Resources

Vendor Readiness

Article

Preparing your business for sale involves various activities, not least of which is tidying up all the rough edges that often become tolerated when running a business and can tend to become more prevalent due to entropy – the tendency for all things to degrade or run down unless attention and effort are put into them. However, there are also a number of specific activities that should be considered when preparing for an exit.

So, let’s go through each of the sections of the Exit Readiness Map and you can download a copy here.

  1. Key Activities – these are the systems and processes that make up your business, including your sales, marketing and delivery processes, your HR and management systems, policies, procedures, etc. On top of that you’ll want to document all the auxiliary processes, such as recruitment, employee engagement, IT, infra-structure, communication, etc. Having these in place helps you manage the business more effectively now as well as make the business more valuable in the future. It also gives you a starting point for process improvement, optimisation and innovation in the future.
  2. Key Resources – this could include people, plant and paperwork. Key people need to be identified as assets to the business but also as potential risks – if they were to leave, how would that affect the business? These risks need to be mitigated. Critical pieces of equipment or plant also need to be protected, maintained and plans drawn up for their replacement (assuming they don’t last for ever). Finally, you will need to have clear, unambiguous and legally compliant commercial and governance documentation in place. For example, in a business with multiple shareholding directors, a shareholder agreement that clearly explain what happens to the shareholding under various scenarios (e.g. the death of one shareholder, sale of the business) is essential.As you approach the time of selling, in particular, you will want to standardise your accounting processes to minimise re-stating the accounts and maximise the reporting of profits (as opposed to minimising them as your accountant will tend to advise for tax purposes). Ensuring that shareholders are paid a proper market-based salary for the work that they do in the business is important because a buyer may want to employ someone to fill these roles and they will want to see that the business can afford to do that based on the operational cost-base of the business.
  3. Approaching an exit, maybe 3-5 years before you expect to leave, you will want to discuss your plans with your key advisors – accountant, solicitor, financial advisor. It is becoming more common to have a mentor or coach on board as well to help you navigate your way through this time in your business, one which you are unlikely to have been through before. Your advisors may be able to act as a mentor or coach at this time, although reaching out to a professional coach that is trained and dedicated to helping you focus and holding you accountable, will likely get better results.
  4. The fourth area is everything we’ve already talked about in this book. It’s about ensuring your strategy, value proposition, USPs, etc. are clear and coordinated, that growth can be demonstrated, and your growth projections are believable køb cialis oral jelly. As we’ve seen your business will be worth more if you, as the founder, are no longer working in the business and it runs and is growing under the care of your management team.Other aspects you will want to demonstrate are that you have removed (or are in the process of minimising) certain risk factors, such as dependency on single suppliers, employees or customers. Your business dashboard or scorecard will demonstrate to potential acquirers how well the business is doing.
  5. How will you value your business? As you lead up to a sale you will want to define the most relevant methodology to value your business, so you can justify a price to a buyer. Various methods are available. Some industries have generally accepted methods, such as multiples of sales revenue. In other sectors, asset value may be more appropriate. In general, and to allow you to compare widely across sectors, a profit multiple is the most useful for benchmarking. It also gives buyers a way to understand the affordability of the purchase. Typically, 3-4 times operating profit (EBITDA) will be affordable within the cashflow of the business over a reasonable period of time (e.g. five years). Buyers may pay more than that if they can see the long-term strategic benefit of the purchase. It should be said; a business is worth what someone will pay for it. However, if you follow the steps in this post, you can anticipate a valuation that is a considerably higher multiple of profit. It is good advice to have a number in mind as a negotiation tool but also so you know your bottom line – what’s the business worth to you and how much do you need it to be worth in order to have the life you want after you sell.
  6. Next decide how you will sell your business – management buyout, employee buyout, vendor financed, cash, earnout, etc). This may depend to some extent on the size of your business, how quickly you want to “cash out” and how you feel about transferring your employees to new ownership. When all is said and done, you may sell by a different route to the one planned. But this is all part of the planning process.
  7. Marketing your business for sale is just like marketing your goods and services. The first key step is to identify your target market. Who is most likely to want to buy your business? As a rule of thumb, a competitor, supplier or perhaps a customer are good targets for you to consider. They are the most likely candidates to have a strategic reason to buy your business, which will inflate the price for you.Potential buyers around 5-20 times the size of your business may well be your sweet spot. Businesses of this relative size are large enough to be able to afford a higher than average purchase price and also be large enough to assimilate your business into theirs. It is worthwhile researching such potential buyers and keeping a file on them so that you can tailor your prospectus towards them or even court them (subtly of course to begin with). You may also decide on a change of the overall strategic focus of your business based on your findings if you think it would make your business more appealing to one or more specific buyers.
  8. Once you are clear about your target buyers and what you have to offer them, you can think about the channels you will use to make the sale. Can you see the parallels with marketing your products? It can be said that the primary goal of entrepreneurship is to build a business you can market and sell for the highest return. There are different types of brokers available that can help you sell or you could decide to sell it yourself with the help of your advisors. Whichever way you go, this is an important decision and you will want to take advice from several advisors.
  9. How will you communicate the sale? Will you have a prospectus, describing the benefits of the company you are selling to prospective buyers?

Download our handy one page Exit Readiness Map to keep all this information in one place and identify gaps in your readiness.  Keep it as a live document to index all the information your gather. Keeping it up to date with a current valuation will help you know exactly when the right time to exit is for you.

