Many business owners only start to think about the true value of their business as they approach retirement and begin to explore the possibilities of selling their company. But what they tend to find out is that the things that add value to the business are the very things that help grow a business successfully.
It’s also, in many cases, the most valuable asset many of them own, in many cases far more valuable than a property.
So whether or not you’re considering selling your business, the sooner you take action the stronger and more valuable your business will be, should you wish to sell it in future.
And for some business owners the process starts on day 1 – but don’t panic just yet if you’ve only just made up your mind to sell or thinking about selling there’s much you can do.
If you do decide you want to sell, you may have to become far less attached your business than you may be – right now it’s your baby but you’ll have to let go.
It’s also useful to bear in mind that it’s not necessarily what you’re selling that’s important. It’s what the other person is buying that really counts; another reason to learn to let go. And here are a couple of examples to illustrate the point (and if you can find out the potential buyers’ reasons for buying, it can help increase the value – more on that a little later).
I recently sold my small inbound call centre.
I employed five part-time staff, had small offices, a bunch of computers and specialist software.
I sold to a larger player. The buyer had spare capacity and offices plenty big enough to house any additional members of staff that might be needed to cope with the additional business.
The key bit’s that when it came to valuing my business, what profit I was making was irrelevant; it’s what was the value to the buyer. The only cost they would incur to deliver the revenues was one additional full-time member of staff. A big difference to five part-time staff, rent, office overheads, etc. So the price was negotiated on my gross fees – not what profit I was or wasn’t making.
And what the buyer wanted was more clients. A very good match.
My reason for selling – very personal, a lifestyle decision.
I had been working with my client for a number of years when the decision was made to sell.
The business comprised four restaurants in a fashionable area of London with large(ish) administrative offices in the building which also housed one of the restaurants.
Using the principle of what were the purchasers buying we had a good root through our P&L (Profit and Loss) Account.
The filed accounts showed a profit of circa £2.3m.
What wouldn’t the buyer be taking on was the question?
The list we came up with totalled just over £1m and included items such as –
- Our Chairman’s salary and expenses
- The chances were that any buyer big enough to take us on would be able to cover a reasonable proportion of administrative costs
- The Chairman’s partner was the Company Secretary – no longer needed
The final list came to just over £1m – which we could easily prove
The business was valued on a multiple of eight on EBIT (Earnings Before Interest and Tax) which we could prove was £3.3m versus the accounts figure of £2.3m and on a multiple of eight this made a difference of £8m – not a number to be sneezed at!!
Reason for selling – the shareholders felt they couldn’t take the Group to the next stage.
And the reason for buying was that our landlord of the building which housed our offices wanted to turn the building into a Boutique Hotel with a fine dining restaurant.
An interesting aspect to this deal (from an accountant’s point of view) was that we were recommended to undertake Vendor’s Due Diligence.
The chances are that when you come to sell your business, the buyer will want a good look at your books and records and much more, according to the size and complexity of your business. This is known as Due Diligence -a process normally undertaken by the purchaser at their cost.
By undertaking the process ourselves we would have to bear the cost if we couldn’t sell the business.
It also had to be undertaken by a reputable firm.
We agreed and the sale process was now well underway.
We’d been getting ready for this for some time and we knew our books and records were in apple-pie order.
However, there was still much more to be looked at. The following covers a number of different types of business and can be applied to most.
See how your business measures up! These are areas that might be looked at and as I said at the start, are also areas that should help your business grow and be ready for a sale at short notice.
Let’s start with what could and does often go wrong once you’ve decided to sell and the Due Diligence process is underway –
- The books and records don’t tie in with the picture you’ve painted
- You omitted to mention one or two salient points – such as there’s a legal issue you’re involved in – an HMRC investigation, etc
- Your advisors have “misled” you as to your company’s value and you’re so far in, you feel you can’t withdraw
- You get so wound up in the process, you forget about day to day business – far more common than you may think
Let’s look at the various aspects of your business a potential buyer may look at. And this is in no particular order –
1. Plant, machinery and equipment
Is it up to date and well maintained? Is it suitable for purpose? Is there technical support available for all items that are critical to the smooth running of the business?
Do you have a plant and machinery register – is that up to date?
Make sure all your licences are up to date.
Do you have a good number of customers or are you too reliant on one or two big clients? Buyers like to see good quality “blue chip” customers and will be concerned if they see an over-dependence on just a few.
Do you have a high proportion of repeat business or are you always looking for new business to replace lost?
How much of your turnover is based on contracts? Are any due for renewal? If so, try to tie up new deals before putting your company up for sale.
What market share do you have – in your area, region, nationally, internationally? Why do people buy from you rather than your competition? Do you offer anything that your competitors don’t? If so, make it the focus of your marketing. If not, think about how you could differentiate yourself from the competition.
Is the marketplace for your products and/or services growing or contracting? What are you doing to keep up to date and to address the changing needs of the market?
There should be a management structure with clearly defined responsibilities. If it’s a small business, it may be that one person does several things. That doesn’t matter as long as everyone knows what their responsibilities and what the levels of authority are. A potential buyer needs to know who to talk to where he/she might make a saving.
Are your employee contracts up to date and in line with current legislation?
An organogram would be helpful.
Are the processes that make the business work well both defined and effective? Are you making the best use of currently available technology? This may be boring but it’s absolutely vital.
And an office manual/bible with the processes clearly defined is a great help.
How secure are your sources of supply? Do you have any distributorship or agency agreements in place? What exclusivity do they give you?
And, if you’re dependent on manufactured parts check out delivery times, can you get them in time for a rush order for a major client? Check stock levels.
9) Intellectual Property
Do you have any of your own design products? If so, is the IPR (Trade Marks, copyright, patents, etc.) properly protected? This is vital. And be careful not to rip off anyone else’s.
Here are a couple of cases for music buffs
“My Sweet Lord” sung by George Harrison & “He’s So Fine” sung by The Chiffons. The court decided the My Sweet Lord infringed the copyright of He’s So Fine and cost George over $0.5m.
Chuck Berry clashed with the Beach Boys over Chuck Berry’s “Sweet Little Sixteen” and the Beach Boys “Surfin’ USA”.
If this whole paper is heavy going, go to the “Songs On Trial” section of The Rolling Stone Website for some light relief.
Back to business
Is there clear evidence that the people in your company have been trained properly for their roles within the company?
Make sure there are training manuals, process manuals, etc.
11) The Financials – very, very Important
Many small and medium businesses have been structured with tax efficiency in mind. There may be a need for some restructuring in the years prior to selling, so get good tax advice early. In any event, a strong Balance Sheet gives reassurance that the business is well managed and cash generative. In an ongoing situation, this will be useful in securing funding for growth. Similarly, a consistent record of good net profit (compared with similar companies in the same business sector) will impress your bank manager and prospective buyers alike.
This isn’t a definitive list by any means and there are also things you should consider
- Have a bloody good reason for selling plus have a business plan to show what could be done – buyers may be suspicious of your motives otherwise
- Don’t make yourself indispensable – a buyer may not want you hanging around too long unless you’re the reason they’re buying your company
For those of you just embarking on the journey of building company, here are 4 things a great number of successful companies have in common –
- A plan!!
- Well trained and well-incentivised staff
- Excellent advisors
And when it comes to selling your business, as much as you may love your accountant and solicitor make sure they’re well versed in selling businesses – this is one time you don’t want them learning at your expense.