Corporate Finance Guides
Guide to Equity Release (Cash-Outs)
Guide to Management Buy-outs (‘MBOs’)
Raising Development Capital
The Sale Process
The Descision To Sell
The Decision to Sell
Selling your business will probably be one of the landmark decisions of your life. Your exit strategy should be meticulously planned so as to minimise conflict and maximise the value and/or the strategic objectives of your disposal.
A good starting point is to review your thinking and decision-making about the sale. Be clear on your motives and the implications and, if it is appropriate, ensure you have considered the alternatives. For example, if your aim is to raise funds, have you fully considered other potential sources or perhaps either a partial sale or a disposal of assets? If retirement is your goal and you have sufficient funds in place, are there others, including family members, who might take the reins under your continued backseat ownership?
Assuming you have reached the decision-point, be clear on what you personally want from the sale. The largest possible amount of cash might be the obvious goal, but perhaps you have an interest in the future shape and reputation of a business that bears your name and your sweat equity and would settle for a lower sum from the “right” buyer. Or there might be competitive issues related to your other business interests that mean you would not want to see the company fall into the “wrong” hands at any price.
And what sort of financial terms would you be prepared to accept? These might range for payment in full and final settlement at the outset, through phased payments to profit- and performance-related compensation. Might you be willing to take paper in the form of loan stock or equity from the purchaser?
It is also important to assess the consequences of selling – on your employees, your family, other shareholders – and to have a clear idea of what you want to achieve for each of them. This is not necessarily an easy process.
In a sole proprietorship, where the owner is heavily involved in the day-to-day running of the business, there could be powerful relationships at stake and a genuine concern about the implications of your withdrawal from the business. Will your departure lead to instability. This is something potential buyers would spot and it may be that concerns could be met through some form of support and mentoring in the early stages of new ownership
In a family owned business, or one in which family succession could be an issue, a good part of the challenge is having buy-in on motives and desired outcomes before the process starts and an agreement on how disputes might be resolved, usually through a third party such as your adviser. The key is to have, at the outset, a valuation and a preferred buyer strategy on which all parties are agreed.
With more formal board structures, much will depend on which board members and senior managers, if any, might have a part to play in the business under its new ownership. Be alert here for rivalries that, if they surface, could disrupt the current performance of the business and undermine the potential for a good deal on the sale.
This thought process will help you establish a rationale for your decisions and will help your adviser to chart the best route to achieve your desired outcomes.
Value and timing
The starting point for that route is an assessment not only of the value of the business but also its marketability and the timing of a sale. Even a solid financial performance and attractive valuation of the assets and goodwill will only take you so far if the economic climate is declining or if there are fundamental weaknesses in your management team or cracks and creaks in your plant. Can you be flexible on timing? Can you correct shortcomings? The further ahead you are able to plan, the more likely you are to be able to take corrective action to ensure your business is in good shape, the graphs are pointing upwards, and that you can choose the most opportune time to sell.
It is quite possible that the valuation of your business itself might be a factor in your final decision on whether or not to sell and the buy-in you might be seeking from others, so you will want it to be as precisely calculated as possible. There are a number of different approaches to this calculation depending on whether the business is consistently profitable, in which case an earnings multiple may be used. Otherwise, forward cashflow or asset valuation might be the key elements. Bear in mind though that your potential purchaser may choose a different approach to the calculation.
How to sell
The more comprehensive and better informed your inventory of information about your business, the better are your chances of achieving a sale at the right price and a smooth transition of ownership.
A sales mandate and portfolio provides part of the rationale for your asking price and gives potential buyers an insight into the strengths of your business, as well as any challenges they may face. In addition to the financials, you should provide a fairly detailed, written description of the business, covering its history, ownership, supply chain, customer base, products and competitors, Product samples, illustrations or literature should be included, together with an inventory of stock and equipment.
There are two principal routes to sale – either openly in the market place through trade advertising and word of mouth, or confidentially through trusted and discreet channels. Normally, the more widely an offering for sale is publicised, the more likely you are to attract multiple interest and bids. But there may be times when confidentiality is important for protecting markets or avoiding unrest within the business. In this case, direct approach to potential buyers, perhaps via a third party, is necessary.
Trade sales to another business are the most common outcomes but there are several potential sales targets you might want to explore:
A trade purchaser in the same industry, where there may be competitive or synergistic value
A trade purchaser in a different industry or from overseas, who wants to diversify into your sector
Existing employees – through a management buyout (MBO) or even a full-blown sale to the workforce
A team of external investors/managers looking for business ownership entry – a management buy-in (MBI)
A mixture of the above two, commonly known as a BIMBO
The decision to sell your business is merely the start to a fairly complex and potentially fraught process, where conflicting interests and ideas have to be reconciled. It is vital to get sound advice from the outset.
For more information on raising development capital, contact Jeremy Cole, partner, Cole Associates on 0161 832 9945, firstname.lastname@example.org.