This article was originally published in the GrowthBusiness M&A Guide.
The M&A Guide is aimed at entrepreneurs and owners of growth companies, summarising the state of play of the dealmaking landscape and the various elements of the ecosystem over the past year. The aim is to help business owners understand whether a merger, acquisition, sale, or going public is right for their business, and the types of advisers and expertise they may require along the way.
Preparing your business for sale
John Cowie, partner Kingston Smith
There are few more important decisions for a business owner than that of opting to sell. However, selling a business requires time and careful preparation coupled with some smart strategic decisions.
Getting this right will help to ensure the owner achieves the highest possible valuation. Here are our top tips to ensure that you maximise the value of your business when preparing for sale.
Prepare as early as possible
You should be thinking of ways to optimise profitability long before deciding to sell your business: are you maximising supplier discounts, are you giving customers overgenerous volume discounts, are there operational efficiencies or other cost reductions which you could be working on?
Getting this right well in advance will enhance value at the point of exit.
Give yourself enough time
The process of selling a business will be stressful and time consuming. Streamlining your business affairs and collating core financial and operational information before you begin the sales process can reduce the pressure and free up your own time during the process. A typical transaction can take from six to nine months to complete so this is time well invested.
It will also help you to keep your eye on the ball and run your business as usual during the actual sale process. Poor business performance in the immediate run up to sale is all too common and can lead to a buyer trying to reduce the price – or worse.
Management information and financial controls
A strong finance function with good financial controls is clearly important. Poor management information or limited availability of financial information can give the impression of a disorganised management team and may influence a buyer during a transaction.
Preparing early enough will give you sufficient time to address weaknesses in this area prior to going to market.
Customer concentration and reliance
If your business is reliant on a small number of important customers, buyers may see this as a risk area. Any efforts to widen the customer base and reduce your dependency on key customers in the 12 to 24 months before sale should be time well spent. If this is not possible, anticipate a buyer’s concerns and be ready with a clear explanation of why your business thrives despite the customer concentration.
Strategy and forecasts
You should put in place a business plan or strategy for future growth. Even if you do intend to leave the business after selling, a potential buyer will want remaining management to have clear plans and objectives on how to achieve growth or targets.
It is important to be aware that what you are really selling is the future cash flow of the business and being able to demonstrate this credibly in the form of a defined strategy, a financial model backed up by detailed assumptions and a motivated management team can help showcase the value of the business.
Taxation and pensions
Tax and pensions are complex areas that buyers invariably focus on at the due diligence stage. Take some time to ensure that the tax affairs of your business are in order prior to going into a sales process. It will help ensure there are no surprises for a buyer – or for you.
Likewise, pension schemes can be problematic in the context of selling a business so the impact of any pension arrangements should be discussed with advisers as part of your planning. Get the facts straight early and you will know what to say and what to expect from a buyer.
Appoint a professional adviser
A common mistake is to rush into a process or negotiations without taking advice. You should spend time selecting your adviser carefully as this is someone you will work with very closely over an extended period of time and in whom you will need to place considerable trust. You should meet them, take references and then ask yourself: do you get on with them? Will they be honest and supportive if the going gets tough?
Sellers sometimes fail to recognise the value of having an adviser to act as a buffer between them and the buyer: when a seller has a difficult conversation which he needs to have with a buyer, it can destroy the delicate dynamic between an interested buyer and willing seller. It can pay dividends to delegate those tough discussions to your adviser.
Having a reputable corporate finance adviser on your side will also give you the technical expertise to guide you through the complicated sales process while maximising valuation. You also benefit from years of experience: a good corporate finance adviser will have seen it all before and will know what constitutes a battle worth winning and one worth conceding.
Kingston Smith Corporate Finance has a long track record of managing these processes for clients to allow them to concentrate on running their business, as a top 20 multi-disciplinary advisory and accountancy firm. Over the years, we have completed over 500 transactions across a variety of industries, helping owners grow and unlock shareholder value, as well as, crucially, helping them sell their business when the time comes to move on.
It is also important to have a strong tax and legal team around you so speak to your corporate finance adviser and share your views on this. Each adviser has a defined role in the sales process and together they should help to keep momentum, offer the right level of protection and maximise value for you.
John Cowie is a partner at Kingston Smith.