Increase business valuation and saleability in 12 steps
Feb 01, 2019
Richard Wright, founder and director of Prepare To Sell, explains why every business owner should follow the 12-Step Plan, whether planning for sale or managing sustainable growth.
Step 1: Decide when to sell and what sort of deal you are looking for
- Choosing the right time to sell and planning ahead are essential to creating the maximum sale value for your business.
- It is advisable to avoid an exit deadline. Get early guidance on your business’s potential value, then think about what business value you would want or need to meet your aims and ambitions. If there is a shortfall, give yourself time to close the gap.
- The value of a business is highly subjective and valuation methods vary. Make sure the valuation you get is justifiable and realistic.
- Do you want to sell the entire business as a going concern, or part of it? You may want to exclude assets you own such as property or patents.
- You may be required to work with the business for a year or more post-sale (a handover period or longer term as an advisor) so factor that into your exit timing.
- Have you properly considered succession planning for family businesses, management buyouts for motivated teams, and outside investors/management buy-ins to remove glass ceilings to current growth? There are often other options or considerations.
- If you are not a majority shareholder you need to be aware of the potential impact of the deal on your share value.
- Complicated shareholding arrangements often prevent successful deal completions. Tidying up share arrangements needs to be done well before sale to be tax efficient. So get good advice early.
- The sale process can be prolonged and challenging, and you need good guidance on managing the whole process to avoid unhelpful information leaking to employees and customers.
Step 2: Make sure the business can function properly without you
- If you want to sell the whole of your business, its value is based on what’s left after you’ve gone. So the ideal solution is to transfer your skills and expertise to your management team. Let them deal with your customers, under your guidance.
- Make sure customer loyalty is increasingly shown to be with the company, not with you.
- Enable and empower your management team to operate the business without you. If you’re not doing this already, start small until everybody is more confident with this process, including you. With the right management and financial information systems, this delegation does not mean loss of control.
- It is much more appealing for a buyer if your management team can not only operate your business day to day, but also drive it forwards. It is vital to show that the experience and expertise in the business will remain post-sale.
- Passing decision-making responsibilities is a cultural change for most owner-managed businesses. It’s no quick-fix and often needs some outside guidance to make it work. But it is key to growth whether you are selling your business or not.
- By passing day to day responsibility to others, you can concentrate on the direction of the business, and often find a better work/life balance for yourself.
Step 3: Demonstrate a track record of growing sales, profits & cash with good projections
- You are selling what you’re doing now and what you’ve done in the past. But a potential buyer is interested in your future earnings and growth potential. The ability to scale your business.
- It’s therefore much easier to sell a business which is already growing and can demonstrate a good performance track-record.
- It is important to show that sales, profits and cash are growing sustainably. (So growing sales by cutting margin, for example, is not a good story).
- Obviously all this is much easier said than done. If it’s not possible, do you have a good story about the current resilience of the business, and the means by which a new owner can create growth?
- You have to show confidence in the future of your business, even though you won’t be there. So you need a good explanation for selling.
- Place yourself in the position where selling is an ‘option’, not a financial necessity.
- Good, ambitious projections are important for a successful sale, but they must be achievable. They may include the capital investment, skills and contacts the buyers have and you don’t, in order to achieve – but if explained clearly, that’s ok.
- Your business plan needs to explain in detail how you will achieve your aims and targets. If you don’t have a business plan you need to put one in place (with outside help if necessary).
- The ideal time to sell is when profit and sales growth is at its greatest, not when it is ‘under your belt’ and growth has become flat.
Step 4: Reduce dependency on just a few customers, suppliers & staff
- A buyer is looking to build on what you’ve got, not fill the gap created by the business transfer.
- A change of business ownership will put stress on relationships with customers, suppliers and your staff. Buyers are reluctant to buy if there is a high risk of losing a major customer, critical supplier or key employee. So it’s important that you are not over-dependent.
- Can you survive if you lose your biggest customer or your best employee? You need to ask that question of yourself, because the buyer certainly will.
- It is helpful to demonstrate, as far as possible, a broad spread of customers, old and new, some stable, some growing.
- Your largest customer should on average be no more than 10-15% of your sales. It’s not uncommon for 80% of sales to come from the top 20% of customers. But do those 20% provide 80% of your profits?
- Look at ways to reduce the chances of losing them: through incentives, contracts, future loyalty bonuses, etc. Get key staff to train others to cover for them and transfer those skills and that knowledge.
Step 5: Make sure your business’s brand values are clear, attractive & resilient
- Your business is your brand. It’s a complex mixture of experiences customers have of your products, services, people and attitudes. It includes your premises, website and everything people see, hear and feel.
- Make sure your vision of the value of your brand is properly understood and shared by all your customers, employees and suppliers.
- Why not test to make sure the reasons customers are loyal to you are the same reasons you think they are? If you’re not sure, ask them.
- The benefit of your brand is what you are really selling. It’s the ongoing revenue stream that your brand promises to deliver.
- So how strong is your brand? Can you explain its unique benefits to a buyer?
- How easily customers would switch from you to your competitors is an indication of the strength of your brand. Do you command a price premium? What are your customer retention rates?
- How will customers perceive your company brand if you, the owner, are not there?
- Your ‘brand’ and what you stand for must be clear, attractive and resilient.
Step 6: Build & reinforce strong loyalty from customers, suppliers & employees
- We’ve said that transferring your business to new owners can test the commitment of your customers, employees and suppliers. So how can you increase that commitment?
- You could offer customers incremental rebates for future business (maybe a 2-3 year deal), or long-term contracts with customers and suppliers, for example.
- Look at staff loyalty bonuses that are paid if they stay for the next 2-3 years, linked to success and targets.
