Business Brain: Selling a business means facing up to ‘hard realities’
Therefore, it is imperative that the preparation phase begins well in advance of the planned disposal (For example, 18 months).
It is essential that the seller views the business through the eyes of a potential buyer. Owners may lack the dispassionate ability to perform an objective review of the overall health and value of the business and any emotional attachment needs to be tempered by hard realities.
As a starting point, you should consider whether the underlying financial records present a comprehensive picture of the overall value of your business.
You may be compliant from an audited accounts point of view, but it is important to take a step back and consider whether there are other intrinsic areas of your business that add value, such as key supplier and customer relationships.
Conversely, it is crucial to identify whether there are any aspects of your business that are underperforming or loss-making. Tough decisions must be made early so that appropriate and timely corrective action can be taken.
You should be mindful of the potential impact a disposal will have on the other key stakeholders in the business such as your employees, your customers and your suppliers.
Focus on ensuring a smooth transition to new ownership and it is vital that key personnel “buy-in” is secured though open and honest communication. Where possible, it is good if there is a transition period during which the seller and buyer work together to bed in the new ownership structure. Often, business owners may wish to remain actively involved in the business and the buyer may be open to this, at least during the transition phase.
If you are looking to maximise your company’s value, overcome the disruptive effects of a sale, and cash-in when it’s all over, don’t expect it to happen as an overnight event.
Critical to the successful sale of a business is the development of solid, experienced middle management, particularly if you will no longer be involved in running the company. In addition, strong financial reporting systems and historical statements (preferably audited) are essential.
They must support the financial data presented to potential buyers, and ensure that all the required documentation can actually be generated. The optimal timing of communication with key customers and suppliers and the ability to transfer key contractual arrangements to the buyers should also be contemplated.
An independent valuation of the business should be sought before you placing it on the market. This will help you to manage expectations through what can be an emotional process. Most deals are usually driven by earnings before interest, tax, depreciation and amortisation (EBITDA) and it is therefore important that all non-recurring income and expenditure is identified early in the due diligence process.
Unrealistic price expectations are the quickest way to dampen buyer enthusiasm and ensure your disappointment. Inflated valuation expectations will impede you from recognising reasonable bids.
What another entrepreneur got for his company three years earlier, or what one large company paid for another, is irrelevant to your transaction. The market will determine what your company is worth today. When you do enter into negotiations to sell, you need be clear about your initial terms and in particular, the definition of price.
For example, it is normal to allow working capital to be retained within a business but this should be clarified.
Remember that businesses tend to be ~ valued on a cash-free, debt-free basis, meaning the seller keeps all the cash and pays off all the debt simultaneously upon completion.
Keep in mind that the seller may consider certain obligations as “debt-like” in nature outside of the liabilities classified as debt on the balance sheet as they may seek a price reduction.
Maintaining control of information to potential buyers is critical, especially if there are a number of different teams reviewing the businesses.
Keeping messaging consistent and ensuring that all parties receive the same level of information will improve transparency in the process. Consider producing a vendor due diligence pack to release to bidders as an alternative to detailed work being conducted through a data room.
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