Should you be thinking of selling a business, there are many things that can be done to maximise your business value, as part of a business development plan. But whether or not you wish to sell, it is as well to remember that many business owners do not plan at all, which may account for 3% of business owners with a written business plan, earning more than the other 97% added together! Here are ten ideas to consider if you wish to increase your business value prior to selling and a further ten, when placing your business up for sale:-
Maximising Business Value (Pre-Sale)
1) Focus on selling. Nothing happens unless selling is taking place. Concentrate on selling the benefits of your products and services rather than just the features of your products alone. You don’t have to have the best products but an “outstanding service” can lead to an “outstanding performance”. Selling is a numbers game (it is easier to approach twice as many prospects than to suddenly become twice as good a salesperson) so make sure the activity level is going up – not down! Companies get strung along into receivership because they can’t sell or can’t get the money in. Ultimately, make sure that the sales process is not reliant on the business owner – businesses are difficult to sell “if the business owner is perceived to be the business”.
2) Review your sales plan. There are only 4 ways to grow a business – (i) Growth by acquisition, (ii) Increase number of customers, (iii) Increase transaction values by selling more products & (iv) Increase frequency of sales. Make sure you understand your “unique selling points” and write them down – if you don’t understand them, how can your customers? Growth by acquisition can help speed up geographic expansion through acquiring an already established customer base, product lines & services but care needs to be given to potential cultural differences between two organisations, which may affect customer & employee retention.
3) Increasing sales/profit record. Aim to demonstrate consistency, preferably with increasing sales/profits, it will help strengthen your negotiating position, increasing value and one less reason to talk the price down. Remember that loss making businesses are difficult to sell – if possible, turn the business around first and then sell.
4) Develop a 3 year plan. Try to develop a realistic budget for the year ahead with a further two years of planning ahead, updated each year as part of your business plan. Ideally, you need to know where your future sales revenue and profits are coming from – likewise when you come to sell the business, the buyer will want to know that too!
5) Review the marketing plan. Marketing can be best summed up as “identifying and supplying a customer’s needs at a profit”. Treat marketing as an investment rather than a cost and work out how much you would be prepared to invest in order to gain a new customer. Review new markets for existing products or new products for existing markets (be wary of new products for new markets as this is where the greatest risk lies). Try, test and measure at least 10 different marketing methods to gain new enquiries and customers – cut out the ones that don’t work and invest heavily in the ones which do. Remember the 5 WAYS in which you can have an influence on:-
Number of Leads x Conversion Rate = Customers x Number of Transactions x Average Sale Value = Turnover x Profit Margin = Profit.
6) Review the Customer Base. If your business becomes reliant on any one customer, the risk goes up and the value goes down. Make sure the risk is spread, with no more than 20% reliance on any one customer. If possible, market products and services to a broad range of industry sectors eg Public & Private Sectors to reduce the effects of any down-turns. Also, try and cultivate customers who are prepared to agree to “rolling contracts” (eg maintenance & service contracts or retainers) so that sales can be achieved with less effort, whilst become more predictable – businesses with rolling contracts in place are more saleable for when the time comes to sell.
7) Review prices and margins. The more profit you generate, the more valuable your business will be. People think customers buy on price but they rarely do – only 10 to 15% of the public buy on price as what customers really want is value for money – the prouder the price, the better the deal! The most successful businesses are customer led; they don’t necessarily have the cheapest products. Put prices up if discounts are required. Pricing is key to profitability but often misunderstood – for a 30% Gross Margin business, if you reduce prices by 10% then you will need a 50% increase in sales just to stand still; a 10% increase in price, you would need a 25% drop in sales volume before you start losing out!
