Selling a business is an important and complex decision, with many personal and external factors to consider. Having invested time, money and effort developing a business and making it what it is, maximising value from a sale is typically the key objective for most owners.
In the current market place, standing out by ensuring your business is ‘sale ready’ is key to both appearing more attractive to potential purchasers, and to attracting a premium valuation. This should involve planning well-ahead by making simple improvements to operational performance prior to sale and ensuring you are legally and financially prepared.
The overriding guidance I give to most clients is ”make it simple”. This statement is so wide and is meant to cover all aspects of a business: make access to information easy, resolve all litigation, invest in management etc. To attract a premium a trade purchaser must feel that there are good synergies and business integration is going to be easy. Most trade purchasers don’t have the management bandwidth to fix issues themselves so resolve them before going to market.
Planning for sale in advance
In an ideal situation, preparing for sale should begin as early as 4-5 years before the transaction takes place. However, in reality most business owners ignore any planning and just take their business to market. Whilst this is still a viable option an owner could be leaving value behind.
Whilst for some, it might seem counter-productive to prepare for exit or invest in say management in advance of an exit, it is likely to put an owner in a stronger position. A business is much more complex than any product you can sell, with so many facets that can be improved, so it is important to invest time wisely on the areas that will deliver most value to you.
Exit planning: business valuation
My first recommendation in exit planning is to prepare a business valuation. Purchasers approach valuations in many different ways so it is important to understand the industry dynamics that the business operates in. This will provide the current value of the business, but more importantly, it will explain how a purchaser is going to value you. It should highlight the key value drags and value drivers. If you understand this, you can then think about how to improve your business, how to address any weaknesses, to get to a more attractive value and most importantly give you some focus.
As a general rule of thumb most business are valued on a multiple of profitability namely EBITDA (being earnings before interest, tax, depreciation and amortization). EBITDA is considered representative of a company’s cash generation.
The EBITDA multiple is a financial metric that is applied to EBITDA to derive the headline business valuation. By understanding this, you can make simple sustainable changes to business that can improve EBITDA and perhaps improve the multiple used. For example, a simple option is to cut out unnecessary costs.
Improving operational performance
When looking to make an acquisition, purchasers will often attempt to establish the underlying EBITDA of a business, as well evaluating its risk profile. Therefore, making improvements in operational performance, can add to the profitability and credibility of your business, making it more likely to attract buyers and investment opportunities.
Focus on making simple changes to operational performance that can be implemented prior to sale, that are sustainable and long-lasting is key, as opposed to complex changes that may take months or years to complete. Areas that I have seen increase the desirability of a business are:
- Making cost improvements by making processes more efficient (including products, overheads, and procurement)
- Reducing working capital
- Revenue improvements
- Customer experience improvements
- Implementing consistent procedures across your operations to improve efficiency – a key example of this is document control
In this way, focusing on operational improvements prior to sale can lead to a greater return on the purchase price.
Consider the marketplace
Improving operational performance to maximise value is key, but ultimately, the market drives the worth of a business. It is equally as important to consider which areas likely purchasers or investors are interested in – this will help establish where you should seek to increase value.
For example, financial investors such as private equity funds will likely focus on the current operating profitability of a business, whereas a strategic buyer will also take into consideration growth opportunities through additional revenue. Being aware of the market, and the likely potential buyers, will help in establishing where operational performance could be improved and in turn help your business appear more attractive to the relevant buyers.
Here to help
To optimise value, it is important to take advice from professionals well ahead of any sale process.
Preparing a business for sale is initially a complex process. There is no one rule that fits all. Take time to understand your business, its value drivers and the market and as ever appoint reliable professionals to guide you through the process. This will ultimately ensure you achieve your aims and objectives, and also maximise the value of the deal.
Against a backdrop of Brexit uncertainty, and Covid-19, our award-winning corporate finance team had an exceptional year to March 20, completing £212m-worth of transactions. Further details of these deals can be found in our latest annual deals book.
Our highly accredited team will work with you closely, formulating a bespoke strategy that satisfies your aspirations and timescales, and maximises and highlights the strengths, opportunities and value drivers of your business.
If you are considering the sale of a business, please get in touch.