One could be forgiven for believing that the plethora of published advice on ‘how to sell your business’ might lead business owners to assume that this is the key question they should be asking.
In fact, the most valuable question they should be posing has little to do with how to conduct the sale of the enterprise. Rather, how to ensure that they get the best financial return from the sale of their business.
And the single word that holds the key to maximising profits from an exit strategy is timing. Of all the multitudinous factors to consider when it comes to the company sale, those with the most sway over the ultimate sale price have timing at their core.
Much like selling a house, businesses sell for more or less money depending on the market they’re operating in. To take an example, a construction business for sale during a wane in the property market cycle is likely to fetch far less than one that’s on offer whilst the market is on the rise.
It’s not just the ebb and flow of a specific market sector that affects business sales; one should also be conscious of the general appetite for investment. Windows of opportunity are periods characterised by a glut of national if not global capital - conducive to creating a sellers’ market.
Although market movements can’t be controlled by individual players, trends are detectable, particularly for industry insiders. It is paramount that business owners keep market shifts firmly on their radar. Anyone who is involved in their businesses can’t help but notice trends in the market; and those considering a business sale ought to co-ordinate the process in alignment with these trends.
Buyers are not paying for the business on the basis of ‘as it was’. Buyers are not even paying for the business on the basis of ‘as it is’. They are buying on the basis of the company ‘as it will be’.
Therefore to maximise value the company needs to be sold when it’s operating at peak efficiency and when profits are upward-trending. As early as possible (even years before), begin to maximise profits and reduce costs. Many owner operators use their company to swallow personal expenses and reduce their tax liabilities, but this is not in alignment with an efficient exit strategy. These tax savings will usually be dwarfed by the increase in company value based on the multiple of net earnings once costs are reduced.
The management team
People are arguably the most important part of a business and when it comes to a sale; in many cases the right management team can make or break a deal.
The right people will work together to not only add value to the ongoing business, but also assist in securing and delivering on a profitable sale.
With people the key is to plan well in advance. A business sale with a brand new management team who have been bought in just months ahead of the business being put on the market is quite likely to put off buyers and investors. But bring them in a year (or more) in advance and they have a chance to not only get up to speed with where the business is, but to establish and execute an exit strategy.
One often overlooked matter when looking at the people involved in the sale is the fact that the management team who helped to build your business up from the start might not be the best people to bring it to the point of sale. Sometimes bonds can be too close and it’s worth seriously thinking about whether or not you believe the people you’re working with are the right ones to help you sell your company; if they’re not, do something about it as soon as possible.
Contracts and processes
Trading takes centre stage in nearly every workplace. But in the wake of chasing and closing deals, and delivering the product/service, a continual flow of admin and contractual agreements must necessarily follow.
Contracts with suppliers, customers, staff members, stakeholders, not to mention reviews of the business processes that keep everything moving - a huge amount needs doing regularly. It’s easy to let some of this slip into arrears or to sweep less important paperwork under the carpet. If you leave the task of finding efficiencies in these areas to your buyer, this is equivalent to offering them a discount on the price of your business.
Anyone attempting to sell their business before tidying up contracts and reviewing business process will have a less enticing proposition for potential purchasers, who will be faced with having to untangle the complexities themselves, adding time and expense to their due diligence efforts. The ‘messy’ state of the company can also be used as a bargaining chip to bring down the price.
For anyone seriously seeking to maximise returns from their sale, these operational matters are a crucial point to tackle and the sooner the seller starts to deal with them, the more potential there is to increase a company’s sale value.
Those who find themselves really pushed for time and need to focus efforts down on one key area should look at financial paperwork first because above all else, buyers want to see solid proof of profitability.
Sellers who have a little more time on their hands can start to break things down and take a closer look at securing supplier contracts and agreements, as well as reviewing everything from ownership of intellectual property through to the IT systems that support the business.
Broker or solo
One of the most common questions from business sellers is whether they should involve a business broker or go it alone. At the Business Sale Report, we’ve supported both sides of the argument and it’s really a matter of which situation suits the individual business owner. The challenge is sometimes in finding a business broker with a proven track record; one with a knowledge of the vendor’s industry and a decent up-to-date database of potential buyers.
If a business is put on the market without a broker, sellers can expect to do a lot more work. Despite the clear financial advantages associated with this route in terms of commission saved, this assumes that the vendor has the same skills and resources as the broker, and that the vendor’s time is not better spent elsewhere i.e. keeping the business running smoothly.
However, even those who aren’t working with a broker are still advised to have a professional valuation done in order to reassure themselves and any potential sellers about what they can expect from the sale. And of course, a word with your qualified accountant about the state of your books is another must.
But with brokers, perhaps the main motivator for working with one is to have their advice and expertise on hand to guide the seller towards the best approach. Brokers will help negotiate deals on structured earnouts, for example, which will help sellers to make the most from the sale by working with the buyer over an agreed time period to maximise sales.
So the secret to maximising returns when selling your business is all in the timing. If possible, owners should be planning their exit strategy before their departure is even on the cards; don’t wait for illness or retirement to sneak up and force a business sale, ensure it’s something that you have control of.
Some of the most successful business sales have come about because they have been built into the business plan from the company’s earliest days. This is what will allow a business owner to act as soon as any opportunities present themselves.
The deal: Maximuscle’s sale to GSK
The price: £162 million
Back in 1995 Zef Eisenberg founded Maximuscle, a sports nutrition brand. In 2010, he sold the company for £162 million. Here’s how.
Maximuscle was no stranger to acquisitions having sold a stake for £10 million to Piper Private Equity in 2004 and refinanced in 2007 after Darwin Private Equity bought the business for £75 million. But the firm had never been part of a trade deal. So how did it attract GlaxoSmithKline and their healthy price tag?
Firstly, Maximuscle knew that Darwin’s interest in the business would not be long term; they were looking for a three to four-year deal that would bring profit, they would not be the partners to invest in anything that might take too long to come to term.
This knowledge gave Maximuscle an idea of when they would next be on the market and as predicted, four years after Darwin took up the reigns, the company was in negotiations with GSK.
A market leader
These four years gave the company plenty of time to turn itself into an attractive prospect for a trade buyer. Not only this, but it gave the company time to decide the type of buyer they wanted to attract, ensuring that the attraction was mutual.
Speaking to Startups.co.uk, Eisenberg explained: “When GSK get involved they want the market leader. What excited us was that GSK has a mature European distribution channel, with languages, reputation and knowledge of the nuances of those markets.”
He added that they’d seen what GSK had done for Lucozade taking it “to mainstream distribution through sports centres, vending machines and garage forecourts” and wanted a new owner who could deliver the same for Maximuscle.
The upper hand
Ultimately, the preparation and time spent building an excellent trade offering meant that Maximuscle had the upper hand when it came to talking money.
The firm didn’t feel that they wanted the upheaval of a sale when GSK first put an offer on the table and they turned the deal down. GSK came back with a second offer and again, Maximuscle said “we weren’t interested as it was too soon after the previous deal to have got the business to the kind of valuation we were targeting”.
This forced GSK to reconsider just how serious they were about the offer and to the end this preparation and thought about the disposal of the company meant Maximuscle had the upper hand in negotiations, enabling them to maximise returns from the sale.
“In the end,” Eisenberg explained, “they ended up offering a price we couldn’t refuse. So they’re paying next year’s price today.”
Selling a business: resource list
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