From sole traders to multi-national PLCs, the act of putting a business on the market can, in itself, damage a company at the very time that you are trying to maximise its value. What are the risks, and what can be done to reduce or eliminate them?
The main risks of an open market campaign include:
- Customers and suppliers worrying that you might be in trouble
- Employees worrying about their job security
- Potential buyers assuming you want to sell for negative reasons
- Rivals seeing an opportunity to find out all about your business
- Owner managers are diverted from running the business
At the same time, of course, you want market exposure to as many potential buyers as possible. Clearly, sensitive preparation and handling are necessary.
Ideal scenario: maximum preparation and transparency
Venture capitalists excel this because it’s at the heart of what they do. Build a business up, making it clear to all along the way that a sale is the objective and how their interests are going to be protected. For some SMEs, too, this is a realistic option, especially where an owner manager is retiring and has planned for it well.
Opposite scenario: the ‘secret sale’
How feasible this is depends very much upon how many businesses like yours there are. Releasing very limited information initially does not affect the level of interest from our existing pool of potential buyers – we know who they are and what they want – but it does limit the word of mouth referrals that often arise when an established and respected business is known to be up for sale.
Before or after: informing customers, suppliers and staff
The sensitivity of these central relationships is the principal reason that buyers tend to be so keen on performance-related, earn-out arrangements. These enable all concerned to say “It’s happening, but in stages, and nothing is going to change initially or fast or without talking to you”. Even so, senior staff in particular can react badly and should, wherever practical, be told at least before the general announcement.
Similarly, it can make all the difference in the world to important clients and suppliers if they are just given a little personal attention – ideally visits – reassuring them as to how much they matter.
Rivals, trade buyers and confidentiality agreements
It’s common for businesses to be sold to competitors (“trade buyers”), so this is a market few can afford to ignore. But how do you separate genuine intent from an underhand desire to just gain information? Confidentiality agreements help, but only go so far.
In practice, sellers soon realise how much information is out there anyway. They can usually make a fairly accurate guess about the size, sales and financial status of their direct competitors: their rivals can almost certainly do this about them, too.
Secondly, an analysis of what is really sensitive – such as a planned new product, or an exclusive agreement with a supplier that few know about – usually makes it possible to be sufficiently open with genuinely interested parties to get them stage at which they have to start spending serious money with lawyers and accountants. At that point, it’s possible to look at your impression of them, how much you think they will have to speculate on fees, the confidentiality agreement they will have to sign, and the potential value of the new information you will have to reveal, before deciding whether to proceed any further. By this stage, too, you should have information on their creditworthiness and funding, further informing your decision.
Distraction – or valuable preparation?
Much is sometimes made of how distracting the sales process can be for owners. In the latter stages it can be but, overwhelmingly, we see the process as a positive one for the businesses concerned. Just as house owners will only notice and attend to the weathered paintwork and creaky floors when wanting to impress potential buyers, so business owners hoping to sell will get their house in order, too. The result can be an organisation which, by the time it’s ready to put on the market, is so desirable that the owner is happy to tell everyone all about it, generating the best possible price in the process.
For further information about how to protect your business during the sales process, please contact your local office of The Business Partnership.