Every business owner requires an exit plan, and for many this will revolve around eventually selling the company that they have often spent years nurturing and growing, but it’s easy to underestimate the amount of groundwork required to achieve a successful sale and maximise a company’s value.
Crucially, it’s never too early to think about the foundations that need to be laid to sell a business. Even people who are many years away from retirement or those who presume a company will follow a natural progression, such as staying in the family, will benefit from having the basics in place. This is especially true because it’s impossible to predict what the future holds, be it health related or an attractive offer suddenly arising for the business.
One of the most important aspects in any business sale, is how it will function once the current owner has handed over the keys to the kingdom. This can also be one of the most difficult aspects to get right. The vast majority of buyers will expect to see a strong management team in place, who can run the business with minimal input from the shareholders, so an owner manager who can effectively make themselves redundant, will have a much better chance of securing a higher price.
A simple test of this is to look at how the business functions when the owner goes on holiday. If they spend their downtime glued to their phone, Skyping the office and having to continually make decisions and reply to emails, it’s clear that a lot needs to change before most buyers will consider it.
The type of buyer will also have a view on this. Strategic buyers will often be interested in the company’s operations and probably plan to run it themselves, whereas many investors are often more focussed on the potential returns and won’t want to be involved in its day to day running.
However, regardless of who the buyer is, being able to present accurate financial statements, solid cash flows and realistic forecasts that can be supported with hard evidence, will significantly make a company more attractive to a purchaser.
It’s important that everyone on the team pulls in the right direction to create a clear and transparent picture. Any conflicting messages or nasty surprises will quickly destroy a buyer’s trust in the process, and this is one of the biggest reasons many deals don’t go through. It’s also vital that the entire team remains focussed on continuing to ensure the business runs successfully throughout the sale process – at this point there are a lot of balls to juggle.
Another key consideration is how working capital and net debt will affect the overall transaction price. During the sale, the buyer and seller will often have very different views on how much working capital should be left in the business.
The buyer will want sufficient working capital to enable them to continue to trade, without having to invest more money, but for the seller, the lower the amount of working capital left in the business, the higher their net proceeds will be.
It is usually best to negotiate a target working capital amount at an early stage and document it, alongside what is to be included and excluded in the overall calculation. This negotiation can be complex, and poorly advised sellers can often give value away without realising it. Understanding how working capital can impact on net proceeds is therefore essential.
Finally, in most cases, profitability is the key consideration for buyers so this has to be as healthy as possible, which can take several years to get right. This means driving efficiencies and looking at where costs can be reduced well in advance of a potential sale.
By Hamish Morrison
Partner, BHP Corporate Finance