Starting and running a business can be challenging, but exiting a business can be even harder! As a business owner you know how important strategic planning is, but you also need to plan for the option to sell or exit the business in the future.
By taking steps to proactively plan, you will maximise the outcome that you want and extracting the maximum value out of your business. While many factors contribute to a successful exit strategy and business sale process, we have identified 10 key steps you can take now to improve the outcome of your business sale and why each step is crucial.
1. Understand the ‘Why’
Selling your business can be daunting and time consuming. One of the key questions that investors or potential acquirers will want to understand is ‘why are you selling?’. It is important to understand your intentions before sell and openly communicate this to your advisors and potential acquirers as it may become a point of contention later in the negotiations. So, before you embark on the sale process understand why you want to sell. Are you ready? And what do you want to achieve? As buyers often like the former owners to stay within the business for a transition period, is this something you are willing to do? Or are you looking to exit immediately?
Understanding your ‘why’ will help keep you focused on the end goal.
2. Use specialist advisers
Selling your business is a team effort. Many business owners may only sell one business in their lifetime, so it’s important to surround yourself with experienced M&A advisers, accountants and solicitors as they’ll help you maximise opportunities, minimise risks and represent your best interests to potential parties. Having experienced advisers can reduce your burden by providing financial, tax and legal advice on the sale structure as well as market research, industry analysis and business valuation expertise to assist you through the due diligence and negotiation process.
Experienced advisers with good industry knowledge will help you control the narrative to potential buyers and position the business to maximise the outcome.
3. Look at all options
The first offer that comes along is often not the only one that is available or even the best option. Your advisers can identify and seek out a range of previously unknown potential purchasers including international corporate buyers, equity institutions, existing management, or long-term employees. Consider potential synergistic opportunities which could improve the value of your business and carefully evaluate options by keeping your end vision in mind.
Identifying and vetting acquirers who strategically align with your exit objectives is key to getting a great outcome.
4. Get organised and document
Many business owners are not prepared for the amount of work and necessary documentation required to support the ‘due diligence’ process demanded by purchasers. Due diligence is an essential part of the exit process as it enables potential acquirers to verify the historic and forecast performance of the enterprise and the associated risks. It can be extremely time consuming to generate and provide the required due diligence materials and historical data to provide confidence to an acquirer and present the business in the best light.
Start by compiling key financial statements, legal contracts and other key information dating back at least three years and looking forward at least 12 months. This information pack should also contain relevant lease agreements, employee agreements, lists of assets, strategic plans, forecast model and business process documents. Your advisers will be key in advising you on the relevant documents to prepare and maintain, as well as reviewing these to maximise the efficiency of the diligence process. The completeness, quality and timeliness of information provided during the diligence process impacts the perceived risk profile and has a significant impact on the potential success of and the transaction value. There is great value placed in a business being ‘deal ready’ to take advantage of opportunities as they present.
5. Keep personal and business separate
It is important to keep personal ‘non-core business’ expenditure outside the business. A business sale value is usually linked to a ‘multiple of annual earnings’, and so the inclusion of ‘non-core business expenditure’ within the operations of the business can reduce the perceived earnings of the business and can have a significant impact on the sale price achieved. Historically if there have been non-core business expenses recorded in the business, they should be separately identified so that the normalised underlying earnings of the business can be demonstrated. Any unintended tax consequences and risks need to be considered. Where possible maintaining clean and separate records for the business operations will help maximise the outcome from an exit strategy.
6. Understand the tax implications
Often the sale of a business is delayed or deferred, as the business owner has not fully understood the tax implications of their current tax structure and they are faced with unintended and unfavourable tax outcomes. Engage with your tax advisor well in advance of any business sale to explore the most tax-effective sale structures. This may include advice on the impact of capital gains tax and related small business and other concessions. Taking early actions to optimise your tax structuring can add significant value to the net proceeds received from the sale of a business.
7. Remain focused on the business
It is not uncommon for owners to start winding down before exiting the business, especially if you are approaching retirement. However, business value can be eroded if management focus is waning due to reduced sales or increase in expenses or debt. Maintain focus. Run the business to its fullest capacity or speed up the progression of internal management teams so the business value is not eroded. You should also consider implementing processes to allow the business to operate autonomously and independent from the owners. This can improve the marketability options for the business with prospective buyers.
Remember, the due diligence phase will also require the involvement of some key staff members. It is worth considering if the core staff required in this phase have the capacity to prepare information and respond to due diligence queries while maintaining their day jobs – consider the need to delegate responsibilities or projects between staff members. To maintain the integrity of the process, it may be important to inform key staff members and remind them to maintain complete confidentiality.
8. Maximise the return on capital expenditure
Closely consider the need to update, replace and expand your capital equipment base. Will the purchase of asset/s improve the capacity and efficiency the business? These will have an impact on how your business is valued by a potential buyer. Ensure your assembled assets are fit for purpose and embracing current industry best practise but be careful not to overcapitalise as you may not receive full value from the sale.
9. Reduce risk for the purchaser
The acquirer of your business is ultimately buying the future earnings potential of the business, so providing a clear business plan and forecast for the ongoing business model that is proven, robust and realistic will reduce their perceived risk and increase your sale price. The real value often comes from the quality of strategic plans and forecasts, as these provide visibility over the cashflows that will flow on to the acquirer. Prospective buyers are attracted to businesses that demonstrate growth or that they can bolt-on to boost their current business operations. A well thought out strategic plan further helps to articulate the future growth potential in the business. Value can be communicated via supportable forecasts demonstrating achievable growth and profitability, backed by strong historical performance.
10. A staged exit can have benefits
It is not necessary to sell 100% of your business immediately. Some acquirers prefer a ‘staged-exit’ as it has the advantage of protecting customer goodwill associated with the existing owners and allows the new owners time to learn the subtleties of how the business operates. There is the advantage of receiving an immediate cash release while still retaining an interest in the business which may continue to grow, demonstrating the businesses’ full value, while reducing your level of responsibility and risk with a clear endpoint. It is about letting go and being rewarded.
At HLB Mann Judd, we understand that selling your business can be a significant event and comes with many uncertainties and a significant commitment of time and resources. Our experienced team advise businesses in various stages of their life cycle and we work closely with business owners to inform them of their business succession and exit options and formulate strategies to help them to unlock and maximise the value built into their enterprise.
While some business owners have well developed and operate with long term exit strategies, other business owners are presented with opportunistic offers to purchase their business which appear too good to pass up. Regardless of how you arrive at the prospect of selling your business it pays to consider your options and plan for the best outcome. If you are considering selling your business in the short term or want to talk through the establishment of a long term exit strategy, our team would welcome the opportunity to help you identify how to make it happen.
This article was co-authored by Eshaanya Rai.