A business owner came along to a seminar we gave on this topic with his mind fixed that his business was worth nothing and his best exit would be to shut the doors. He owned the property that the business operated from, so he planned to sell it to raise money for his retirement. However, after hearing the seminar, he realised his business did have some value. He wanted to sell within six months, ideally, so there was little time to make the kinds of improvements to the business detailed, but some aspects were already in place. In the end, he managed to sell his business as a going concern and raise enough from the sale to be able to afford to keep the property, taking a rent from the new owner as a passive income. Even if it is too late to change anything, the information in this post can help you to understand, and therefore communicate, the value your business represents to a buyer.

The Five Ways to Exit a Business

There are five basic ways to exit your business.

  1. Delegation – put the business under management and remain as a shareholder. You can bequeath your shares as you wish in perpetuity as long as you have done what is necessary to put your business on a sound footing with a capable management team.
  2. Succession – pass the business on to a family member to run. This is ideal if you have one that wants to run the business, has the capability to drive it forward and has worked in the business to learn about its various aspects. In many cases though, these criteria are not met, and second-generation owner-managers can be problematic for businesses.
  3. Sale – put the business up for sale to a third party, current management, employees, or offer shares for sale through an IPO (ultimately to trade publicly on the stock market).
  4. Close the doors and walk away. Based on the Office of National Statistics analysis, a significant number of UK businesses end this way.
  5. Death in service.

Any one of the first four exit routes could be attempted after the owner’s death (route 5). Unfortunately, if the business hasn’t been prepared for management, succession or sale then it is unlikely to be as smooth, lucrative and sustainable as you would probably like. It is therefore preferable to put steps in place to exit before this point.

Fortunately, the steps involved in any of the proactive methods (1-3) are largely the same, the main differences being (i) the intent (ii) preparation of the people involved to accept the new leadership, or (iii) preparation of people for their new leadership roles and (iv) finding a buyer if going that route. That might sound a lot, but almost everything else with regards to preparing the business is the same. You’ll want to show historical growth and a future growth plan. Depending on the size of the business, you’ll want to have a management team in place and documented systems and processes. You’ll want to have good repeat business, good customer satisfaction and positive cashflow during the growth cycle. Together, these will make the business attractive to a buyer (so the sale will be more lucrative for you) or they will give the new management a fast start as they take over the business and make the first months, even years, far easier.

So let’s look at selling the business as a specific case. A supplementary reason for considering sale as a specific case is that the value of your business is a useful measure of the success of your business strategy and management. Business valuations are often based on a multiple of profits, the multiple being based on the perceived scalability and sustainability of the business in the future, i.e. the success of your strategy to grow historically and the remaining growth that can be perceived in your growth plans and strategic documentation (as created so far).

A well-managed growing business with good cashflow and few dependencies on critical suppliers, staff, customers or the owner, will sell for a higher multiple. As high as 40+ times has been recorded by our clients. On the other hand, the average owner operated business sold for a multiple of 3.6 times their annual operating profit in 2016, with some selling for less than their annual profit.

Based on these figures alone, it is definitely worth investing time and money on building a saleable business. It might be the biggest pay day you have and even if you don’t sell, you know it is in good shape when you step down as MD and take up the shareholder role as your only involvement. Subsequently, you can monitor the future value of the business as a KPI of the management you entrust with your asset.

If you’d like to find out how much your business could be worth right now, try our online business valuation calculator and when you’re ready, get in touch to put a strategy in place to maximise the value of your business.

Making the Exit Decision

Article

You’ve put your heart and soul into building your business, and it’s going from strength to strength. At some point you will face the exit decision: stay or go. Entrepreneurs face this decision at various times for various reasons.

Read More

Exit Readiness Index

Free Tool

Bob received a very lucrative offer for his business, equivalent to four to five times annual revenue, from a strategic buyer. He snapped their hand off, but didn’t think through the impact that the divestiture would have on his employees. He’d worked with these people for years building the business and when he sold, the new owners didn’t need many of them. Bob suffered with depression for a couple of years after exiting, regretting his decision.

Read More

Is Your Business Exit-Ready?

Case Study

When the GB Olympic Relay Team heads out onto the track, they have practiced the race many, many times. Those of you as old as me remember some of the embarrassments of the 80s when we had some of the best sprinters in the world, but kept on dropping the baton. These days, British relay runners are far better prepared.

Running a business is like a relay race – at some point, after you’ve run your leg, you pass the baton to someone else. Whether through a sale, merger, family or management succession, you pass the baton.

Read More

Business Valuation Formula

E-Book

When talking to business owners about the value of their shareholding, we are often asked “what’s the formula to value my business?” In fact, there are various formulae in common use for valuing a business based on the three main approaches that can be taken.

Read More

Business Valuation Methods

E-Book

There are a number of business valuation methods available suited to different purposes, circumstances and types of business. It is often advisable to value a business by multiple methods to get a thorough understanding of the value of a business and the assumptions made to derive the different figures.

Read More

Business Valuation Calculator

Free Tool

Access our free, confidential online business valuation calculator here for a quick valuation of your business. Get in touch for a more detailed valuation.There are many reasons to obtain a detailed business valuation, including:

  • To have a reasonable asking price for a company
  • To support negotiations with potential buyers
  • To value shares if a shareholder wants to sell
  • To value for changes in circumstances, for example divorce

Whatever your specific reasons, having a full valuation of your company puts you in a much stronger position – whether for negotiation or sales.

Read More

One Way to Increase Business Value

Article

Here’s a fantastic practical example in how to build a more valuable business from a prospective client this week…

Read More

What Are My Exit Options?

Article

To begin with, it’s always better to exit a business on your terms rather than being forced into it. Far better to have a plan to exit the business and do it in an ordered way. The alternative is death, ill health or insolvency which leave all manner of chaos behind.

Assuming you’re looking for a proactive exit from your business your options are:

Read More

12
Online Business Valuation

The most sophisticated online business valuation calculator available.

Get Valuation