I think the notion of ‘Preparing your business for sale or exit’ is a complete oxymoron. When I hear professionals spout on about this increasingly fashionable topic fueled by the impending retirement of the baby boomers, I often wince and want to run in the other direction denying I ever worked in M&A.
After all what are we talking about here? The equivalent of a lick of paint or a new toilet seat on a fixer-upper or maybe something more substantial – a new roof or a new kitchen? I always despair at people on the show ‘Selling Houses Australia’ who live in abject chaos for years only to see Andrew Winter and his team roll in ‘helping desperate vendors sell unsellable homes’. Invariably the owners are delighted with the results then have to leave their updated home.
Selling a business is not like selling your house. A business is a dynamic living asset made up of customers, management, staff, stock, intellectual property and good will. The business fortunes invariably ebb and flow and valuing a business is far from an exact science. It’s also difficult to try and fix it up quickly, especially for the purpose of selling.
Professional acquirer’s will see right through any attempt to conceal a problem, hide issues or stage the business, it’s also quite possible that the right strategic acquirer may wish to buy your business as it is right now, warts and all. They will often have resources and the capability to handle perceived problems easily, placing little negative value on those issues.
Having said all that, running your business as professionally and profitably as possible for the benefit of you, the current shareholders, should be the all-consuming priority for all owners and their management teams all the time. Not only does the business then become more attractive to you, but guess what? Others are more likely to want to own your business as the fundamental building blocks which create value are put in place.
This is the ongoing process of creating value, and mitigating risk should be the main game. So why on earth only start focusing on that when you are ready to sell your business?
So if creating value, mitigating risk and running the business as professionally and profitably as possible for the benefit of the existing shareholders is what people mean by ‘preparing your business for sale’ then great, let’s get cracking!
1. Develop a strategy and plan for your business
A business with a clear purpose and direction is fundamental to becoming valuable. This work is not easy and getting some outside input can be useful in developing the right strategy and plan. Once completed this work can normally be reduced to a one page summary to help with communication and execution. The clarity that comes from such an exercise can be very powerful. Strategic acquirer’s and professional business buyers love it when a business has a clear vision, strategy and plan.
When all is said and done an acquirer is simply buying the future. When preparing your business for sale, make sure you understand yours.
2. Know your numbers
It’s a fundamental requirement to know and understand your numbers: past, current and by way of a forecast at least the next 12 months and ideally 3 years. Management accounts should be completed monthly and wherever possible should be accurate and produced in a timely manner. These should include adjustments for pre-payments and accruals – the profit for the period under review should reflect what’s actually happened. The balance sheet should balance and be updated monthly.
Do you have a simple finance snapshot available to you by the 15th of the month outlining your previous month’s performance with key insights?
3. Have a strong leadership team
Having a management team in place can be a great way of providing comfort to an acquirer that the business is not a one-man show! Introducing clear expectations and good accountability within the leadership team is essential to operating sustainably. Having a carefully selected and balanced team with the requisite skills adds significant value to an enterprise. Individuals with previous experience within a large corporate environment are not always appropriate in a fast moving small-to-medium sized enterprise. Ensuring candidates have a significant body of experience in a similar sized organisation helps to mitigate introducing the wrong person. At the very least the organisational design must makes sense with clear roles and responsibilities. Cultivating a leadership team that can run the business without you is an important part of the journey to preparing your business for sale or exit.
4. Analyse and mitigate your risks
You want to present your business as a stable enterprise to potential acquirers. Being across and mitigating risks such as revenue concentration, obsolete stock, litigation, doubtful debt etc. is essential to the defence of your earnings. Buyers will not expect a completely trouble free business (with the exception of private equity firms, who frequently seem to want perfection) but they will expect management to be fully across the risks, and where necessary have them reflected in the numbers by way of provisions and have a sensible and cogent plan for each matter going forward.
5. Optimise your corporate structure
Your business is more valuable to an acquirer if it is already running successfully and profitably without heavy involvement from you.
We like all businesses to have a board in place. All of the most successful companies in the world have board meetings every month. Do you? We have found over many years and in many different circumstances irrespective of size, that creating a board and adding at least one Non Executive member who does not work day to day in the business, can be a very cost effective way of adding significant management horsepower. Additionally the independence can add a degree of objectivity not always possible within the management team itself. Operating a board is a statement of intent and signals strategic and professional commitment.
The board provides vision, leadership, accountability and governance to achieve the objectives of the business. It can also help to facilitate an owner stepping back from daily management to fully or partially exit the business without selling. Have you looked at succession more generally? What happens if you can’t sell the business or maybe not as quickly as you had hoped, or for the price you had wanted? What’s your plan B?
Finally, is your corporate structure efficient and will it optimise your position in the event of a significant liquidity event like a sale? We see too many businesses poorly structured in this regard. Ask your accountants how you stand.
6. Formalise agreements with staff, suppliers and customers
Where possible make sure that agreements are current and valid. It’s not necessarily a deal breaker if agreements are not current and perhaps only verbal, but being across that status of all agreements and their importance to the business is just good management – and ‘money follows management.’
7. Be proactive and create your own market
Most businesses won’t be so fortunate as to get a knock on the door, but even if you do, you want to know that you’re getting the best deal. The only way to be certain of this is to proactively explore your options in the marketplace. This needs to be done intelligently and discreetly. Conducting an exploratory exercise while maintaining anonymity puts owners in the powerful position of having real and current intelligence from the market which then allows them to objectively assess the appetite of current acquirers for a business such as theirs. This is essentially creating your own market. The exercise will also alert an owner to the likely real-world valuation which can inform future strategy.
8. Be discrete about your intentions
You are not for sale; you are simply exploring your options. At Oasis M&A we believe strongly in protecting your identity and maintaining anonymity while seeking acquirers to avoid destablising and thus potentially devaluing your business. For this reason, we recommend against producing an Information Memorandum as part of the marketing process. Nothing is finalised until a contract has been signed and payment has been made. Until that point it is all “ifs, buts and maybes” so work on a need-to-know basis! For more on why protecting your anonymity is so critically important, read our blog post ‘How Most Business Owners Sabotage their Business Sale’.
9. Separate personal assets from the business
Good financial management is essential and presenting accounts that are timely, accurate and easy to follow speaks volumes. Even if non-business assets are not in a separate legal entity, at least split them out for the purpose of presenting your management accounts. Confusing accounts that don’t make sense, with non-core items buried makes buyers nervous. On the flip-side, clear, accurate financial management gives buyers confidence.
10. Seek independent, expert advisors for support in preparing your business for sale
Complement your deep understanding of the business with independent, objective experts skilled in negotiation and deal-doing. When preparing your business for sale, you want to have the time to focus on running the business as professionally. This is the critical time when buyers are being objectively identified and shortlisted candidates are valuing the business. A good advisor will add a lot of value and their fees should be returned several times over. Check the track record of advisors and make sure you feel you like they understand you, your business and the market.