Based on over 200 deals and 30 years experience, this countdown of articles crystallises the complex transaction of selling your business into ten golden rules. You will only sell your business once and have one chance to get it right!
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# Seven

NEVER TOO EARLY TO START PLANNING

Even if you are not thinking of selling your business for another five years, you should start planning now – the key is to read, research and prepare to make sure that you and your business are in the best possible position to achieve and exceed your objective

The process

You are likely to only go through a business sales process once so you should find out how the process works, the key steps and the common issues

Unfortunately, no matter how much time you spend preparing, you may still face some unexpected problems and the key is to be ready and flexible enough to deal with those issues without being knocked sideways feeling very surprised, confused or upset

The more you know about the process, and possible issues, the better

Profit quality

Whilst the headline level of profit and cash generation is clearly very important, the “quality” of those income streams is a key factor in determining the saleability and value of a business – buyers are very attracted to robust and predictable profit streams

Businesses with similar levels of profitability may attract widely different offers depending on the certainty and visibility of those profit streams – an engineering business with a one month order book will be viewed very differently to say an aerospace manufacturer who is the only supplier of a particular part and has long term visibility of sales

You should seek ways to improve profit quality (and not only quantity) which will inevitably take time – examples include a recruitment business moving away from permanent to temporary or a software business moving away from one-off licence fees to a monthly/annual subscription model

Value drivers and value drags

The financial performance is a major factor but a buyer is rarely only buying a profit stream, so there will be a range of other factors which will impact pricing or even the ability to sale your business

Your business will have a number of features which will drive increased value and they need emphasising, strengthening and protecting throughout the planning process – these value drivers will clearly be company-specific but might include well-diversified blue-chip customer base, specific protected technology, exclusive supply arrangements, brands, specific licences or approvals, strong established international distribution network or a strong management team

Similarly and often more difficult to identify and accept, your business will have features that will drag value and these need eliminating or mitigating throughout the planning process – examples could include seller, customer or supplier dependency, being tied into onerous contracts, old technology, limited differentiation from competitors, poor culture or extensive change of ownership clauses in key contracts

You should include an honest and frank assessment of value drivers and drags in your planning process

Understand your buyer pool and market

In most cases, sellers do not fully identify or get an understanding of their buyer pool until they are in a formal sale process and yet understanding what makes buyers want to buy is a very important factor in getting the best possible value for your business – valuation is often driven by how much a buyer wants to buy and how much a seller wants to sell (part of the reason why golden rule #10 is “the best time to sell is when you do not have to”)

A limited buyer research exercise and analysis of transactions in yours and related sectors can often reveal their strategic rationale, features that will make your business most attractive to that buyer – filling gaps in their geographical coverage, consolidating the industry to drive synergies, diversifying into complementary products or services, accessing specific technology, removing a competitor or possibly not wanting you to be bought by an existing major competitor are just a few reasons a buyer might be keen to buy

Private equity firms adopt this approach and will almost always undertake some form of “exit review” before finalising their investment in a business

This exercise will either confirm or impact your strategy

And finally, a real-life example…

Although quite an extreme example, a company had the option of generating a higher profit by focussing on South-East Asia (driven by factors such as less competition and a less well-developed market) but decided to focus on the much more challenging North American market where the key buyers were based and become as disruptive as possible to those buyers. Although a brave move. the company received two unsolicited approaches to buy their business within 18 months – in the words of the buyer after the deal, you were a cloud that every time we looked up, you were a little closer, larger and darker and eventually we got too uncomfortable – admittedly, there were some specific factors that played a part here but it does illustrate how a focus on the end-game and understanding your buyer pool can impact strategy

The key message is to plan now and get some help, ideally from someone you trust who has been through the process before