Understanding your company’s assets and having a solid plan in place will help to ensure the best possible sale price.
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A key part of the process of selling a business is to engage professional advisers who will work with you to develop a clear strategy to ensure the company is ready for a sale. Part of this will include recruiting talented employees, communicating your plans to staff, and having a strong understanding of what your company is worth in the market.
If you plan to step away from the business you have run for many years, how can you make sure it is no longer dependent on your involvement? This might mean bringing in a new chief executive, chief financial officer or a fresh management team altogether.
“A business is worth more if there are people within it that you can rely on,” says Katherine Waller, a relationship manager at RBC Wealth Management in London. “If that business is solely reliant on you, the likelihood is it is not going to be scalable without you.”
Where a strong management team is already in place, it could make sense to communicate your sale plans to staff at an early stage to ensure their co-operation later on. Ultimately, the sale may be contingent on their future involvement.
The value of the business will come down to your staff, the strength of customer relationships, and the contracts in place, alongside the assets of the business. You should think about how to maximise value across all of these areas. During the early stages, work with your advisers to review the health of the business, get paperwork in order and make any changes that could aid the sale.
“There needs to be value in the assets. You don’t want there to be a huge liability that no-one knows about. Be transparent about what the assets and liabilities within your balance sheet are producing going forward. You also need to understand the longevity of your customer-base,” Waller says.
Communication and information flow are an integral part of the strategy. From the outset, it is important to consider how you intend to communicate with shareholders, your management team, potential buyers and the wider workforce.
“There is no point telling staff you are going to sell if you are not going to sell,” Waller says.
“You need to be in a firm mindset, have an idea about who you are going to sell to, and be far down that process before you involve too many people. Your board is likely to be involved early on and your shareholders will be the next people to talk to,” she adds.
In Waller’s experience, the best way to get buy-in from shareholders is to articulate the value that can be realised from the deal. Meanwhile, staff are likely to be concerned about job security and the future of the company, so you will need to reassure them about the credibility of the buyer and the structure of the deal.
Of course, there is the possibility that the deal might fall through. Should this happen, it is important to be transparent with any shareholders or stakeholders, as well as being clear as to why it was not the right time.
Simon Smales, a relationship manager at RBC Wealth Management in London, says there have been several occasions when clients have had to back out of deals to sell their businesses.
“An event like that can place further stress on them following an already long process, but in most cases it turned out to be the right decision for the circumstances,” he says. “For one client in particular, it was disappointing in the short term but a better deal came along a few years later and that made up for it. Getting the timing right is the key to maximising value.”
For David Tosh, a relationship manager at RBC Wealth Management in London, unrealised deals are stressful not only for the business owner and co-owners, but also on other stakeholders in the business, such as employees.
“It can affect morale, but it is important to have a long-term view because terminating a deal may be best for everyone involved,” Tosh says. “Successful entrepreneurs learn from mistakes and, in many cases, those who have had to halt the sale of a business are provided with an opportunity to reflect on their priorities and then successfully seek a buyer that is aligned more closely with their objectives.”
Communications to potential buyers will also need to be well thought-out. A company’s valuation will be based on a number of factors, including its competitive advantage, revenue growth, intellectual property, scalability and the present value of future cash flows.
Any information that is presented to buyers, particularly within the information memorandum, must highlight the maximum future cash flow and the minimum cost of capital.
“Your balance sheet and cash flow analysis needs to be bullet-proof. If there is anything that is slightly questionable, you will lose value. If someone doesn’t understand it, they won’t attribute a value to it,” Waller says.
Your advisers should provide you with a valuation range to expect from potential buyers, based on a number of metrics for your business, comparable recent transactions and valuations of rival companies that have been sold or listed on the stock market.
A business owner should also determine their ‘walk-away price’ early on in the sale process. This is the price that signals when you will walk away from a buyer during negotiations. In Waller’s experience, the walk-away price is likely to be defined by how much the business owner requires to fund their plans after the sale.
“You have to be sensible about what your business could be worth from an internal and external perspective, and how much is enough for you and your family. That comes back to its marketable value, which refers to the multiples of earnings your company can realistically achieve in the market,” she says.
Another way to boost the sale price is by creating competitive tension among potential buyers. This will come down to your professional advisers and their ability to put you in touch with credible buyers, who are able to deliver the type of deal you are seeking.
Once you reach the final stages, hold your nerve and take a pragmatic approach during negotiations. It is likely to have been a long journey to have reached this point and no one wants to fall at the final hurdle.
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