Getting the timing right for the sale of a business represents one of the key drivers of the value which is ultimately achieved. For example, the right timing might be dictated by a valuation bubble in a particular sector or by an unsolicited offer received from an overseas buyer.
Most businesses, however, are not ready for a sale and risk settling for a low valuation or seeing negotiations falter. Rather than rush for the exit, business owners should start planning well in advance of a sale to get the best deal.
Focus on the team
A major cause of sales breaking down is the management team itself. Financial buyers in particular place great emphasis on tried and tested management that has proved its ability and is well incentivised to drive the business through its next stage of growth. If the leadership is not united around a clearly articulated growth plan, experienced buyers will avoid taking an unnecessary risk. Business owners should bring in external talent if needed as well as structure compensation in a way that incentivises their teams.
Back up your growth plans
Doubling sales in a year, rolling out a franchise nationally and improving margins – these are predictions for which prospective sellers need to provide compelling evidence. Spurious claims will not survive the intense scrutiny of the due diligence process, so management should be objective when establishing a growth forecast and show a track record of achieving major milestones.
More established businesses, for example, may consider making an acquisition of their own, or opening offices abroad to demonstrate growth potential – both steps that Cavendish advised when working with luxury travel business Scott Dunn ahead of its sale to Inflexion.
Beware of due diligence
If the business fails to pass muster at the due diligence stage, this will either set back negotiations or end them altogether.
A first essential move is defensive in nature: make sure that you have done your legal checks and taken steps to protect your IP. For knowledge-intensive industries especially, any deficiency in patent or other IP registrations acts as a potential deal breaker. When Autologic Diagnostics, an engineering and support services company, discovered an IP conflict with the auto manufacturers over a crucial step of its diagnosis and repair process, discussions were put on hold for months while it obtained an EU ruling to secure the transfer of IP.
Another element sometimes overlooked by business owners is the composition of the client list. A diversified group of clients reduces the risk associated with your cash flows, hedging against an event affecting a single client or a downturn in a particular sector. Moving away from highly concentrated client base could save a sale process as attention to risks as well as revenues is foremost in the mind of buyers.
Align the shareholders
Shareholders typically desire different things from a sale – an exit fully in cash, an earn-out, retaining some shares in the company – which unless resolved can make a sale impossible. Draw up a shareholder agreement early on to avoid this and make the process smooth and ultimately viable.
Target the multiple
High EBITDA (earnings before interest, taxes, depreciation and amortisation) doesn’t necessarily equate to a large deal size if offset by a low multiple. The largest determinant of the EBITDA multiple achieved is the sector in which you operate and how you rank in that sector. It is possible to take ownership of this by reconfiguring business models, adding new product lines, and tilting your offering towards specific customers. When advising Primal Pictures in 2012, for example, Cavendish obtained a higher multiple by moving the business away from pure medical publishing (where typical multiples are around 6-8x EBITDA) to a digital data business, bringing the multiple into the 10 to 12 range. For buyers to find this credible, however, this must be a sustained shift rather than a temporary aspect of the company’s business.
Don’t stand still during the sale process
Selling a business takes time, and the buyer will keep an eye on your ongoing performance while negotiating. Avoid setting unrealistic sales targets and losing momentum due to exclusive focus on the sale. Introduce the right budgeting process and consider bringing in an experienced financial director to help you remain on track while planning your exit.
Preparing to sell your business is a lengthy and complex process. The mistake to avoid above all is to see your exit time horizon as set in stone when you start out. Awareness of the mistakes that can sink a sale offers a head start and puts shareholders in a position to plan their exit well in advance. By insulating themselves against these classic pitfalls, business owners can create a stronger bargaining position from which to get the best deal.