Golden Rules To Follow When Selling Your Business
Gain a better understanding of the rules to follow if you're thinking of selling your business.
Dated: 26 November 2019 Author: Roy Farmer, Head of Corporate Finance
I am regularly asked by business owners when is the best time to sell their business. And invariably my response is that it depends.
There almost always needs to be a reason for a business owner to sell, a trigger event such as retirement, ill health or the desire to do something different. However, the best time to sell your business is very often when you don’t need to, as the pressure to sell is not there and the very viable alternative is to continue with the business.
What is essential, however, is to take all of the necessary steps to ready your business for sale and to understand the options available. This then provides a business owner with the confidence that when the time comes to sell, they have taken the necessary steps required to help maximise value.
Whilst preparing for sale can feel like a daunting process, there are a number of simple steps which can be taken that can be highly beneficial when the opportunity to sell arises.
Understand what your business is worth
Business owners very often don’t have an appreciation of the value of their business, even though it can be the most valuable asset that they possess. It is difficult for any business owner to make a decision around whether and when to sell their business unless they know what their business might be worth as a starting point
It is for that reason that an understanding of the value of your business is essential. A business valuation need not be expensive, but the benefits can be enormous. The discipline of going through the process of understanding the value of your business can also result in you taking actions which can subsequently enhance the value of the business.
Work out your different exit options
A common way of realising value from a shareholding in a business is to sell to a trade buyer. This well-trodden exit route can have many advantages, not least the fact that a strategic trade buyer may be able to achieve operational synergies through the business combination and have sufficient funds available to support a strategic premium being paid.
The obvious alternative to a trade sale would be a sale to management, typically known as either a management buy-out (“MBO”) or a vendor initiated management buy-out (“VIMBO”), the latter being where the vendor controls the process. We work with many shareholders who find a VIMBO a very appealing exit option in that not only is confidentiality maintained, the seller can structure a transaction tax efficiently with the current availability of entrepreneurs’ relief. This structure typically allows for an initial cash sum to be released with the remaining value achieved through a combination of deferred consideration and a minority equity stake in the on-going entity, often providing further future upside in value through the growth in the value of the on-going entity. This structure can work particularly well where the seller does not have a need to receive all of their share value upfront and has confidence in their management team to continue to drive the business forwards.
For several years, shareholders have had the option of transitioning ownership to an Employee Ownership Trust (“EOT”). This option can be particularly useful in businesses heavily reliant on its people and where a capable management team is readily evident. The process is not dissimilar to an MBO or VIMBO and is commonly termed ‘The John Lewis Model’ in the UK.
Preparation is key
Preparation is the key to maximising value. For some, the preparation stage can span months or years dependent upon the actions required.
The planning process can cover a myriad of areas that may include management succession, customer diversification, developing new business opportunities and working capital management to name just a few. Businesses will also often lack good quality management information, and a good quality suite of management reports can take time to build.
Build a team of experienced advisers around you
Preparing your business for sale can take a significant amount of effort and can be complex and challenging, so it is vital to engage the right team of advisers to support you in the process. Appointing experienced professionals inevitably comes at a cost, but the value the right team of advisers will bring to the process and the consideration they will help ultimately achieve can be significant.
Many transactions fail because of a dip in performance prior to completion. The sale process is hugely distracting, and it is easy for business owners to lose focus on the running of the business. Good advisers will reduce the burden of the transaction and ensure that the business owners can retain control of their prized asset before sale.
I always encourage clients to appoint their advisers early as the value a good adviser can provide, particularly early in a process, can be enormous, and some of that early advice can take time to put into action.
And finally, it is important to choose a team of advisers you can get on with, given the amount of time you’re likely to spend with them during the sale process.