Increasing the value of your business28th December 2013
As we mature most of us will hope to reduce our involvement in day-to-day work activities and extract value from our businesses, either through a business sale, family or management hand-over, or financial restructuring. After all, life is about priorities, and whether it is a fresh challenges or the allure of grandchildren, we all need to enjoy getting the balance right.
For some a business exit may happen in their 20s, for others in their 70s, but there tends to be just one opportunity to really get it right, and often this is occasioned by an approach from a suitor or the impact of some positive or negative external event, perhaps in the economic marketplace or to our health. As with most things, planning ahead tends to bring its rewards.
The basic principles of selling …
Just like any good business should be focused on it’s customers, a business sale needs to be focused on the needs of the buyer, and doing it right takes thinking and preparation in order to optimise the deal value and structure for the seller in a way that also works well for the buyer.
Buyers are principally looking for one thing; a future cashflow. This will be their return on investment, and they will calculate this based on their expectations on the future profitability and tax burden of the business, the investment required to achieve that performance, the funding commitments they will take on to buy and invest in the business, and the resulting free cashflow.
If you are fortunate you will find a strategic buyer, who is looking to secure market share or territory in the expectation that they can keep competitors out, or achieve economies of scale, or integrate your business in ways that add real value to their own so they are prepared to pay a premium. This is why many acquisitions start off by diluting the shareholder returns of the acquirer, as they are focused on longer-term gains.
So the starting point is to establish how to achieve and demonstrate the optimum sustainable profitability and cashflow, and other valuable aspects of the business like the brand, intellectual property and other aspects that may be of high worth to the buyer.
By understanding the needs of the buyer, we can concentrate on selling the benefits of your business.
Many careers have been dashed by bad acquisitions, and however carefree the buyer, their funders will be taking a long hard look at what they are stumping up money for. So often you will be satisfying two different entities, each with different objectives, in order to get the deal away. This means ensuring they can both focus as much on the value of your business rather than the risk of your business.
So minimising the perception of risk is critical to ensuring the buyer focuses on the right things. There will inevitably be a due diligence process, and you want this to go smoothly to impress both the buyer and funder, and to keep their concentration on the opportunity rather than niggling detail.
Risk embodies many things, but minimising the perception of risk may include;
- Dependable revenue streams and margins, with any variations explainable and forecastable.
- Dependable customer base, by sector and clients with a strong level of repeat business.
- Dependable staff, with a motivated management team exhibiting strength in depth, supported by appropriately skilled and trained staff.
- Dependable infrastucture, with capital expenditure and administrative systems robust and up-to-date.
It may be that a “risky” feature of the business is what attracts the buyer. Perhaps the fact that you have sustained far more than your expected market share for many years, or a niche part of the business with great growth prospects. But ensuring that other risks are not an issue enables the buyer to focus on these positive aspects.
This requires a real focus on ensuring that the day to day activities of the business, and the contracts you rely upon, can be clearly and accurately presented. The approach to this presentation is key, for instance profitability may have been curtailed because of heavy investment in growth, and you need to be able to present not just the full picture, but also the beneficial underlying strengths in your business that a buyer could enjoy.
Buyers, buyers everywhere …
Sadly buyers don’t grow on trees, and finding the right potential buyers with the right funding capability is critical.
Ideally you want a range of them who will compete against one another. At other times even if dealing with just one buyer it is possible to extract extra value for “exclusivity to deal”, after all they don’t want to waste money and energy on an abortive competitive acquisition and may pay a premium for that.
Understanding potential buyers’ strategies, and where you may fit in, is also important. With public companies the Chairman’s/Chief Executive’s statements in the annual report and accounts can be very instructive, as will be any investor presentations they make, both of which will be available on their websites. It isn’t just in what they say, but looking at what is missing that may indicate how your business might add real value to theirs, for instance in the scale or margins you achieve, or in the distinctive offering or synergies that they could adopt.
Concentrating on the business…
Many business sales go awry because the business owner is so distracted by the business sale that they take their eye off the successful running of the business. Optimising both is important, and this is why external support is so necessary, after all there are only so many hours in every day, and you are unlikely to have a wide range of business sale negotiation and structuring experience.
Think of all that can go wrong with a house sale, and multiply it many times over. The critical thing is to find the right buyer with the right funding at the right price, agree the deal structure in detail before it reaches detailed legal drafting stage, minimise the time during which things can go wrong, minimising your risk and tax. This all takes timely, effective and decisive project management.
Not your only strategy…
A business sale should never be your only strategy. Businesses that are purely built to be sold on generally lack the dependability and sustainability that is attractive to buyers.
Your core strategy should be about building and sustaining success, and having that as a fall-back if a sale doesn’t happen isn’t a bad place to be.
Of course your core strategy needs to be good, and if it is then there are a myriad of other ways of extracting income and capital from a business which can ultimately be more rewarding than the one-off delight of a completed sale.
At the right stage…
FYI is happy to work at an early stage to support the business and its work towards achieving a sale, moving into project management at the right time with a range of existing or new specialist advisers to ensure that all bases are covered.
FYI… Making it happen.
Since this article was written we have introduced The Sellability Score … click here for more information.