Business for sale! Selling a business is rather like selling your home. If you want to achieve the maximum value, you need to get your house in order and prepare well in advance before putting up the for-sale-sign.
Just like selling your home, when putting your business up for sale it’s wise to ensure that it is beautifully presented before opening your doors to prospective buyers. It is also a good idea to identify opportunities to add more value to your company. Small, targeted investments can increase the value of your business and make it a more attractive target. Similar to how a new kitchen can add value to your home.
Planning your exit takes time. If you want to receive the best price, you will need to think strategically. Allowing enough time to prepare properly is the first step. Understanding your potential buyers and choosing the right time to sell are equally important.
This time must be spent wisely positioning the company and dealing with any potential due diligence issues. This process can take up to 2-years before putting the company up-for-sale and should ideally be completed prior to appointing a business broker or M&A advisor.
It’s important to know what to expect when selling your business. Here are a few tips to help you to prepare for sale successfully:
Know the price of everything, and the value of… well, everything!
A business is only worth what a buyer is willing to pay.
A company’s value is determined by more than just its historic financial performance. You need to understand what the value drivers of your business are. Simply getting a few more ‘good years’ of performance under your belt isn’t necessarily going to dramatically increase its value.
As a starting point it is worthwhile obtaining an indicative open market valuation to better understand how a potential buyer will value your business. This will help you to focus on the aspects that are most important in determining the eventual sales price.
Get your house in order – prepare for sale before appointing a business broker or M&A advisor
Don’t just paper over the cracks!
Deal with any skeletons before you get to due diligence. It is usually far cheaper for the seller to fix any problems ahead of a sale rather than the buyer to deal with them after a purchase. Red flags make buyers nervous, and nervous buyers don’t like signing cheques. This is especially true if they identify a problem that you were previously unaware of!
As with selling a property, you shouldn’t just randomly wake up one day decide to drop into your local estate agents. While they will certainly welcome your custom, it is unlikely that you will achieve the best price for your humble abode.
People tend to at least decorate beforehand. Others will spend money on home improvements to get everything shipshape before putting their property up for sale. This is normally done before appointing an estate agent.
The same is true when it comes to selling a business. Your business broker and/or M&A advisor, just like an estate agent, will help you to attract buyers and handle the sale on your behalf, however, they will not help you to paint and decorate your home or build that extension. That is your responsibility.
Identify your target market – Who will potentially buy your company and why?
Buyers fall into 3 categories: strategic, financial and individual. Each type of buyer tends to have different motivations and objectives when purchasing your business.
A strategic buyer could be an existing competitor or a non-competing company operating in an adjacent industry or market sector. Typically, their interest in purchasing your company will stem from synergistic opportunities that may arise following an acquisition.
Financial buyers include private equity, venture capital, etc. They usually focus on opportunities within their specific area of expertise. When investing in portfolio companies they always consider what a future exit may look like. Private equity investors are generally only interested in companies that operate in attractive market sectors/segments, have a strong competitive advantage, and display great future potential.
Individual buyers include entrepreneurs who may simply want to purchase your business to replace you as the owner-manager. Such transaction may not be motivated by possible synergies or be driven by a future exit strategy.
Like selling your house, you need to give consideration to who the likely buyer will be. For example, if you have a property that is located next to an excellent school you would be safe to assume that it could be an attractive prospect to a buyer who may have children. You would be wise to ensure that your home is appealing to families as opposed to a pensioner looking for a quiet retirement.
Likewise, the buyer types above will have different reasons for acquiring your company.
Stand in the buyer’s shoes – understand their perspective and what they value.
Not all buyers are the same.
A strategic buyer’s interest tends to revolve around scale, scope and/or capability. They may consider purchasing your company because they can achieve economies of scale by becoming larger. They may want to expand the scope of their product and services, or your business may just simply have capabilities that they don’t currently have. The value of your company to them will be dependent on what is motivating them to buy your business.
Financial buyers start with the end in mind. They are laser focused on how they will realise a return on their investment as they will look to sell your company in the not-too-distant future. To be an attractive prospect to this type of buyer your business will need to be a leader in its field and ideally operating in a growing market with high barriers to entry.
If they don’t believe they can make at least 3 times their money by acquiring your company, supercharging its business model, and selling it on, they will not be interested.
A business that is relatively small and isn’t operating in any niche market segment, may not be an attractive investment opportunity to either a strategic or financial buyer. If this is the case, you may want to focus your energy on attracting the attention of individual buyers.
Using another property example, if the most likely buyer for your house are developers who will probably knock it down and build flats, spending time and money on making it feel homely won’t add any value. It would be a far better use of time to obtain outline planning permission to drive up interest, and ultimately the price, of your property.
Get your timing right
It’s all in the timing. Sometimes it’s a sellers’ market, and sometimes the buyer will be holding all the cards. If you have ever tried to sell a property during a recession you will know first-hand that the eventual sale price will most likely be lower than that advertised by the estate agent.
A recession is a good example of how different types of buyers can become either more or less active in M&A.
Recessions can often drive market consolidation which in turn can spur an increase in strategic transactions. Conversely, market instability can force financial buyers to wait until a better time.
When the economy is awash with cash and debt is cheap, you often see ever increasing multiples being paid by financial buyers as they aggressively deploy capital to satisfy their investors. In these instances, it is not uncommon for strategic buyers to take a step back and wait for the market to cool.
Individual buyers can be more opportunistic. The right deal at the right time can tempt them to part with their hard-earned cash.
It is important to know when to sell and who to target.
How H&Hendricks can help
At H&Hendricks we are able to help you target value creation opportunities before putting up the for-sale sign. We help business owners to maximise the value of their companies and make them more attractive to potential buyers.
We offer the following services to help companies prepare for sale:
At H&Hendricks, our expert team is ready to support you with your most promising opportunities. We will help you to achieve your business ambitions and increase the overall value of your company.