8) Review the Management Structure. Businesses are difficult to sell if the Business Owner “is the Business”. The 3 main roles are Make it (Ops), Sell it (Sales), Count it (Finance). Find ways of making sure the business is not reliant on the owner – look at the management team to see where additional responsibility can be taken on or consider employing someone to take on tasks to enable the business to become more “independent” of the owner rather than totally “dependent”. If the senior team is too small, consider taking on a non-executive Director or Consultant to benefit from their outside knowledge & experience and offer them as “continuity” when negotiating the business sale. Make sure Board meetings are held regularly with an Agenda and Minutes/Action Points recorded – don’t miss “future business development”.
9) Value your assets. The greatest asset in any business is People followed by Customers. But make sure you have “the right people, sitting in the right seats, before you start driving the bus” in the first place! Make sure everyone has a Contract of Employment and Job Description in place (these will come up in due diligence, when selling). Look after your key people – losing them at the time of selling a business will probably jeopardise the deal. Make sure that you are aware of the values of your tangible assets such as property, plant and equipment. A fixed asset register is often essential when discussing values with a buyer. Other assets include patents and intellectual property rights, which will all add value for when the time comes to sell.
10) Make sure your information is up to date. A well run and administered business will increase the perceived value and nothing puts off potential buyers off than lack of up to date information. This includes Statutory Accounts, Management Accounts, Order Book Values, Staff Contracts of Employment, Staff Handbook, HR records, Job Descriptions, Copies of Leases, Asset Lists, Business Awards/Certificates etc etc.
Maximising Business Value (Commencing the Sale Process)
1) Make sure you really do want to sell! A serious prospective buyer will be interested in the reason behind you wanting to sell the business. And if it’s not a compelling reason, they will probably go elsewhere. You need to think through the reasons for selling and how your life will be, once the business has been sold, so make sure your business plan is aligned with your personal aims and objectives. No buyer is going to want to waste time and money with business owners who don’t know whether or not they really want to sell, so understand the reasons why you want to sell and then make a definite decision. Selling a business is a team effort, not just between the buyer and seller but also between the professional bodies involved, often requiring a great deal of co-ordination in trying to agree time-scales, providing information, clarifying terms and driving the deal forward to Completion. You, not just the buyer, need to be fully motivated to make sure this happens!
2. Make sure you check the background to your buyer. There could well be many people who think they want to buy your business but many of them could be just be looking out of idle curiosity or not even have the means to do the deal. There’s no point in going through all the hard work of agreeing terms and fine tuning the contract of sale if the funding can’t be secured before legal completion! Check out the credit worthiness of your buyer and don’t be afraid to ask for proof of funding – your business broker should be able to do this for you.
3. Know how much your business is worth. The business may be worth as much as someone is prepared to pay for it but this does not place you in a strong negotiating position. Make sure you know how much you business is worth by taking out an independently prepared, professional business valuation report. This will help you to understand whether or not it’s worthwhile trying to sell the business in the first place and enable you to substantiate the price you have in mind. Once you understand the price or value of your business, you may need to take tax advice to ensure that any potential deal is tax efficient. Remember, the books will be the books and whilst a Valuer can look at adjusted profit figures, don’t expect a buyer to pay for undisclosed business – if you can’t record it, you can’t pay for it!
4. Make sure you know your numbers. Many business owners are interested in selling their businesses but struggle to know what the balance sheet is worth, let alone the turnover or profit figures. There is a balance between knowing basic information and giving the impression that you know almost everything that there is to know about the business, as you may end up being perceived to be the business. Don’t guess the figures and at the very least, make sure that you can get your hands on the information required and have summary sheets to hand. Another area which is good to know, is the likely level of business for the year ahead, three years, even better. Buyers are especially interested in the future business prospects and so it greatly helps to have a considered opinion, rather than second guess. False information will lead to uncertainty and reduce confidence in progressing the deal.