- Get your management teams closer to customers. Spend time understanding in depth your customers’ worries and their wishes. Lead the process of changes they would like to see.
- Make sure every aspect of your package of products, services, innovations, designs etc are as strong as your customers want.
- Ensure your customers and suppliers are close to the teams that actually deliver that package.
- Show customers a breadth and depth of the talent in your business that is not just yours. Your employees will be motivated by it because they feel valued, and your customers will like the feeling of being able to get answers from a team of well-informed and committed respondents.
- You may have a complex network of suppliers, partnering companies and associated businesses that are key to your success. It is helpful to map this as a Process Flow Chart. It demonstrates the broader basis of your business model, identifies barriers to entry, and shows less focus on you.
Step 7: Make your products & services easy to scale-up and difficult to copy
- A buyer who sees your business as a useful addition to their own range of products and services is bound to ask the question: Do we need to buy a whole company or can we buy key assets and poach some good people?
- Your business is worth a lot more if its operations are very difficult to replicate.
- The key is the uniqueness of your expertise, the appeal of your product and service mix versus your competitors, and the level of product and process innovation. Do you have valuable patents and registered designs? Do you have a large capital base that would be expensive to set up in competition?
- If you’re happy that you’ve done everything to make it hard for existing or new competitors to take business from you, how easy is it to expand your business? A buyer will want to grow what you have.
- A high level of expertise and in-depth knowledge that a bespoke service provider can offer to customers is a good way to command a price premium and keep customers locked in. But scope to expand is restrained by the number of employees with these skill sets.
- If every customer is given its own product or service built around its specific needs, that’s very time-consuming and resource-hungry, and difficult to roll out.
- Providers of bespoke products and services may benefit from exploring a more standardised range of packaged services which are then tailored to customer needs. This can be understood by a sales team with a broader skills base, under careful guidelines for implementation, and therefore expanded much more rapidly.
- The best deal value for your business is most likely to come from a larger company for whom your business is the perfect fit; enabling your business and theirs combined to grow at a faster rate. Think about where that synergy may lie and build on it.
Step 8: Make sure your management & financial information & reporting is good, complete and reliable
- If you don’t delegate many of your management functions already, doing so is a bit scary, but essential for growth or sale. It’s less scary if you know you are still fully aware and informed of everything that’s going on.
- The key to that is putting in place management & financial information systems that keep you fed with accurate information when you need it.
- If you have empowered your management teams sufficiently to effectively operate the business on a day-to-day basis, this information is vital for them to make good management decisions.
- A key indicator of the business’s dependence on you is to see who is in charge of setting and measuring your company’s key performance indicators.
- A buyer will need to see there is a good history of complete, accurate and reliable information, covering all aspects of the company’s performance.
- It would be helpful to make full audited and consolidated company accounts available to prospective buyers, showing your performance over several years.
Step 9: Run the business as though selling is an option not a necessity
- The ideal selling position is to have numerous potential buyers bidding for your business. If you haven’t, that may show if you don’t have ready answers to the questions other bidders would be asking.
- Either way, it’s preferable if you can show that, for you, selling is an option not a necessity.
- It is vital that you demonstrate your ongoing commitment to the business (particularly as you may have to work with or in the business for a period after the sale has gone through). Your enthusiasm – or lack of it – will show.
- The buyer(s) will look at whether you have continued to invest in your business, replacing capital items when due. Have you continued with new product development, training, process innovation, updated website and promotional material?
- Continued investment shows a buyer you still believe in the business, so they can too.
- Good chemistry with a potential buyer is key to a successful sale. Being honest and open will be essential to build trust.
Step 10: Tackle problems that may lead to legal disputes or compensation claims later. Make sure you are fully compliant.
- Many business sales fail at a late stage because of lots of seemingly ‘minor’ details which add together to create a higher overall risk for the buyer.
- A higher risk for the buyer means a lower deal price for you.
- The details which come out of the legal & financial due diligence can mean that the deal price you agree in principle early on is lowered later.
- The sorts of items we are talking about here are things left unresolved that could become a compensation claim or legal dispute in future years for the buyer.
- For example, are all your shareholder agreements as they should be? Are you compliant on all legislation such as Health & Safety, the Environment, Data Protection, Copyrights?
- Have you any employee disputes looming or outstanding, or potential claims from customers or the public? Are all your contracts of employment correct and up to date? Are your trading terms & conditions robust?
- Has the business any future pension liabilities or potential claims for unpaid taxes?
- If these can be addressed before putting your business on the market, you are more likely to sell, and less likely to face a warranty claw-back in the future.
Step 11: Make sure first impressions of your business are positive, professional & appealing
- This is step number 11 because ideally you will want to tackle steps 1 to 10 before you meet a potential buyer.
- The very first impression a potential buyer has of your business is critical. That may be existing knowledge, an Information Memorandum sent out by a sale broker, your website, or your first meeting.
- Your website, brochures, office decor, call-handling reception, your operations and your people will all influence that first impression.
- A disorganised and undisciplined operation will show straight away.
- A good atmosphere created by happy and engaged staff will also show straight away.
- ‘Window dressing’ will not work. A buyer will study every aspect of your operation. Everything you state or imply must be verifiable. If your business has structural weaknesses, address them as far as you can but be honest about them and disclose them. This will help to build trust and reduce the chances of warranty claims later.
- Buyers are more concerned about unknown quantities, and their valuation will reflect the risks they perceive.
Step 12: Appoint the right people
- The deal will only be as good as its weakest link. A poorly drafted sale agreement could see you ultimately receiving a lot less than you expected, or even having to pay some back. So appointing the right advisors is key.
- It is vital that the accountant and solicitor you use (your own or one appointed to represent you) are appropriately experienced in handling deals of your size and type.