Often when meeting new clients for a potential business sale the first question I am asked is ‘What can I do to increase the value of my business?’
The answer is dependent upon the timescale for the sale. The suggestions for a client selling a business tomorrow are very different to one thinking of selling in two years. Part 1 of this article will focus on companies looking to sell their company within the short term.
Take a look at the financials
It may be worth having a chat to your accountant about your business performance. The diagram illustrates some key ratios to understand:
Illustration 1 Key Ratios
A potential purchaser will be interested in knowing the expected return on their investment. They will be looking for a good return on their investment to compensate for the capital risk on the new venture.
The purchaser will be interested in the profit margins and whether there is scope to increase margins through reducing costs or raising prices. Customer and supplier relations are key to this area and it is important to keep these stakeholders happy during the sales process.
It is important to be aware of the relationship between cash flow, debtors, creditors and stock. These need to be managed to reduce working capital requirements.
Improve the attractiveness of the business
It would be worthwhile to take a ‘fresh look’ at the business and consider what is good and what works for the company:
- Analyse debt levels-can these be reduced to improve cash flow?
- Examine stock levels and identify slow moving stock.
- Extract any non-business assets from the business.
- Identify any personal costs attributed to the business.
- Ensure any customer or supplier service issues are resolved.
Obtain a valuation
A business owner will generally be unaware of the value of their business and may need some assistance in calculating a business value. It is often the case that an accountant or business broker will be brought in and they will be able to give an approximate market value of the business. This value will be based on both local and national knowledge of your business sector. Moreover, it will be adjusted for current market conditions and prevailing sales. To achieve best value it is wise to use an advisor who is able to gather data on recent sales. Using an agent attached to a larger organisation will help secure this as they will have access to a national database.
Choosing A Broker
Business brokers are experienced business professionals with backgrounds ranging from marketing, accountancy and engineering. When choosing a broker it is essential to ask a number of questions:
- What is the initial and total fee?
- Is there a termination fee?
It is often the case that a broker will want an exclusivity contract and it is important to ensure that all the terms and conditions are understood. It has been known for vendors to receive an unexpected termination fee on of a broker’s contract.
Prepare Sales Information
It is obvious that you will need to have in hand the last 3-5 years of financial accounts. It may be necessary to restate these to account for excessive salaries or subsidised premises. It may be also worthwhile considering failed projects or one-off costs that will not recur for the new owner.
It is also important to consider confidentiality, as some business details are clearly sensitive. A non-disclosure agreement should be signed at an early stage of the enquiry process. From this point key accounts and suppliers should be kept ‘under wraps’ until the price is negotiated and solicitors instructed.
Part 2 of this series will discuss the issues for companies looking to sell in the medium term. In these cases the potential vendor has a little more flexibility in terms of strategy and time will have greater opportunity to showcase the very best of the company.
For further information contact our offices today!