18% said a lack of clarity around their numbers (revenue recognition) had a negative impact on price.
So, as the selling entrepreneur what can you do to oil the process, avoid the common mistakes, and maximise the achieved valuation? Here are seven crucial tips to get your sale off on the right track:
1. Pre-qualify prospective buyers
“Businesses shouldn’t be shy to qualify prospects for fear of putting them off,” says Natasha Frangos, haysmacintyre partner and head of creative, media and technology. “This process can actually often draw the prospect deeper into the sale and can be used to protect sensitive information about your company from falling into the wrong hands. It ensures that only serious buyers have access to key details of the sale. It is imperative to have a non-disclosure agreement (NDA) in place.”
2. Prepare the right paperwork
“There is not enough planning and preparation ahead of going through the process,” says Frangos.
- Collate financial and legal due diligence contracts
- Consider any staff issues the business has
- Outline your turnover recognition policy, identifying the accounting period during which revenue and expenses are recognised
- Look at your working capital management, meaning the balance of your current assets and current liabilities
- Pull together details of the intellectual property your business owns
3. Understand your perceived valuation
A misconception common to entrepreneurs is that their business is worth more than the market is prepared to buy it for. To build value, says Frangos, you need to understand the drivers behind a business’ growth. “Reliance on too few key customers, the business being too dependent on a handful of critical employees, and whether there is still growth in the market (so not exiting beyond its peak),” will often have a negative impact on perceived value vs market value.
4. Have a clear corporate structure and ownership
You need to list the key roles, duties, how they relate to each team member’s job title and who they report to. It should be clear to a potential acquirer which positions are filled, by whom, and the roles you may need to hire for. In addition, what percentage of the business does each director, investor or manager own, and has any equity been allocated to employees?
5. Engage the right group of advisers
This is something where companies “often underestimate the amount of resource the sale process will take”, says Frangos. In addition to external advisers you need to designate an internal team responsible for pulling together the necessary documentation and capable of responding to advisers. “Once a company is into the deal, the importance of making complete disclosures and negotiating warranties that are not too onerous is where your advisers will provide invaluable support,” adds Frangos. “Any areas of potential concern should be put to the selling team advisers who then frame the way in which the information is communicated to the buying team.”
6. Negotiate as much immediate cash as possible
If you are still a key figure in the running and leadership of your business, an acquirer will often want to ensure you are not able to walk away immediately following the completion of the deal. “It is very common for deals to include an earn-out mix of cash and shares,” advises Frangos. “Sellers need to be wary of allowing the buyer to defer too much of the sale price, providing an opportunity for the buyers to not pay in the future due to breach of a warranty.” Get advice for you and exiting shareholders on the most efficient global tax position you can achieve.
7. Consider how to transition the team post-deal
As well as being a major upheaval for you it can be a challenging time for your team as they adjust to new ownership and all that entails. Familiarise yourself with the acquiring company’s culture, processes, contracts, and intentions for your team. This can be an energy-sapping period and many will naturally turn to you first if you are working an earn-out period, so be prepared.