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!
THINK LIKE A BUYER
You are quite rightly very proud of your business and what you have achieved – as your most valuable asset, you want to secure the best possible value on sale
One key to maximising value is to think like a potential buyer – not as easy as it sounds as it is very difficult for any business owner to stand back and take a totally dispassionate view of their business. Also, each buyer might have a different view on certain issues and accept potentially negative features as industry norms
It is important to think about the features of your business that would add value to a buyer or detract value – in other words, what a buyer really wants and what they will want to avoid. Although traditional valuation methods are based on recent profit levels, buyers are very rarely simply acquiring a profit stream alone so it is important to enhance the value drivers and mitigate or ideally eliminate the value drags
Be wary of those features of your business that are not ideal but you “live with” as a buyer may not take the same approach
Some of the areas that will impact a buyer’s view are summarised below but there are many others so the key is to look at your business as a potential buyer – would you buy it and for how much?
If you can think like a buyer, ideally a cynical and streetwise buyer, then your chances of achieving the best possible outcome are significantly improved – some would argue strongly that this is the most important and even the only golden rule!
Profit quality and cash generation
The quality or robustness and predictability of profits and cash flow is critical to valuation – valuation is not all about profit quantum alone
Buyers are very attracted to recurring and contractual revenue streams
Management continuity / seller dependency
This is a very common issue and the seller must accept that a buyer is buying the company and management team, not themselves – value and deal structure will be materially impacted if key customer and supplier relationships and decisions rest with the seller
The acid test is how the business would perform if the sellers left the business for an extended period of time
Customer or supplier dependence
Undue customer or supplier dependence clearly makes the business very vulnerable to third parties or to single factors such as a change in a buyer or a supplier rationalisation strategy, which are totally outside the control of the company – some buyers may simply consider this risk too great to submit any offer
In certain industries this level of dependency is accepted such as automotive and aerospace where there is very strong mutual inter-dependency – customer and supplier are highly commercially reliant on each other, especially where the supplier is the sole source of a product
Unfettered ownership of intellectual property is clearly important. You should be particularly wary if sub-contractors have been involved in developing that IP and ensure that the contractual arrangements make it absolutely clear that any IP generated belongs to you
You are clearly entitled to undertake any tax planning that you consider appropriate but no buyer will accept any liability for your tax arrangements, no matter how remote. Even relatively straightforward tax planning measures are coming under scrutiny and tax due diligence will emphasise the worst possible scenario
Any environmental issues will materially impact a buyer’s view. Clearly, some sectors are more exposed to issues than others
Be realistic in presenting profit forecasts – the infamous “hockey stick” approach will attract suspicion and undermine your proposition
A very common statement from sellers is that “these forecasts are very prudent” so ensure that statement is supportable
These are only some features and the key but challenging exercise is to specifically and critically appraise your own business
Vendor due diligence is increasingly common as an additional way to get an independent view of your business prior to approaching buyers
In summary, please remember the following:
- Buyers are typically risk-averse…and suspicious
- Due diligence is not discovery but verification – new information arising during due diligence can be very damaging and will be uncovered
- Unattractive features and events need to be disclosed positively
- You should telegraph potential deal-breaker issues early
- Be realistic
- Never ever reveal your asking price or bottom line, even after the deal!
- Retaliate even before any price chip – defending the original agreed price through the legal and due diligence process is critical