Maximising the value of your business when selling: Now, in a year or two, or long term.
“The best time to start maximising the value of your business to a buyer, is the day you start it. The second best time, is today.”
John Hatt, Business Partnership partner since 1979 and personal broker of over 500 business sales.
Most of what makes a business attractive to buy also makes it a good business to own. That’s easy to say but, in the face of daily realities, hard to do: every business owner has a ‘guilty list’ of things they know should be done, given time and money. Some, such as statutory paperwork, can be minor obstacles, overcome in the run-up to going to market. Others are good business disciplines – often forgotten in the heat of battle – which can make a huge difference to the value of your business whilst you run it, and all the difference to a buyer, when you come to sell.
Every day, we help business owners start preparations for selling. We see, at first hand, the true nature of business life and how potential buyers feel about things like evidence of past and potential performance, gaps in records and the importance of staff retention rates. We have also lost count of the number of times owners who have made preparations for selling, say “I wish we’d done this earlier. It would have made life easier for years”.
Whenever you might exit, you can take action to maximise the value of your business, both to a buyer in the future and to you, now.
Selling now: Getting your house in order.
No matter how urgent your sale, there are certain bases that must be covered for your selling price to match the true value of your company. Without these, many potential buyers will not even look at your business and those that do, will start from an unnecessarily wary position. They include:
a) Annual accounts: These must be complete and well presented, going back at least three years. They should include a brief commentary, i.e. an interpretation which explains the overall picture and looks ahead.
b) Financial management information: Show that you are in control. It greatly comforts a buyer to see that you know your margins and overheads, who your good and bad payers are, what cash in the business, predicted cash flow and more. At least half of the business owners we meet do not know these things. When they do, they invariably see things they want to change. Modern bookkeeping software can be a great help here because it makes it easy to show such information in a format with which potential buyers are often familiar.
c) Contracts with employees, suppliers and customers:
Every business relies on relationships with key people. Business buyers are always keen to see that those relationships will continue after the business has been sold, so the more certainty you can offer – especially in relation to a solid order book – the better. In addition, showing that your employee and supplier contracts are up-to-date with what they do for you, and with current industry standards, helps to show that yours is a well-run, orderly business.
Strong, clearly contracted relationships thus maximise the selling price of your business and reduce post-sale risks for all concerned.
d) Insurance and statutory compliance documentation: As part of their due diligence process, buyers will need to see that you have the necessary insurances, evidence of pension payments etc. There are also numerous sector-specific requirements. For example, regulated professional firms will need to show unbroken record of indemnity insurance.
Lack of documentation commonly extends the time between initial agreement and sale completion. Occasionally, it terminates the sale.
e) Good practice documentation: Thorough employee records, leases, practice policies, PQQ documents and more, all show buyers that your business has systems and ways of working which will run just as smoothly, when they own it. Failure on his front often results is the delay of agreed sales and additional costs, invariably borne by the seller. As with financial information, specialist software, such as packages for HR and customer relationship management (CRM), can be a great help here.
Selling in a year or two: Considered preparation
Going through the basics listed above tends to reveal opportunities and threats which take more than a few weeks to resolve, but rarely more than a year. With more time, you can improve your position – and value – far more. Here are a few examples, all of which can add to the bottom line or reduce risk, for you and any new owner.
a) Staff retention rates and reliance. Great retention rates might speak volumes for the business, or just for you – and vice versa. If they are poor, what can you do to improve them? A year of good retention can persuade buyers to forgive poor previous years.
Is the business over-reliant on a few key members of staff? If so, should you address this by making it less reliant, or by using incentives to tie them in more closely?
b) Over-reliance on one or two suppliers. This risks over-paying and, if you are let down, being unable to operate. Buyer know this: multiple suppliers reduce risk and thus make your business look more valuable.
Are there alternatives our there? How hard would it be to secure alternative suppliers? The harder it is, the greater the argument for starting to look, now.
c) Operating manuals; repeatable systems, processes and culture: Is your business reliant upon ways of working that exist only in the heads of those who will exit, when it is sold? Culturally, all organisations and especially SMEs, follow their leaders. When those leading your business are gone, how will people know what to do?
Buyers love to see systems, policies and processes in place which give continuity. With some businesses, an operating manual can incorporate all of these things. With others, in can be more about codifying and training. Often, this is not quite such a daunting task as owners initially perceive.
d) Securing your intellectual property (IP)
It’s THE question that gets asked in the TV show, Dragon’s Den: What’s to stop me or someone else stealing your idea? In the information age, IP can be the only meaningful asset a company has. It applies particularly to product companies and to businesses which are, or have the potential to be, franchises. It applies to branded services, trade secrets, databases and more.
IP is about much more than just patents. Via copyright laws, registered designs, registered trademark phrases, images and sounds, companies can secure and sell their IP – sometimes separately from their business.
Selling long-term: have a plan
The preceding two sections both raise aspects of a business which, if not attended to already, tend to take longer than a year to address, certainly in aggregate. Ultimately, they all come down to running the business as profitably as possible, with good risk management and a clear plan for where you want to be in the medium and long-term. They include:
a) Avoiding over-reliance on too few customers. It many sectors, it is common for 80% of sales to come from 20% of customers – but that doesn’t make it inevitable. Showing that you would survive losing your two biggest customers would make your business much more attractive, create potential to improve your margins (because each customer will have less power over you) and help you sleep at night.
b) Improving productivity: The best routes to this usually involve better technologies, staff training & development, or both. Grants are sometimes available, as is lots of information on what has worked well for others in your sector. Improving productivity in these ways has numerous benefits, including better staff morale and loyalty and happier customers.
c) Fixed cost efficiency: Reducing costs feeds straight into the bottom line, but some take time to address. For example, are you in the right building? Would it make sense to move? If not, could you secure lower rates, rent or service charges?
Infrastructure – be it hardware. such as production machinery, or software, such proprietary ERP systems – can be highly disruptive to change. This makes it all the more important to address as part of a long-term, planned process. Doing it can transform not just the efficiency of your business, but also how it is perceived, internally and externally, with real impact on the price your business can realise.
A good business is a good business, to owners and buyers. But, no matter how good your business is, potential buyers can only judge and value it, by the evidence they see. To get a fair price, they need a fair picture of how good the business is. To get a great price, they need a great picture of it and its potential – and that the business is on course to get there.
Business Partnership specialises in connecting buyers with business sellers across the UK. For help on maximising the value of your business over the short or long term, please, get in touch with us on 0207 145 0040.