How To Sell Your Business For The Price You Want
Why Are You Selling?
There are many reasons why business owners choose to sell their business including a desire for retirement or to hand over succession to other family members, business partners or management.
Other reasons may include:
- To acquire money to fund growth, when the opportunities available to a business are greater than can be exploited by the business based on its own financial resources.
- To become associated with a larger firm, allowing access to their developed distribution channels or their particular manufacturing or marketing strengths.
- To allow concentration on a particular area of operations without having to worry about ‘the whole shooting match’.
- To pursue other business interests.
- To reduce risk by ‘banking’ some or all of the cash made in building up the business, thereby eliminating some of the personal risks that will come from making future business decisions.
Whatever your reasons, you need to decide that you are serious about selling your business, as it is not a decision that should be taken lightly. After all, once your business is sold, it is sold. In addition, the process will take up an enormous amount of time and effort and will cause significant amounts of disruption to the business when customers, competitors, employees and suppliers find out that it is being sold.
Nevertheless, if you have successfully grown a business, sooner or later you are likely to consider selling it. In addition to disposing of all the worries and responsibilities, you will be looking to reap the financial rewards of all the hard work that you have put in over the years. However, the prospect of a sale for an entrepreneur (who has often founded the business) can create mixed emotions. On the one hand there is the prospect of realising the value of the business that has been built and obtaining both financial freedom and freedom from the demands, risks and worries of running a business. On the other hand, letting go of your baby which you have sweated and worried and slaved to build can generate a strong sense of loss, particularly if you feel responsible for the prospects of staff and managers left in the business.
Many owner-managers therefore find it harder than you might expect to decide whether or not they ought to be selling the business.
The principal reasons for selling divide into a number of personal and business requirements.
Banking the money
Often much of a business owner’s personal wealth will be tied up in the company they have created. A sale of the business therefore offers the principal opportunity to convert this holding into cash which allows the business owner to diversify their investment across a range of different types of asset and investments, thereby minimising their exposure to the particular business’s health or otherwise, and to enjoy the benefits of having created a successful business.
Reduction of risk
Often in the early days of a business, despite the legal status of limited liability, the owner finds that they have had to put up personal security in order to obtain bank funding, or even to give personal guarantees in order to obtain certain supplies, ranging from property leases all the way down to a photocopier. The effect of these personal guarantees is that the business owner is liable for the debts of the company in the event of the company’s failure, and we often find that such personal guarantees, given in the early days of business, have never been fully removed. In addition, the responsibilities of directors grow ever more onerous with every piece of legislation and, for example in the event of insolvency, directors face the prospect of potentially being made personally liable for some of the company’s trading losses. It makes sense therefore for owner-managers at some point to seek to reduce their exposure to such risks by selling the business to others who are willing to run it.
Health concerns or retirement
The above points are particularly relevant when the owner-manager decides it is time to retire or their health starts to fail. In fact, many businesses are sold not because of any financial considerations, but principally through some change in the owner’s life; however many entrepreneurial business owner-managers seem to thrive on the activity and mental challenge of running their own business well into their 70s and later.
Entrepreneurs and owner-managers are human, and they do get bored. Those who are highly entrepreneurial may find that once they have established a business they sooner or later become bored with running the same thing and wish to move on to new projects. Others become bored with living under the continual pressure, and decide they wish to pursue other interests, seek to retire, or occasionally, seek to hand on the administrative and managerial aspects to others in order to concentrate on the particular aspects that they love.
Money to grow
The faster your business is growing, the greater will be its demand for working capital to meet its expanding trading, together with investment capital to support it in exploiting new opportunities. For this type of company, achieving a sale of part of the owner’s interest can be the route to acquiring the capital needed to take on the opportunities that arise, but this will naturally involve some form of loss of control of the business in return for the external capital introduced. In these circumstances an entrepreneur has to decide whether the opportunities offered by this extra money compensate for the restrictions on their independence.
Considering the implications
If you are thinking about selling, think through the implications for your personal life. How will you feel once you have sold up? What are you planning to do next? When deciding whether you wish to sell, you should consider the above motives. Which apply to you?
If you are considering retiring bear in mind that your business environment gives you a high degree of structure to your life. Moving to retirement will be a major change in lifestyle for which you need to prepare. Therefore seek out other business people who have sold up, and talk to them about both the process and the impact of having sold up on their lives, their relationships and what they have gone on to do.
GOLDEN RULE 1
Have a good reason to sell (that is logical to the buyer)
The buyer will want to know why you are selling. The more valid your reason for selling, the more serious the buyer will be. If you do not appear to have a valid reason for selling, the buyer will be suspicious and think you are selling because there is something wrong with the business that they have not yet spotted or you are not serious about selling. If they are suspicious about the business they will not pay you as much for it.
KEEP YOUR BUSINESS OFF THE MARKET UNTIL YOU WANT TO SELL
Once you have decided whether you want to sell, the next question is ‘When to sell?’
Some owners take the attitude that the business ‘is always for sale’ for the right price. These businesses are not really interested in the sale but if someone is prepared to make them a silly offer they would consider it.
The problem with this approach is that a serious buyer with a serious interest is committed to expending a high degree of cost in time and cash in pursuing an offer through to a sale. Stop for a moment and think how the ‘we’re always for sale if the price is right’ approach appears to a serious purchaser. They could spend a lot of time and money pursuing the purchase of your business only to find, in the last analysis, that you are not actually interested in selling it. This may also mean that you miss out on what otherwise might be a good offer.
