For most business owners, selling a business is the most significant financial transaction you will ever make in your lifetime.
It's the opportunity to make up for all those years of lost earnings when you were reinvesting to build your business; the chance to realise the dream of financial security for you and your family.
Given this, one would think that owners would leave no stone unturned in their planning for their exit.
In reality, however, this is rarely the case.
If you're an owner thinking of selling at some point in the next five years, what should you start doing now to make that exit as smooth as possible and to ensure you receive the full value of your business?
How much do you need?
The first step may surprise you – engage a financial planner.
I’ve been speaking at financial advisers’ conferences for many years now. I always try to ask for a show of hands of how many engage their own financial advisers. The result is always below 5%.
I engaged a financial planner myself. This is for two particular purposes.
Firstly, I can’t challenge my own assumptions. I need someone to help me work out what my future might look like, to dare me to dream a little.
Secondly, they provide the discipline of ensuring that my cashflow projections are as accurate as possible. Both of these outcomes were crucial in the sale of my business.
In the exit plan process, it's particularly important to work out how much you need to sell your business for. This will be different from the value of your business. If your ‘need’ figure is higher than your value, then you can’t sell yet, and you have clarity of what you need to do over the ensuing years.
If your ‘need’ is lower than your valuation; great news, you have options!
Get a valuation
Adviser practices are relatively easy to value. It's therefore a mystery to me as why so many people base the value of their business on what they read in the papers, or what they heard a friend sold for.
Let’s get one thing absolutely clear: AN OFFER IS NOT A VALUATION.
Just because someone was offered a certain amount, before the due diligence process, does not mean that is what they will get. Indeed, just because someone says they sold for a certain amount of money, doesn’t mean they will receive that amount at the end of the process. All sorts of things can happen in the meantime; the amount that owners end up with in their bank is rarely the amount they thought their business was worth at the start of the process.
As a corporate finance adviser once said to me: if your payment is staged over a few years, assume the value of your business is the first payment, and treat everything else as a bonus.
Aim to be pulled not pushed
It's been said many times, that the biggest barrier to small businesses are their owners.
I thought this was a load of phooey until I exited my business and then saw how everyone stepped up in my absence. I had been in the way as much as I may have been inspiring.
Owners are often strong characters – you need to be, to start a business. There comes a point in time, however, when what the business needs is not a visionary at the helm, but an engineer in the boiler room.
Many adviser practices have owners who are also advisers, and who are also running the business. These are three very distinct roles, which requires very different skill sets.
Having one person in all three roles also makes it very difficult for them to exit, especially if they are the type who finds it hard to let go of control.
Having something outside of the business to pull you away from it is therefore essential. The day will come when you will no longer be running this business – what will you do with your time then?
Developing these outside interests, whether personal or business, will significantly help the process as you come nearer the sale.
Understand your options
In simple terms, there are three ways of selling a business:
- Trade sale e.g. consolidator or other local firm
- Employee ownership trust (EOT)
- Management buy-out
Which of these will be right for you will depend entirely upon your circumstances, e.g. a trade sale may be best if you want a quick exit, whereas the EOT will ensure you will receive a fair value of the business while also seeing it continue beyond you.
A management buyout is often seen as a favourite, although this does depend on having a team you trust to run the business, and who are in a financial position to buy you out.
We offer a feasibility study for firms to help them understand which option might work best, and an EOT works for many more companies than they expect it to.
Transition before transaction
When it comes closer to the time of selling, most owners speak first to solicitors, accountants, business brokers or corporate finance. These are people who will help you deal with the transaction.
To properly prepare a business for sale, however, the company must first be transitioned. This means working on the culture of the business; managing the expectations of the leadership team; mapping out processes; sorting out skeletons in the closet such as minority shareholders; and many more things.
In my experience, almost every single owner underestimates the time it takes to get a business ready for sale. The net result is a lack of options, increased fees to advisers, and a reduced sale price.
If you're thinking you might wish to sell your business in the next five years or so, the time to take action is not five years’ time: it is now.