Having invested considerable time, money, and emotion into a business, selling is often the most important decision many owners will take. It’s usually a one-off opportunity to crystallise value and hence critical to get right.
Ensuring your business is ‘sale ready’ in the first place, will make it more attractive to potential buyers or investors and significantly increase the chances of a successful outcome. Trying to address concerns once the process is in motion can prove to be challenging. Nervous buyers can quickly undermine the price, withhold cash on exit or walk away from the deal altogether.
It is never too early to start planning for exit. Implementing good business practices and disciplines in advance of a transaction, will not only make the process much smoother but also enhance value to a buyer. Vendors who take the right steps to prepare, will almost certainly end up reaping the biggest rewards.
Founders’ reliance risk
Entrepreneurial businesses are, by definition, reliant upon their owners. However, and whilst not always the case, most buyers will want to ensure that the business they are buying is capable of functioning, and indeed growing, after your exit.
If the business cannot function without you, then what is a buyer acquiring? Ensuring that you have a strong management team, who can continue to drive success after you step down, will make your business far more attractive to a buyer and will likely achieve a higher valuation.
Quality of financial information
Poor financial information sends the wrong message to a buyer. Good quality, up to date financials and systems is not only good practise, but make a buyer’s ability to value your business, and rely on the financial results, much easier.
A good quality and relevant monthly board pack, including profit & loss, balance sheet and cash flow, together with key KPI’s, granular profitability by product, service, and customer is the ideal, and will put you one step ahead on commencement of any transaction process.
A buyer will undertake financial due diligence on your business as part of a sale and being able to provide this information not only makes the process smoother but improves their perception of your business and may reduce challenges to the agreed sale price and structure.
Furthermore, investing properly in your finance team is an area often overlooked by many businesses as they grow and mature. A strong internal finance function will be key to ensuring proper financial information is kept, whilst also enabling you to successfully navigate through financial due diligence.
Future growth and trends
Being able to illustrate a strong, growing profit pattern over a sustained period will undoubtedly increase the value of your business. Moreover, being able to understand your business’ profit trends and future growth opportunities, as well as underlying market dynamics, can dictate the optimal time to sell a business.
Strong visibility over future growth opportunities, and potential future profits, via secured order books, long term contracts and recurring revenue streams, will also enhance its value.
Being able to clearly articulate and quantify future performance via clear pipeline tracking or detailed forecasts supported by verifiable assumptions will only add further value.
During a deal process, it is also crucial to perform well compared to forecasts. Strong financial performance during diligence and negotiations will provide additional confidence to the prospective buyer and significantly reduce the chance of a “price chip.”
Manage current and future risks - honestly
Buyers will eventually take a forensic look at your business, so it is crucial you identify areas of concern before they do. Think critically about your business and how it could be perceived by an outsider. Does the business rely on one or a few key customers or suppliers? Is the sector particularly susceptible to wider macro-economic conditions?
Ultimately all businesses have risk areas. Understanding how these might be perceived early on allows you to mitigate their impact, either by taking steps to address them or by disclosing them in a constructive and balanced way at the start of the process. Both actions will build a trust factor that should positively impact the eventual deal value.
Legal and financial tidy up
A crucial but often overlooked area for many business owners that can often lead to significant or terminal issues being uncovered during financial, tax or legal due diligence. Keeping your statutory records, corporate filings and tax affairs accurate and up to date is of critical importance for any DD process. Ensuring Companies House filings are watertight, proper company articles and shareholder’s agreements are in place and that resolutions and board minutes have been produced (and filed where appropriate) should mean there are no nasty surprises uncovered during DD.
Ensuring compliance with your legal and financial reporting requirements sends the right impression to a buyer. From a legal perspective, make sure that items such as incorporation documents, statutory registers, share certificates, property leases, title deeds, intellectual property rights, employee contracts, directors service agreements or customer and supplier agreements are in place and up to date.
Tax due diligence and planning
Whilst the tax due diligence process will mainly focus on the most recent tax filings, it will also look at some historical items, in particular if there have been any restructurings or transfers of assets between companies in the case of groups. The most common issue in our experience is the employment related securities legislation – these are wide-ranging tax rules which broadly seek to charge income tax where employees or directors acquire shares in their employing company at a discount. We would recommend that you ask your tax advisers to review this area before the due diligence process starts so that you are aware of any potential problems and can either take rectifying action, where possible, or disclose the issues early in the due diligence process.
What are the opportunities and how can we help?
Experienced advisers will provide valuable advice to ensure your business is ‘sale ready’, and therefore maximise value and support you in leading, negotiating and ultimately executing a successful transaction. Whether it’s growth finance, debt advisory, M&A or international expansion, our advice and support cover every stage of your business journey.
We are also a UK member firm of Oaklins International Inc, the leading and most active global advisory firm for growing mid-market companies. By seamlessly collaborating across borders, we combine our local experience in acquisition, capital raising and sell-side advice with the capabilities of 850 specialist colleagues around the world. With us, you can find exceptional opportunities and bring them to fruition.