As a successful entrepreneur or business owner, you won’t want the business you’ve built up to simply stop when you retire or move to new interests.
However, anecdotal evidence shows of those who plan to sell their business, only around a fifth will be successful.
Exit planning isn’t an overnight exercise. If you want to ensure a good price for the business when you sell, you need to start planning 5, 10 or even 15 years ahead of time.
What makes for a good sales prospect and price?
The sale price of a business used to focus primarily on multiples of turnover. However, nowadays the calculations are more complex and can involve a myriad of other factors.
Areas to think about well ahead of time include:
- The intellectual property you can bring to your business. For example, if you have an accountancy firm, what could you develop which would make you stand out from the competition?
- Whether you could develop skills in specialist areas such as tax, or if you can develop and demonstrate expertise in mergers and acquisitions?
- Your marketing: Do you have a well-known brand and active marketing programme?
- What assets are there in the business? For example, premises and equipment.
Your sales patterns are also important, consider:
- What kind of sales pattern do you have? Recurring revenue through ongoing subscriptions on auto-renew offers predictable cash flow, as does retainer work, and can make your business more attractive to buyers.
- Are you very affected by seasonal buying? If so, could you can add a new product or service to reduce the peaks and troughs of demand?
How much will someone be prepared to pay?
The value that someone is willing to put on a business can vary considerably depending on how it fits into their business strategy.
For example, a firm seeking fast growth may be prepared to pay a higher price for your business to give them extra capacity and staff immediately, rather than the lag which would come from building their business up themselves.
Are your finances in good shape?
Don’t forget about your finances – having demonstrable ongoing cash flow, good profit margins, significant tangible and/or intangible assets, and small debt levels are all likely to come into play when negotiating to achieve a good sales price.
This is where having a seasoned and senior level financial director or finance manager can pay dividends. They can help you prepare for sale 3 to 5 years ahead, highlighting any anomalies and spotting areas which could be improved, such as profit margins, to help gain a higher sales price when the time comes.
Ensuring your financial records are in order is also an essential box to tick – think Patisserie Valerie and the recent discovery of the £20million ‘black hole’ in the chain’s finances and the arrest of the finance chief.
The FD will also be an important ally to have at your side when it comes to negotiations and due diligence, including valuable advice on what the purchaser is offering in terms of price and terms.
Your finance team or director may also be a key part of your succession planning and, if they stay with the company after you leave, provide reassurance for the purchasers.
What other sale options should you consider?
As well as selling the business as a going concern to outside parties, you could consider offering it to your management team through a management buyout, or even taking inspiration from the likes of Rupert Murdoch and Richard Branson and involving your children with the view to them becoming your successors in the business.
It’s also worth deciding what you want to happen to the business should you die whilst actively involved. This requires a written agreement and often takes the form of offering the stake in the business firstly to senior management team, to try and ensure continuity of the business.
Finally, if you want to sell your business as a going concern, there are certain legal responsibilities you need to fulfil – to your staff, to the tax man, to your purchaser and, if applicable, to your shareholders.
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Photo credit – Little John, Unsplash