5. Identify and understand your USP’s. Like any other sale, there are two main points for sales people to consider: “features” and “benefits”. In general, buyers are not really interested in how long you’ve been in business or what great customer service you provide – you should be doing that anyway! Buyers are only interested in “what’s in it for them”. Before selling your business, you need to place yourself in the buyer’s shoes and identify all the things that would create value for them because if you don’t fully understand them, how can you expect the buyer to know, as they will not appear on any set of accounts. Ideally, you need to write down all the things that make your business unique (ones which can be truly justified) and use them in the selling process to drive up the perceived value. Invariably, there will be weaknesses identified within your business but this is where a negative can be turned into a positive – the weakness could become a selling point as “an opportunity for future development”, where the buyer might be able to maximise future growth.
6. Find several potential buyers. In general, it is best to aim for 6 potential buyers as offers could be double that of others, simply because businesses have more perceived value for different reasons, to different buyers. Even if you do have just one buyer, there’s nothing wrong in letting on that there are other interested parties to create a competitive environment, otherwise it’s difficult to negotiate a higher price, if the buyer thinks they have total exclusivity, before talking to anyone else. When you do accept an offer and have to grant exclusivity for the due diligence exercise, ensure that this is limited (60 days is the norm), so if the buyer does try to re-negotiate the price down to an unacceptable level, you can get the business back on the market, rather be drawn into a long, drawn out battle. Remember, that deals can fall through for a variety of reasons (funding being one of them), so if you can have other potential buyers on hand, you will stand a better chance of finally selling. Even before you decide to sell, record all unsolicited approaches – they may become useful one day.
7. Don’t accept the first offer! If you are interested in securing the full or fair value for your business, it is always worthwhile declining the first offer, as people often want what they can’t have and if the buyer wants the business badly enough, they will soon be back with a revised, better offer. When advertising businesses for sale, it is always advisable not to give an asking price or a guide price and never disclose your bottom line price as this will be limiting offers to that level. Always best to invite “indicative offers”. NB Many business owners, do have unrealistic expectations about the price or value of their business, so again, put yourself in a buyer’s position and ask yourself, how much would you pay?
8. Market the business for sale. Apart from having to be pro-active in marketing or advertising your business for sale, nothing puts a buyer off more than lack of information, once they have shown some interest. Ideally, the best initial document to provide is a Sale Memorandum or Information Memorandum (known as the IM), which will provide a good overview and background to the business, without giving away sensitive or highly confidential information. Invariably, it will provide key financial figures and highlight many or all of the unique features about your business and list the opportunities for future business development. Make sure that you read and re-read the document to ensure that it is a factual and true description of your business, as false claims or statements will eventually be found out and undermine any potential deal. As business is done between people, the main objective is to provide just sufficient information in order to meet the buyer face to face. Prior to providing the IM document, a Confidentiality Agreement or Non-Disclosure Agreement (known as an NDA) should be put in place, as this will help ensure that everything can be kept as confidential as possible, without the risk of it being made public to your customers, suppliers and staff.
9. Be prepared to negotiate. Whilst there are deals where all the cash is paid up front, don’t assume that this will be the case with your business. Place yourself in the buyer’s shoes and start to realise that there may be an element of risk to be covered, finance to be considered, hand-over period to be agreed etc. A premium may be agreed if the business is funding the take-over, so best to keep an open mind on how the deal can be structured. Understand that there is a big difference between “deferred payments” and “earn-outs”. Deferred payments may have some form of security agreed, whereas earn-outs may be linked to the future profitability of the business, where you may have little or no control.
10. Make use of Professional Advisors. No one likes to spend money unless they have to but with the careful appointment of professional advisors, they can actually save you a great deal of money. For instance, a Broker can help find you suitable buyers through their connections and lists of potential buyers and investors to place you in a competitive bidding situation; a specialist Corporate Lawyer will help protect you from unfair or onerous terms within the contract of sale; a Tax Accountant can help advise on the best ways to minimise your tax liabilities (before the sale completes) and a Corporate Financial Adviser can help make sure you are getting the right advice on when to sell and how to maximise shareholder value. Make sure that your advisors have the capability of meeting your requirements, can work to an agreed budget and work within your agreed time-scale.
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