Many entrepreneurs build a successful business and then decide to sell it, only to find that the sale just doesn’t happen; maybe they aren’t offered the figure they were looking for or they’re not offered any figure at all! So how do you avoid this scenario? Here are some things to consider.
If the owner is integral to the company’s success on a day-to-day basis, a potential buyer will not want to purchase it. So it is important that owners design themselves out of the business early on, instead having a management team that can successfully run the business when they are not there.
A good business plan is crucial. The business owner can use it to compare the financial forecasts in the plan against the management accounts, monitoring how well the business is performing and quickly responding to any issues. To a buyer, the plan is a great indicator of the business’s strategy, progress and therefore the opportunity at hand.
The objective of selling the business, and the timescale involved, should be factored into the plan. For instance, investment decisions should be conducted with an eye on the future exit goal.
The two most obvious signs that a business is successful, and therefore valuable, are high turnover and good profit margins. However, buyers will not take an entrepreneur’s numbers at face value. It is paramount that they are seen as accurate and dependable; any inconsistencies or gaps will represent a risk, reducing the sale price or putting potential buyers off all together.
That’s why business owners need to establish the good business habits of solid reporting, planning and forecasting, with an effective back office finance function.
Get asset ownership and protection sorted in the early stages of your business’s lifecycle. Brand, trademarks, copyright, patents, website addresses, research and development – it is vital to protect the intangible assets that are unique and intrinsic to your business. For help with this speak to a specialist intellectual property lawyer.
Such intangible assets also need to be owned by the business rather than the owner; a potential buyer will expect this. If you do need to transfer assets from your personal ownership to the business, don’t do this just before the sale. At that point they may be worth a lot more than they were originally and you could end up with a considerable personal tax liability at the point of transfer.
A purchaser is buying a company’s future income streams and wants a business that’s scalable. For instance, they will want to see potential to sell what you offer to customers/markets they know, to sell new products and services to your existing customers or to move into a new location or geography.
Beyond this, don’t develop an organisation that’s overly dependent on one or two customers, suppliers or employees. A prospective buyer will know that if one of these goes, a large part of the business’s value is gone too.
It sounds an obvious point but a business that needs a lot of working capital to be put in at the point of sale will not secure the same price as it would if its working capital was sufficient. Similarly, make sure your business gets paid for its products/services before suppliers need to be paid – such a positive cashflow is a sign of a healthy business.
You might think that, when it comes to your products or services, a sale is a sale. However, different types of sales are worth different amounts to a prospective purchaser. A business with a recurring revenue model is more attractive than one with lots of one-off sales. So, look at your business – is there scope to build in recurring revenues?
If your business’s brand is strong and has a significant connection with customers, you can command higher prices and enjoy greater customer loyalty. Equally, if your customers are happy, they are less likely to leave when the business sale goes through.
All of these things will impact on your ability to sell your business and the price you get for it – but remember those customers must be attached to your business, not you!
Lastly, get good advisors – accountants, lawyers and other professionals – working for you, helping you establish good housekeeping, add value and avoid expensive mistakes. They will also provide corporate and personal tax planning throughout your journey from start-up to sale. The advice accountants give early on could fundamentally impact on the amount of money you extract from a future sale – so use them!