Category: Helpful tips for SME's | Preparing to sell a business
Fri 7th February 2020
If selling your business has been on your mind, asking yourself why you want to sell is an important thing to do. Not only is it a worthwhile question to answer for yourself, it’s also one of the first questions a potential buyer will ask and your response can have a major impact on the sellability and value of your business.
The last thing you want to do is give any potential buyer the perception that you’re selling your business because it’s in trouble because your reasons don’t stack up.
Below are the most common reasons we’ve found for business owners wanting to sell their company.
It’s no surprise that retirement is one of the most common reasons for wanting to sell a business. In fact, many buyers actively look for retirement sales when looking for businesses to purchase because it’s such an understandable reason for selling and because a retirement sale will often mean the business has been running well for some time, with a management team already in place.
The natural business cycle
In our experience, the sale of B2B service sector businesses is driven far more by the business cycle. Owners of these businesses are younger, particularly with IT and software companies. The driver for sale is when the business reaches certain tipping points on the growth curve. Typically with SMEs, this is when the turnover reaches £500k, £1.5m-£2m and £5m.
Below we’ve shared some advice for you if you find yourself reaching those tipping points yourself and you’re looking to sell your business.
At around £500k, you should start to extract yourself from the service provision side of your operations and focus on team management and building sales to support the team. If sales do not continue to grow significantly, the company lacks critical mass to cope with client and/or staff churn and the business stagnates. Joining a larger organisation gives your business that critical mass and takes the burden off your shoulders.
£1.5m – £2m
At £1.5m-£2m, it’s a good idea to put an operational manager in place to run the service provision team. To continue growing, you’ll need a dedicated business development manager/account manager to keep the current client base happy. You’ll also need to put in place good financial management and credit control systems and staff.
This is the tipping point where the business is no longer “lifestyle” orientated. Joining a larger organisation or bringing in new experienced business owners takes the responsibility off your shoulders and enables the financial investment required to take on more senior staff and increase the marketing budget to achieve greater growth.
At £5m+, the company comes on to the radar for mid-sized (£10m-£50m) trade buyers and private equity firms looking to build mid-sized groups. For companies that reach this point, this has often been the initial long term plan. At this point you’ll have a strong management team in place and have good prospects for continued growth, with a number of avenues to choose from.
Change in personal circumstances
We’ve found that a change in the personal circumstances of the owner tends to be what precipitates the sale of very small businesses (<£500k) or lifestyle businesses. For larger businesses, there is more at stake in terms of valuation, therefore owners are more likely to wait until the business is in a good position to sell well.
A number of the personal reasons to sell that we have encountered are:
Inherited wealth: The owner no longer needs the income generated from running the business.
Desire to move abroad: We have helped business owners sell-up in order to move to Canada and Australia, as well as foreign nationals wishing to move back home.
Dispute between business partners: Despite good intentions and friendships at the beginning, business partners often develop different aspirations and/or financial needs from the business, which can lead to serious tensions between the partners. If one cannot buy out the other, then the best option is to sell before the business is affected.
Serial entrepreneurs – also known as a business broker’s only source of repeat customers – are some of the most interesting people we get to work with. Typically, they will build a business to a certain point over 3-5 years with the sole aim of selling it when it achieves certain metrics.
Before you sell
So you’ve figured out your reason for selling. Great!
However, before you sell there are a number of additional things we think you should keep in mind.
Timing of the sale
When to sell is often just as important as why.
Getting your company ready to sell
We’ve mentioned this a bit already, but having everything in order before you approach any potential buyers is paramount. We’re talking about audited financials, a great executive/senior management team, watertight growth plans and the right technology in place. Tick all the boxes, then go back and check them again.
Finding the right potential buyers (link to the who will buy my business article)
Selling a company is not always only about getting the best price. If you’re not selling 100% of your business, or you plan on staying on with the business and working for the new owners, it’s just as important to find the right buyers, rather than simply the buyers that are offering the most money. Think about the future of your company and your staff as well as the total valuation.
Think about the buyer’s reputation, their caliber, culture, and the chemistry you have (or don’t have) with them too. All of these are important factors to consider.
Proper exit planning goes a long, long way when it comes to selling a business, so make sure you spend the necessary time to get everything in order. That way you’re more likely to be selling in your own terms, rather than the market’s – whatever your reason for selling is.
We hope you enjoyed this article and found it useful. If you do have any questions for us about selling your business, please send us them using the contact form below. Alternatively, should you prefer to call us, you can do so on 020 8090 9380.