In the first part of this blog I discussed what types of business are unlikely ever to sell and what you can do to extract maximum value. Now. Let’s assume that the day has come for you to close down, realise the assets, pay the bills and walk away into the sunset. Closing down a business is time consuming and emotionally draining for the owners. In most cases, they will be walking away from their life’s work. If your business has reached a certain size, it’s likely you will need help from a trusted advisor who should project manage the process for you, the owner. Bear in mind, the owner will have a much-increased workload dealing with customers, suppliers, staff, financiers, tax authorities and the many specialists who need to be involved. The many specialists involved mean the owner should meet with: registered insolvency practitioners and liquidators to understand the administrative and legal processes of closing down the business, and run a “beauty … [Read more...]
How to exit your business successfully even when you can’t sell it – Part 1
Let me repeat some statistics: 75% of all small to medium sized businesses never sell. 17% sell for a disappointing sum. Only 8% sell for a sum that meets the owners hopes and desires. That is 1 in 12. So if your business is likely to be in the 75%, what can you do to get value? Some businesses are not suitable for sale. Typically, we are talking about businesses in the following categories: Owner is totally critical to the business – examples can be found in most small professional practices where the client acquisition and service delivery is solely the responsibility of the owner Sole trader with distinctive skills, such as a trades professional e.g. a plumber or an electrician who are incapable of managing other people, or who prefer not to manage other people, and are satisfied to make a living on their own, having built up a wide referral base of satisfied customers Businesses dependent on one large customer such as a specialist … [Read more...]
Selling or Buying a Business – A Game of Snakes and Ladders?
The London Group March networking event takes a look at what's involved in selling or buying a business or raising some equity, with key insights from recent deals. Join us on Wednesday 29th March 2017- 6:30 pm Seats are limited – click to reserve one Program includes: Selling or Buying a Business with Special guest speakers: Peter Kroeger: Mergers and Acquisitions Partner at KLO Partners Mitesh Patel: CEO and Founder of Fifosys Ltd, an IT Managed Services Business and software developer for Engage Whether you want to sell your business tomorrow or one-day, or you are looking to buy a business as part of your growth strategy, or you have a client who wishes to sell their business or acquire a business, or raise equity funding - this will be a fascinating and illuminating event. You will pick up tips to help you figure out where the snakes and ladders are when you are involved in preparing for the sale of a business. … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 5
How secure are your forecast revenues and profits? In the last blog I dealt with the question of Forecast Gross Margins. Another hard lot of questions you will have to answer will be to do with your historical and forecast sales and profits. The hardest part of any sale is convincing an acquirer that the business is going to meet its forecasts. All acquirers will argue that the best guide to future performance is the current and past performance. If: you develop budgets and forecasts and report actuals against these forecasts on a monthly or quarterly basis, and your actuals are generally as good or better than your forecast, then you have started to provide a measure of comfort. You will need to look at each line item in your forecasts and if they show a steady progression and that is what you have always done, then there should not be a problem. However, if you are forecasting a rapid … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 4
How secure are your forecast gross margins? In the last blog I dealt with the question of Employee claims. Another hard lot of questions you will have to answer will be to do with your historical and forecast gross margins. This is based upon an actual case. The Company in question sold products all over the world – 90% of sales were to overseas customers. It had grown and now turned over £5m and made a gross margin, after deducting costs of sales, and direct costs of carriage, freight, insurance and agent’s commissions (all of which varied from territory to territory) of around 30% overall fairly consistently year on year. The price for each customer was negotiated annually in advance and took into account these varying direct costs. Internally, the gross profit was really only accurately reported after a stock count which was performed every 6 months. The accounting system used did not have a dynamic stock and cost of sales … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 2
How secure is your intellectual property? In the last blog I dealt with the tricky question of contracts and “change of control clauses”. Another hard lot of questions you will have to answer will be to do with your Intellectual Property. You have searched for all your IP stuff and mostly drawn a blank. The questions you could be asked are for you to provide a list and supporting documentation covering all: “Details of any software, web site or electronic database owned or used by the company indicating in each case whether the software, web site or electronic database is owned by the company or licensed. Supply copies of all licence agreements together with a list of fees payable and Copies of all other agreements relating to the development or operation of software, web sites, databases or hardware for or on behalf of the company. Details of any infringements or alleged infringements of any intellectual property owned … [Read more...]
Selling your business – The impact of customer contracts
Having built up your business over many years you have finally made the big step and decided it’s time to hang up your boots. You have a buyer and an offer has been made and accepted and now the due diligence process is under way. You are becoming increasingly frustrated by the questions you are being asked but, through gritted teeth, you have gathered together all the information and provided it to the other side. The hardest part was finding all the contracts with your customers and suppliers, making sure they were signed and current, but you got there in the end and gave yourself and your team a metaphorical pat on the back. One of the questions asked was: Are there any “change of control” provisions in any contract with a customer (or a supplier) such that the contract can be cancelled by the customer (or supplier) if they wish if the ownership in the company changes? And this is the point at which you realise you have a … [Read more...]
