In this piece, we speak to Peter Gray and Caroline Belcher of Cavendish Partners, who review the key stages of selling a business and how to navigate them successfully to maximise the price on sale.
Select the right exit route and time your exit strategically
The starting point for selling your business is choosing the best exit route, advises Gray. ‘Consider your objectives and then select the route that best matches them. For example, a trade sale is probably best if you want to cash out and leave the business, while private equity represents the best alternative if you are looking for a partial exit and to stay with the business for a period thereafter.’
Once you have selected your exit route, focus on getting the timing right – it is a key valuation driver, Gray says. ‘Though the financial performance and growth prospects for your business underpin what it is worth, valuations can be driven up further by a buoyant M&A market. Valuation bubbles may also arise and ramp up the multiples in your sector, so capitalising on these makes sense.’
Cast your net wide when considering potential purchasers
Identifying a range of potential buyers early is critical to give you the widest possible range of potential acquirers, advises Belcher. ‘The ideal purchaser profile is a ‘strategic’ buyer, which might use your firm as a base to expand internationally or sell your products through its existing distribution network, and therefore is prepared to offer more than a textbook valuation.’
The main types of buyers are competitors, companies in related markets, financial buyers such as private equity groups and overseas buyers. Once you have identified the most likely purchasers, make yourself as attractive as possible to them by investing in the areas they value.
‘Crucially, look abroad, as foreign buyers will often pay a premium to enter new markets. Use advisers with international networks to reach them.’
Position your business to maximise the multiple
Positioning your company to command the highest multiples is key, Gray says. Multiples vary considerably across sectors. ‘For instance, software-as-a-service companies may sell at around 3-5x sales, while digital subscription businesses trade at profit multiples in the 10-12 range.’
If your company spans several sectors, restructure your offering and use PR to position your business within the sector with the highest multiples. Implement a clear growth strategy to maximise your EBITDA in the lead up to a sale.
Conduct your own due diligence to get the business in shape
Gray says that a pre-due diligence exercise is an essential part of pre-sales planning. ‘Focus on a review of financial and operational matters (including a review of your management team), a legal health check and, where necessary, an environmental assessment,’ he advises. ‘Use the process to identify any weaknesses that can be rectified to avoid a price chip from the buyer.
Choose the right sale process and share only necessary information with buyers
There is no one size fits all sale process. If you are a rapidly growing company in an attractive sector, buyer appetite for your business will allow you to conduct a tightly controlled process with tight deadlines; if instead your sector is less attractive to investors, you may instead be compelled to run at the speed of potential purchasers.
“The secret to successful negotiation is to understand the purchaser’s perspective”
‘The information memorandum is central to the sale process,’ says Belcher. ‘It must be accurate, but it is also your strongest sales tool so make sure it presents your business in the best possible light, including your growth opportunities and financial projections.
Know your buyer when negotiating
The secret to successful negotiation is to understand the purchaser’s perspective. For example, strategic buyers or emotional purchasers, e.g. HNWs who aspire to own trophy brands, will likely be willing to pay a premium – so should be more accommodative in price negotiations.
Belcher advises to evaluate all offers meticulously as they may differ significantly in terms of the balance of cash, deferred considerations, shares and loan notes they include. ‘While the quantum of up-front cash consideration is key, in a situation where the business remains reliant on you, there will be a high probability of an earn-out. This will involve you staying at the helm for a period post-sale and having the sale price linked to your financial projections.’
Minimise risks as you finalise the sale
Gray says that negotiation of the sale documentation is all about minimising any ongoing risks and in particular, minimising the possibility of a claim under the warranties you will be providing to the buyer. You should consider taking out insurance to protect yourself against this risk.
‘Finally, if there is an earn-out in place, be prepared: you will need significant protections to ensure that the buyer cannot impair your ability to meet the performance targets required to realise the maximum deal value.’
Have you considered ongoing sustainability
Despite the rewards on offer – and the inevitability that an entrepreneur will sell up or pass the business on at some point – many still do not make adequate succession plans, which can ultimately cost them when they come to sell.
Indeed, one in three owner-managed businesses do not have a plan in place for when the business leader exits, retires or can no longer work, according to a report by investment firm NVM.
In addition, 43% of non owner-managed businesses ignore the issue, refusing to make plans because they cannot find a suitable successor. A further 38% do not acknowledge that succession planning is an issue.
This lack of preparation could mean vendors lose out when they exit because they cannot demonstrate sufficiently the ongoing sustainability of the business when they have left, especially if the vendor is selling to a private equity firm.
“Considering the importance that is placed on management it is vital that businesses demonstrate their contingency planning when the management itself is leaving,” said James Arrowsmith from NVM. “It is simply a matter of demonstrating there is new capacity to deliver the ongoing profitability of the business.”
A departing owner-manager with no or an inadequate successor makes buyers nervous and therefore likely to reduce their bid or not bid at all, according to NVM.
A possible solution is to bring in a replacement prior to a planned exit to work within the business on a consultancy level with the option to buy the business. “This can work well for vendors as they maintain control during the handover and know they are leaving the business in safe hands,” Arrowsmith said. “They are also more likely to realise the full value of the company when they exit.”