Then bear in mind that often the most easily accessible buyers for your business (if not necessarily the best) will be somebody already in your trade. How small an industry do you work in? You may well find that word quickly gets round about those people who are ‘always for sale but only for silly money’, but who are ‘not serious about going through with it ’. If you get yourself tarred with this brush, you are unlikely to attract a serious buyer on the offchance that you are really going to go through with it this time.
Worse still, should you later decide (or are forced by circumstances) to attempt to really sell the business, how many purchasers in your industry, knowing this reputation, are going to take you seriously? In effect, therefore, you will already have spoilt part of the market.
Or worse again, if the market knows that the business has been for sale for a long period, it may come to be perceived as ‘damaged goods’ because many potential buyers will suspect that you haven’t achieved a sale because there is something wrong with your business. If you get yourself into this situation, how successful are you going to be when it actually comes time to sell? And what price are you likely to attract?
GOLDEN RULE 2
Be serious about selling
Don’t be for sale until you are for sale. Ensure that buyers know that they have a one-off opportunity to deal with a serious seller who is committed to go through with the process of selling and won’t waste their time and money.
SO WHEN SHOULD YOU SELL?
You are likely to get the best price for your business at the point when its growth prospects appear highest. The growth prospects of your business will appear best when:
- your company’s business is growing (has been growing strongly and has prospects of strong future growth)
- your industry is growing and
- the outside economy is growing.
Ideally, therefore, you want to be selling at a time when your performance is good and your prospects are better.
It is a fact of life that many entrepreneurs are attracted to high growth industry as an expanding market offers easier opportunities to create a new business. What you must bear in mind however is that every high growth industry eventually settles down to a much lower rate of growth which cannot support new entrants into the market and often cannot support all of the existing players. Therefore many sectors, from skateboard shops through to nursing homes, golf clubs, and mobile phone shops, will show periods of high growth with large numbers of players entering the field only to have a ‘shakeout’ as the rate of growth declines and the less successful players go to the wall.
In buying your business, purchasers will be putting a value on the prospects of the business.
When picking your moment to sell therefore, it pays to ‘leave something in it for the next man’. Remember that selling a business is a process that will take some time. Many entrepreneurs are tempted to hang on into a growth industry, attempting to squeeze every drop of growth out of the business and aiming to sell right at the top of the curve (just before B in Figure 1). The danger with this approach is that you just might be very lucky and sell out at exactly the right time. However, bear in mind that the sales process will take several months to complete, from start to finish. The chances are that you will not be successful and will miss selling right at the peak.
The point to note here is that the value of the business at point A is likely to be much greater, or as great as the value of the business at point B because the business at point A is being valued on the basis of continuing growth as perceived in the marketplace; whereas the value of the business at point B is being valued on the basis of a flat market. Selling at point A may therefore get you a better price than selling at point B, as even though point B is higher, a buyer may ‘overpay’ at point A.
Figure 1. Buyers buy on trends.
Moreover, the value of the business at point C will be based on a declining market and although objectively the business is at the same level as at point A, a buyer will tend to underpay, based on the current declining trend.
You should review your business every six months or so and consider whether now is a good time to sell. In fact, asking yourself the question: ‘Would people want to buy my company?’ is a good test of whether you are generating value or not. Because if the answer is ‘no’, what does this tell you about your business?
Keep an eye, therefore, on the value of your business and the rate of growth of it, its industry and economy in general.
GOLDEN RULE 3
Choose your moment to sell, do not have it forced upon you
Be proactive about deciding when you want to sell your business. Never allow yourself to become a forced seller of your business as a result of economic or other reasons as you will achieve a worse price because first, you will not be selling at the most opportune moment to maximise value, and second, anxiety will force you to accept worse offers than you would otherwise consider.
WHAT IF YOU NEED TO SELL BUT YOUR BUSINESS IS IN DIFFICULTY?
If your business is in difficulty, should you attempt to sell it you must accept that you are unlikely to get as much for it as you would if it was in good health. As you are a distressed seller or selling a distressed business, the value you are likely to achieve for your business will be low.
Therefore, if your business is in difficulties, in order to improve the price you are likely to achieve, it may well be advisable to attempt to turn it around first so as to be able to market a business with a better current trading performance and future prospects.
If your business has become quite severely distressed, and in practice would fail one of the tests for insolvency set out in the Insolvency Act 1986, in that it is unable to pay its debts as they fall due or that its liabilities exceed its assets, then there are further problems in attempting to achieve a sale. These are that, in the event of a liquidation, the insolvency practitioner who has been appointed will have a duty to look at transactions during the period leading up to the insolvency, particularly those undertaken when the company was technically insolvent, to see whether any of these should be reversed. In particular, they will be looking for transactions at undervalue where they are able to argue that an asset has been sold off cheaply (eg you have sold the Rolls Royce to Joe, your brother, for £5 the day before the liquidation), or preferences, where they are able to argue that you have acted to put one creditor in a better position than others (eg you have paid Joe, or have transferred assets to him in settlement of his account prior to the liquidation, when you have not paid other creditors).
Thus any sale or transfer of a business’s assets in the period leading up to a liquidation may be subject to a challenge in the courts by a liquidator. They may also feature in the liquidator’s report on the directors’ conduct prepared for the DTI and upon which the DTI decide whether or not to take directors disqualification proceedings.
For further information about insolvency and business turnaround issues, try www.turnaroundhelp.co.uk or Turning Your Business Around (How To Books, ISBN 1-85703-767-7).
In addition, by taking as many of the steps suggested in this book as possible, even if over a reduced timescale, you will at least present your business for sale in its best possible light (known amongst the turnaround profession as ‘polishing the pig’).
GOLDEN RULES SUMMARY
1. Have a good reason to sell (that is logical to the buyer).
2. Be serious about selling.
3. Choose your moment to sell, do not have it forced upon you.