In the first part of our advice to entrepreneurs thinking of selling up or looking for a merger partner, we focused on maximising the existing positives to optimise the outcome. Now we turn our attention to some of the less pleasant aspects of a business sale: how to minimise or even eliminate those negative parts of the enterprise that buyers will use to bargain down the price, or which will put them off engaging with the sales process at all.
Ensuring your business looks attractive to buyers
There is no business that can’t be made more attractive, at least in the eyes of potential purchasers, by smoothing off its rough edges. Before starting any sale process, it is vital to identify the downsides and come up with a plan for each of them. The simple objective is to maximise the value, though the process of may be complex and can take time to work through.
Does it look like a lifestyle business?
One of the most damning comments about any enterprise is the accusation that it is a ‘just a lifestyle business’, run in an uncommercial way for the sole benefit of its owners. Tell-tale signs include unrealistically generous remuneration packages, non-working family members on the payroll and in the pension scheme or profits diluted by passing significant levels of personal expenditure off as business costs. Owners sometimes commit excessive marketing budgets to indulge their passion for a sport or a cultural activity, without any obvious benefit for the business. Holiday homes in the balance sheet and their running expenses in the P&L is not a good look. The list is endless.
It’s one thing to admit to these issues in a sale memorandum document and adjust the core financial profile to reflect them, but quite another to expect a buyer to sort them out post-acquisition. These are nettles to be grasped before putting the company on the market.
Do you have undocumented arrangements
In a perfect world, all relationships with customers, suppliers, landlords and other stakeholders would be fully documented. In practice, some will have been properly recorded originally, but circumstances have changed without the original paperwork being updated. Other arrangements have grown up through custom and practice without be formalised. These messy loose ends all need tidying up before marketing a business for sale.
Except in the most ruthlessly-efficient businesses, every list of customers is like the proverbial curate’s egg. For decades, business gurus have preached about the 80:20 rule, which dictates that too often 80% of profits come from dealing with 20% of customers, and asked why anyone bothers with the other four fifths of the receivables ledger. This may be an over-simplified cliché, but it’s an important question for owners to ask themselves ahead of a sale. Busy fools rarely secure the best price; that prize goes to entrepreneurs running leaner entities with higher margins from lower activity and slimmer overheads as a result of their self-discipline.
Loose credit terms and persistent bad payers are key issues too, the former because they soak up valuable working capital, the latter as bad debts waiting to happen. Over reliance on one or a small number of customers is another red flag.
Suppliers and service providers
Supply chain sustainability is the hottest of all topics in the wake of the pandemic and now as the Ukraine war further disrupts global trade. Just-in-time is a dead strategy. Far better to have more localised arrangements with a healthy element of cautious just-in-case planning built in to them. Modern procurement thinking condemns supply chains built on low pricing alone. As well as practical sustainability, all the other range of ESG considerations are no longer just theoretical ‘nice-to-haves’ to which to pay lip service. Interested parties now have no choice but to take these issues into account and any shortcomings will be reflected in the price they offer. As with customers, credit terms and over-reliance on single sourcing can also be key factors.
One man band companies dominated by a single entrepreneur supported by weak or ineffectual managers tend not to sell well, if at all and certainly not for good prices. Establishing a sound management structure or plugging gaps in an existing management team is an essential prerequisite for marketing a business.
Any serious interested party will carry out in-depth due diligence, which is likely to expose all of the potential weaknesses we have highlighted. A wise precaution is for vendors to undertake the exercise on their own company before any marketing takes place, preferably in tandem with experienced M&A professionals rather than using some ‘how to sell your business’ guide downloaded from the internet.
Working with experienced M&A advisers
The list of possible downside concerns we have covered is not exhaustive. Professionals with a track record of working on successful sell-side M&A assignments will identify the areas needing attention and will be able to work with vendors to guide them to practical and pragmatic solutions. The earlier they are involved, the less distraction there will be for the owner and management and the sooner the business will be in good shape to be sold.
If you believe some of these issues could affect your business as you consider selling or merging it, Opus has a team who can assist. We have the experience to help you achieve your objectives by steering you towards minimising the downsides and maximising the positives. Opus has offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.