We’ve noticed a significant increase in the number of business owners wanting to better understand what their business might be worth, but also how to go about selling it. What they’re really wanting to nail down is a succession plan. This could include:
- selling the business as a going concern on the open market
- selling the business as a going concern “under the radar”
- selling 100% or a portion of the shares/equity in the business
- merging with another business
- shutting the doors (a last resort)
Tip 1 – Timing is everything
Is the business ready for sale? One way value is determined is by assessing profits and risk. Is the profit where it needs to be to maximise value? What do the prior three years trading look like? What are the prospects for the current year and beyond that?
Nothing speaks louder than a good track record of earnings. Is the bottom line stable, declining, or growing? What upside exists? What downside risk is there?
What systems and processes are in place to minimise risk? Is there a well diversified customer base? How much does the business rely on the owner? Are there key staff in the business and will they stay on? Are the tangible assets in good condition? What are the likely future capital commitments? What is the point of difference and how sustainable is that? How is technology impacting? What micro and macro economic factors are in play?
Great businesses understand their risks and develop plans to mitigate them. The riskier a business, the less it is worth. Selling at a time when risks are minimal/mitigated can positively impact on value.
Tip 2 – What’s in it for me?
Before you look to implement a succession plan, business owners should have an understanding on what the business or shares are worth. As I have mentioned in previous blogs, the value of a business and the value of the equity/shares can be quite different. If the plan is to sell the business, is there enough money to fund your lifestyle? What cash will be left after paying off debts? How long will it last? Where will you invest the surplus cash? As well as financial considerations, there’s also non-financial issues such as how you might spend your time going forward? It’s important to consider life beyond the business and what this might look like.
Tip 3 – Understand your market of potential buyers
There are many businesses for sale at any one time so prospective buyers are spoilt for choice. How do you ensure that your business stands out from the crowd? What are the strategies that will improve the chances of your business getting past the first barrier? Here’s some ideas that can help:
- Prepare a thorough and accurate Information Memorandum (IM) with help from a professional. This is a great way to market your business. Presentation and content matters.
- Be prepared to supply further information to support the representations made in the IM. There should not be any delays in providing this. This can imply you’re disorganised and that the IM may be inaccurate.
- Research your target thoroughly. Tools to help include websites, Companies Office data, accessing professional adviser networks.
- Respond quickly to questions. It reinforces the professionalism of your business.
Remember, first impressions count. Do it once, do it right! Don’t cut corners. This could be the biggest decision of your life.
For more information regarding this topic please contact Steve Alexander, principal and valuation specialist at Crowe Horwath in Hawke’s Bay