Category: Helpful tips for SME's | Preparing to sell a business
Wed 13th November 2019
This is a question that’s often posed by business owners who are deciding between selling their business now or waiting to achieve a potentially higher valuation.
It’s a tricky decision to make but, to be blunt, unless you’re selling your business because you’re looking to retire, or for other personal circumstances, there are only two questions you need to ask yourself here: Will you add more value to the business if you wait, and is the market about to suffer, or currently in the middle of, a downturn?
If you don’t think you’ll be able to add much more value over the next few years, then selling now is probably the right thing to do – you may decide to give it your all for another two years to revitalise sales and grow the team, but how much time and money will this take? And will it make a big difference?
If resources are available and you can add value by growing profits strongly year on year, then perhaps consider waiting.
When it comes to the question of market downturns, it is much, much trickier to figure out as you’re being asked to predict the future.
According to Divestopedia, “A bear market can easily result in a downturn that erases 40% or more of the value of a privately held business. To recover that loss, the same business would have to increase in value by 10% annually for at least six years consecutively just to get back to even, and that does not consider the time value of money or the additional risk the business owner takes in the form of owning and operating a business.”
While the above is a bit of a worst-case scenario, it is worthwhile bearing it in mind and taking some time to think about the current state of the market and how things may change in the near future.
There are a few other things to think about as well, and we’ve shared our thoughts on them below. We hope you find them useful.
Come up with a figure
First thing’s first – you need to come up with an ideal figure that you’d like to sell your business for. Knowing what you want and what you’d be happy with will be useful when it comes to negotiations, but it will also help you understand if now is the right time to sell.
For example, you might know what level of turnover and profit is required to be able to sell your business for your ideal amount. You’ll also know how close or how far you are from that number, which will hopefully help you decide whether or not you test the market now, or in a few year’s time.
How strong is the performance?
If profits are growing, you’re reinvesting in the business, and there are more employment opportunities and potential avenues for growth in new markets and new products, then your business will look very attractive to a buyer.
At the same time, you may feel you are able to boost the company’s value significantly if you can maintain this growth for the next few years.
In our opinion, if selling your business is on your mind, then there is rarely a better time to test the market than when things are on the up.
Service contracts and recurring revenues
Long-term recurring revenues and service contracts are the holy grail for service businesses. Forecasts are easier to produce and are more accurate, cash flow is steady and there’s a very strong financial foundation upon which to grow a company further. All of which makes for very attractive reading for a potential buyer.
If your business doesn’t have recurring revenues, it would be a very worthwhile exercise to explore ways to incorporate them. For example, if you’re running a design agency, facilities management or IT company, perhaps you can convince ad-hoc clients that pay per project, to move to a long-term monthly retainer instead?
A strong team
Businesses that rely on their owners are businesses that don’t sell. If you are the owner of your business and you are crucial to its success, then you’re going to need to make some changes.
To start, you’ll need to hire some talented people to take tasks off you such as quoting for work and dealing with key clients. A strong management and leadership team (not including you) is very attractive to a buyer and will go a long way towards ensuring the future success of your company (and the buyer’s investment).
Essentially, the company needs to be able to run as successfully without you as it does with you.
Excellent financial controls and management accounts
This one is so obvious that we feel it should go without saying. However, you’d be surprised at how many companies we come across that have neglected this crucial aspect of running a business.
Please, please get your accounts in order. This point cannot be overstated. Buyers want to see how healthy your company is financially, and the more complete and robust your financials are, the more confident they’ll be in the ROI they’ll expect and the faster they’ll understand your situation. Nothing puts a buyer off more than a company with poor financial records.
Show me the money
In the sale of a business, the headline value is rarely paid 100% on completion, particularly with service sector businesses for sale.
Whilst the buyer will want to mitigate the risk of losing business on the transfer of ownership, this also represents an opportunity to share the upside of growing the business. Together with the resource, fresh ideas, and expertise of a well-matched buyer, you can grow the business to its full potential value.
More often than not, a good amount of the total value will be paid on completion, but there is always likely to be a period of time post-sale of the company during which you will need to remain involved in the business. It’s important to understand this.
We hope that this article has been valuable, but if you’d like a second opinion about whether or not now is the right time to sell your business, we’d be happy to review your position and give you some honest feedback – at no cost to you.
If that sounds useful, get in contact and we’ll have a chat.