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 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...]
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...]
Improve your Business – Take a Break
A recent survey found companies that can perform well without their owner for a period of three months are more successful and easier to sell than more owner-dependent businesses. Their owners also have a better quality of life. There is no better justification for taking a blissful, uninterrupted holiday than to see how your company performs in your absence. The better your company runs on autopilot, the more valuable it will be when you are ready to sell. To gauge your company’s ability to handle your absence, start by taking a break. Leave your computer at home and switch off your mobile. Upon your return, you’ll probably discover that your employees were resourceful, and found answers to a lot of the questions they would have asked you if you had been just along the corridor. That’s a good thing, and a sign you should start planning an even longer holiday. You will also probably come back to an inbox full of issues that need your personal attention. Instead of busily … [Read more...]
Some Considerations on Exit Planning
Every business owner should bear in mind that at some stage he or she will have to cease involvement with their business. Possible reasons for this are varied. Some are forced upon the business owner, others are the result of a decision to leave. Reasons include: A wish to start or join another business A feeling that you are no longer the best person to manage the business A loss of enthusiasm for the business A wish to retire Ill health Death Insolvency In all cases (even insolvency) it is in the interest of the owner and the owner's family to optimise the outcome. In practical terms in most cases that means to get as much money as possible for the business. Every business owner should from time to time give some consideration to what might happen if they decided or were obliged to exit for whatever reason. In the case of a planned exit they should also remember that they should ideally start active work on the exit three years ahead of its hoped for … [Read more...]
Business Agreements – the Shareholders Agreement a must?
All businesses should have a succession plan in place but many do not. But what will happen to the business if anything happens to the owner or if misfortune befalls other shareholders or partners? What would you like to happen? The shares pass to the heirs – would you have the heirs as partners? The shares pass to you – but what of the claims by the heirs? The shares pass to management and/or employees – but what of your heirs if you are the one who died? The business buys back the shares – but where will the funds come from? The business is sold – but most likely with a loss in value. The shares pass to the surviving shareholders/partners, with cash paid to heirs. … [Read more...]
Entrepreneurs Succeed With Us
Peter Kelly a member of HCBA Co-authored this exciting new business book for SMEs. This book is a highly readable set of principles and actions, which will convert readily into increased performance and profits in your business. Entrepreneurs can sometimes struggle to meet the goals they have set themselves and may need help to create the high performance business of their dreams. The aim of Entrepreneurs Succeed with Us is to help such entrepreneurs get to grips with difficult to identify and resolve business-critical issues and kick-start growth plans to achieve their goals. These may include a successful exit strategy. The book has been written by a team of highly capable professionals who appreciate the pressures of an entrepreneur's day to day and longer term problems. Its content is designed to help them recover from difficult situations by getting to the root causes of their sleepless nights. Entrepreneurs Succeed with Us addresses a range of key issues that face all … [Read more...]
Achieve a good price when you sell your business
Its a sad fact that only 8% of small businesses are sold for a decent price. This is not good news if you are relying on selling your business for your pension, or indeed for any other purpose. However, many more businesses would be saleable for fair value if the owners had planned their exit in good time. Exit strategy Will you transfer your business within your family, or do you want to sell it - to an employee, or to an outside purchaser? How much do you want for it? When? Will you stay with it or move on? You'll need to think this through because your exit strategy will determine how you go about positioning your business for its eventual sale. Positioning your business for sale You’ll start with a valuation and you’ll almost certainly find it is well below what you need. So, then you’ll need an analysis of your business to show you what has to be done to achieve your price. This may include: getting your accounts in shape and audited; some growth, not the least to show … [Read more...]
Business Baby Boomers Benefit from Exit Strategy
After the second world war, there was a surge in the population which is now more commonly known as the baby boomer generation. Sixty or so years on these baby boomers have started to retire. In fact in the UK in 2006 there were more pensioners than children and by 2029 there will be some 5M more baby boomer pensioners. There are about 4M businesses in the UK and of these about 3.2 million are one person businesses with a further one million having up to 249 employees. It is estimated that, as the baby boomer owners start to retire, 30% of these businesses will transfer ownership during the next 10 years. That is 1.5 million businesses! And with fewer younger entrepreneurs coming through many of these businesses will not be sold but simply shut down. According to the Office of National Statistics 67% of us either have no idea or only know vaguely how much our pensions will be. And many of us do not think we can live on whatever pension provision we have made. The sad fact is that … [Read more...]
