What are the key issues I should be aware of when selling a business?
Most people assume that profitability is the most important issue when it comes to selling a business but that is not necessarily true. Almost all traditional valuation methods are fundamentally routed in return on investment and therefore profitability and yet this is not the dominant motive for purchase. It would be folly to assume that profitability is not important but current profitability under current ownership may not as critical as most people think. Consider with me what motivates an acquirer.
Client Base. It is absolutely true that the greatest motive behind any acquisition or premium price is the quality of the purchased companys client base. This is the greatest reason why any acquisition is ever made.
Potential for growth. This is the second greatest motive for purchase and the second greatest reason why a premium price may be paid. Indeed Acquisition Directors live by eight acquisition musts and it is interesting to note that five out of eight musts are all about future potential. Nobody ever bought a companys history only its future.
We could carry on and consider globalisation as a motive, or diversification, or protectionism. There are many reasons for purchasing companies, however one of the rarest reasons is pure investment. Traditional advice says improve your credit control because a £10,000 saving on a PE multiple of seven could increase the price by £70,000. This thinking is very enticing but essentially untrue for a strategic buyer. Whether you improve credit control just before they buy or they improve soon after they buy is relatively inconsequential. Strategic buyers are far more concerned with client base and future potential. This is why loss-making companies can sell very high prices.
At BCMS, one of the most important documents that we produce for our clients is called a step change business plan. This establishes what the business will look like in three years time when the new owner has applied their resources, sales skills and customers to your products. As a departing owner you should never be able to compete with this. If you can do better than they can then you have the wrong buyer. This business plan has a profound effect on price and terms.
How do I get the best price?
Simple. Make sure that you have a genuine choice of competitive buyers. Almost everything that we do at BCMS is designed to establish genuine choice. Nothing influences saleability or price more than this one issue.
At BCMS we hold negotiative dialogue with an average of 230 prospective buyers to ensure that when we get to the bidding stage we are still talking to 6-8 highly motivated buyers. There is no short cut. Competition has a major influence on three things:
- The price paid
- The terms accepted
- The speed of the deal (more important than most people realise)
What steps can I take to make my business more attractive to potential buyers?
At BCMS we look for at least one genuine strength in the following five areas:
- An attractive, dependable, balanced client base
- Genuine future potential for growth
- The ability to generate cash (a bit rare)
- Good client retention or dependable income streams
- Scarcity value
We look to avoid the following:
- Serious unresolved litigation
- Impending industry changes that could pull the rug from under the buyers feet
- Major financial debt
- Serious skeletons in the cupboard
To find out more come to one of our free seminars these are held weekly around the country (see www.bcmscorporate.com).
How do I go about making people aware of my business?
Be totally active in your marketing. Selling a business is primarily a selling issue it is not an accounting issue. It is interesting to note that the best purchasers are often not looking to buy. An acquisition may well not be on the agenda. The only way to find such buyers is through an active search.
Successfully selling products involves active enquiry generation. Why should selling a business be any different? At BCMS, we have developed a vast database of tens of millions of companies. Using this globally unique resource we actively, but confidentially, contact (on average) hundreds prospective buyers just to sell one company.
Additionally, a search should not be restricted to the UK. Overseas buyers seeking access to the UK will often buy small to medium-sized companies and premiums may well be paid for a strategic acquisition.
Failure to find hundreds of good prospects will almost certainly result in no sale. Interestingly, the more companies you approach the luckier you get! The average UK Corporate Finance company approaches 12 competitors by mail is virtually certain to fail.
It is also essential to think laterally. The best buyer is far more likely to be complimentary than competitive.