One Hidden Thing That Drives Your Company’s Value
You already know that your company’s turnover and profits play a big role in how much your business is worth. Are you also aware of the role cash flow plays in your valuation? Cash vs. Profits Cash flow is different from profits in that it measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss. For example, if you charge £10,000 upfront for a service that takes you three months to deliver, you recognize £3,333 of turnover per month on your profit and loss statement for each of the three months it takes you to deliver the work. But since you charged upfront, you get all £10,000 of cash on the day your customer decides to buy. This positive cash flow cycle improves your company’s valuation because when it comes time to sell your business, the buyer will have to write two cheques: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund its immediate obligations … [Read more...]
10 Things That Make Your Business More Valuable Than That of Your Industry Peers
The value of your company is partly determined by your industry. For example, cloud-based software companies are generally worth a lot more than printing companies these days. However, when we analyse businesses in the same industry, we still see major variations in valuation. So we dug through the data available to us and we found 10 things that will make your company more valuable than its industry peer group. 1. Recurring Turnover The more turnover you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer. Even if subscriptions are not the norm in your industry, if you can find some form of recurring turnover it will make your company much more valuable than those of your competitors. 2. Something Different Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to copy are more valuable than a company that sells the same commodity … [Read more...]
Eight Questions You’ll Be Asked When Selling Your Business
One of the most intimidating aspects of selling your business can be facing the barrage of questions during the various management presentations you’ll be doing for potential acquirers. Be prepared to be grilled on all facets of your operations. Of course every meeting will be different, but here are some questions you can expect to be asked when you’re in the hot seat: 1. Why do you want to sell your business? It's a slippery question because if your business truly does have a bright future and you want the buyer to believe that's the case, the obvious question is: ‘Why do you want to sell it, and why do you want to sell it now?’ 2. What is your cost per new customer acquired? The potential acquirer wants to find out if you have a predictable, economical and scalable formula for finding new customers. 3. What is your market penetration rate? The acquirer, with an eye to future growth, is trying to understand how big the potential market is for your product or service and what … [Read more...]
Growth vs. Value: not all turnover is created equally
When you look ahead to next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services? The answer may have a profound impact on the value of your business. Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit. When we isolated just the businesses that had a historical growth rate of 20 per cent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 per cent more than their slower growth counterparts. However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 per cent … [Read more...]
Six ways to profit from your holiday this summer
Summer is nearly here, and although it may seem strange, now may be the perfect time to increase the value of your company. The most valuable businesses are the ones that can survive without their owner. A buyer will pay a premium for a company that runs on autopilot, and levy a steep discount for a business that is dependent on its owner. This summer, consider taking an extended break from your business to see how things will run when you’re not in the building. It’s likely that some things will go wrong, but use those errors as the raw material for making your business operate more independently of you – and therefore making it more valuable. Here is a six-step plan for profiting from your vacation time this summer: Step 1: Schedule your vacation plus one day Whatever day you plan to start working again after your holiday, tell your staff you’ll be back one day later. That way, you’ll have a full day of uninterrupted time to dedicate to understanding what went wrong in your … [Read more...]
Do you have a £500 million business hiding inside your company?
Asking customers to pay to join a special group of your best patrons can increase your turnover; encourage customers to buy new products and services from you, and provide a healthy boost to your cash flow. Just ask Jeff Bezos, the founder of Amazon.com and the chief architect behind Amazon Prime. In exchange for £49 a year, Amazon Prime customers get: FREE One-Day Delivery with no minimum order size on millions of items. Upgrades to Express Delivery (before 1pm) for just £4.49 per item and Evening Delivery to all eligible addresses for just £7.48 per item. Over 350,000 popular Kindle Books to borrow for free, with no due dates. According to TIME Magazine, more than 10 million people have signed up for Amazon Prime programs worldwide. If you do the maths, that makes Prime a five hundred million pound business for Amazon. And like most programs, members pay upfront, giving Amazon a big injection of positive cash flow. But what is even more interesting is what being a … [Read more...]
Building a Business for Sale
To grow a valuable business – one you can sell – you need to set up your company so that it is no longer reliant on you. This can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise. To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialised your knowledge, the harder it is to hand over work to juniors. The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention. Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be a far easier task to train others to do. For … [Read more...]
Is Now the Time To Sell Your Business?
Have you been thinking about selling your business but just can’t decide if now is the best time? Do you find yourself repeatedly analysing the economic situation and wishing you had a crystal ball? There are positive signs and there are negative signs…. If you’re still up in the air and can’t quite decide whether or not to hit the eject button, here are six reasons you might want to consider getting out now. 1. You’re less interested in fighting the good fight A lot of business owners took the Global Financial Crisis in the teeth. If you’ve got your business stabilised and the prospect of possibly having to fight through another recession leaves you panic-stricken, it could be time for you to get out. 2. The worst is behind you Let’s say you were mentally ready to consider selling a few years ago, and then 2008 hit and 2009 was bad, and in 2010 and 2011 you made cuts and adjustments, and now you’re seeing some profit and revenue growth. With your numbers going in the right … [Read more...]
How to make your company irresistible to potential buyers
One of the biggest factors in determining the value of your company is the extent to which an acquirer can see where sales will come from in the future. If you’re in a business that starts from scratch each month, the value of your company will be lower than if you can demonstrate the source or sources of future revenue. A recurring revenue stream acts like a powerful pair of binoculars enabling you and your potential acquirer to see months or years into the future. Creating an steady income stream is the best way to increase the desirability and value of your company. The more certain your future revenue is, the higher the value the market will place on your business. Here is the hierarchy of recurring revenue presented from least to most valuable in the eyes of an acquirer: No. 6: Consumables (e.g. shampoo, toothpaste) These are disposable items that customers purchase regularly, but they have no particular motivation to repurchase from one seller or to be brand loyal. No. 5: … [Read more...]
Exit strategy and planning – Getting the most for your company when you decide to sell – Part 3
Part 3: Enabling issues which should be in place before a sale These issues will not necessarily provide a premium valuation, but the absence of them could lead to some discount in the valuation or might hold up a sale. • Shareholders agreement regulating the rights of all shareholders and ensuring that minorities can be included Key staff and directors service contracts ensuring that the management and technical know-how won’t walk out the door as soon as a sale is made Share incentive schemes locking in key personnel Employee contracts, handbook and policies ensuring all employment law and regulatory compliance issues are up to date • Supplier Contracts are in date and valid; beware “change of control clauses” which could very well reduce value or lead to specific warranties • Customer Contracts are in date and valid; beware “change of control clauses” which could very well reduce value or lead to specific warranties IPR, patents, trademarks, copyright, … [Read more...]
Exit strategy and planning – Getting the most for your company when you decide to sell – Part 2
Part 2: Getting to the highest valuation Valuation The valuation of your company is not a science, but is driven by market forces and your ability to present your business as a significant investment opportunity. To some extent this depends upon the buyer, but it also depends upon the wider economic environment, the state of your own market sector, as well as the state of your business. There are a number of principles that can be applied to valuing your business: • Earning Multiples – Normally based on historic and possibly forward projections for earnings, measured before depreciation, interest and tax, but adjusted for “average Directors” drawings. The range for this earning multiple can vary from less than 4 to greater than 10 and is dependent on many factors, some of which are mentioned below. • Net Asset Value – The book value of the company as declared in the balance sheet. In many cases owners may expect to achieve a premium when using this approach to … [Read more...]
Exit strategy and planning – Getting the most for your company when you decide to sell – Part 1
Part 1: Why planning is vital and the route to exit Exit planning is perhaps the most difficult yet most important period in the life cycle of Small Medium Enterprises (SMEs). It is an event that probably only happens once, yet has a profound effect upon the future life, particularly in retirement, of the owners. Research clearly shows that many owner managers fail to achieve full or fair value for their business during the exit process. The key reasons for this failure are: Unrealistic value expectations and timescales Poor preparation within the business prior to the sale Unwillingness to use professional advisors Inadequate resources allied to the exit process Planning for your exit strategy Planning a strategy to maximize the value of your business on sale requires careful advance planning. You should start considering the issues several years before you plan to sell. The actual exit process will take 6 to 12 months and may require varying degrees of … [Read more...]
How to thrive as a middleman – become an Expert
Being a middleman (or woman) has become risky business. When was the last time you used a travel agent? Agencies have largely become irrelevant given the rise of online travel booking companies. How about a record/CD store? iTunes and online music subscription services have removed the middleman from between you and your music. Think back to the last time you rented a film – did you get in your car to visit the local Blockbuster? Travel agents, record/CD stores and film rental businesses have all fallen victim to the curse of the middleman. When all you do is move other people’s product, the only value you have is your location. But in a world where content can be streamed and containers can be shipped overnight, being the local person is becoming irrelevant. Even if you have a protected geographic territory, near perfect pricing information available to your customers through the Internet will eventually grind down your margins. Dragging down your value Not only do … [Read more...]
