The first in the series considers
pre-sale preparations and the process of going to market.
Deciding when to sell can be key. Take account of the state of your business and
its industry, its prospects for growth and the fact that selling a business can
take up a lot of a business owner’s time – you will need to have the resources
to keep the business running whilst you focus your attention on the sale.
A sensible way to ensure your business achieves
its full potential value and is attractive to buyers is to carry out a review
of its documents, processes and systems.
For instance, are all contracts signed and dated, are there any
disputes, are your employment and data protection policies up to date, will
there be issues with third party consents (suppliers and landlords)?
Any issues will be flushed out when the buyer
carries out its ’due diligence’ but it is always best to identify and address
issues before going to market.
The first step in agreeing a price with a buyer
is to undertake a valuation of your business.
There are a number of ways to value businesses
and the most-appropriate method will depend on many factors including the size
and nature of your business, the market in which it operates and the types of
buyers you will be approaching.
Businesses are most often valued by a multiple
of their profit. The multiple used will
vary depending on factors such as risk and uncertainty, the buyer’s cost of
capital and expected growth of earnings. Typically, the multiple will be
between two to ten. This valuation will be adjusted to take account cash/debt
in the business and working capital requirements.
The adjustments are often subject to complex and
lengthy discussions between the parties’ accountants.
Asset-based calculations will take the value of
the assets of a business and subtract its liabilities. These methods ignore the value of potential
earnings and are most often used for liquidations or non-thriving businesses.
Whichever method is used, you can only realise
the value of your business if someone is willing to buy it so the valuation is
only the starting point. The next step is to find a buyer.
FINDING A BUYER
Finding the right buyer will not
only help to maximise the sale price but also limit the risk of transactions
Supply and demand dictates that the
larger the pool of interested buyers, the higher price your business will
command. That being said, there is no point wasting time courting potential
buyers who are not serious about purchasing your business or who are unlikely
to have sufficient funds to do so.
Do I need to instruct a broker or can I “go it alone”?
Brokers and corporate finance
advisers can help to create a market for your business and connect you with
potential purchasers. Some offer
additional services such as carrying out business valuations, advising on
transaction structuring & finance arrangements and coordinating your wider
team of professional advisers/project managing.
There are costs to these services which can be complex.
Some brokers will want an upfront fee for selling your business, others may want commission only. Fees will vary depending on the size and complexity of the transaction.
Typical brokers fee structures include:
Advisory fee is a fixed
sum payable whether or not the transaction completes;
Success fee may be a
fixed sum or a certain percentage of the purchase price and only becomes due if
the transaction completes;
Termination fee is a
lower fee payable if the transaction does not complete and covers the costs of
Staged fees is a series
of payments upon achieving specified milestones in a transaction; and
Fee tail or tail gunner is
a fee which becomes payable if a transaction completes within a specified time
after the broker’s engagement is terminated.
For many sellers, selling their business can be daunting and time consuming. Brokers can also assist by ensuring the business is prepared for the scrutiny of potential buyers. This article deals with a potential seller’s pre-sale preparations including what you can do in good time before the transaction begins (company health check, valuation). In part 2 of this series, we will introduce the wider team of professionals who are likely to be involved in the sale of a business and in particular the structure of the sale.
The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP