You have a profitable business that could be an attractive proposition for the right person. All the risk and hard work has paid off. You think it’s time to turn the dream of cashing out into reality, but is an exit the right option, is a sale realistic, and when should you start the process?
Is selling the right option?
Give careful and serious consideration to your reasons for sale. You will be asked by potential buyers why you want to sell. They will need to be comfortable with your motivation and answers. Ask yourself the following:
- What are your objectives as business owner? Do you want to realise some or all of your investment to fund retirement or pursue other business/personal interests? Do you want an ongoing full or part time involvement with the business? Do you want to pass the business onto your children?
- What are your objectives for the business? Does it need new investment to grow and what does the growth look like and how can it be achieved? Does it need new owners and/or stronger management to expand and develop? Does it need to diversify into new markets or revenue streams or consolidate its position in its current market and (if so) how and what benefit will that bring? Does it need to be restructured, why and how? Should long standing employees/management have an opportunity to take it over?
- What do you want to sell and to whom? Do you want to sell all or a part of your ownership in the business? Do you want to sell a specific part of the business assets or the whole undertaking? Do want to split the business and sell each part separately to different buyers? Does the business need to be restructured and/or management team strengthened or replaced prior to, or as part of, the sale? If you have multiple businesses, are any businesses and/or assets to be excluded from the sale and retained?
- Who and what else will be affected by a sale? To what extent will it affect other shareholders, the managers/employees, and/or key customers and suppliers? How will they react and what will they want? Are there any restrictions on the proposed sale of shares/assets/business and what is the impact and how will these be managed?
- What will you do after the sale? Plan what your life will be like after the sale - not a critical step to selling your business, rather a building block for preparing and securing your future. If this step is overlooked, you will be left wondering what to do once you no longer own and operate your business. Whether you are retiring or taking up other opportunities, you will need to plan how the sale proceeds will be spent/invested and what your next steps are going to be.
Is a sale realistic?
All businesses can be sold provided they are valued appropriately and marketed effectively, even where the business is not doing too well. The key is for the business to be ready to go to market, which means it needs be functioning correctly and, ideally, profitably. You may need to review all aspects of your business, consider the areas that need to be ‘fixed’, and go through the process of fixing all those issues before putting the business up for sale. You can only sell your business if someone is prepared to pay for it. If you can't identify strong reasons - that can be easily substantiated - why your business would make a good acquisition, it's likely to be difficult to find a buyer. Ask yourself the following:
- Is the business healthy? A business in trouble is difficult to sell and potential buyers are likely to wait until they can get assets at a knockdown price - although sometimes financial distress can be a motivating factor to a buyer who can see a turnaround opportunity.
- Are the basics in place to make it attractive? Buyers like well-organised businesses with strong management.
- Is there a good financial record? Buyers prefer a record of smoothly increasing profits with good growth potential.
- Who might buy your business and why? Can you identify potential trade buyers and a good reason why they should want to buy your business? Buying a business can be disruptive and expensive. Potential buyers may prefer to concentrate on their existing operations.
- Is a sale to existing management possible? Consider selling to your management team. Whilst they may only offer a modest price and/or have limited financial resources, a management buyout is usually far quicker to complete than a sale to a trade purchaser. You may prefer to pass the business onto long serving and loyal staff rather than a third party purchaser.
When should you start the sale process?
Selling at the right time can have a significant impact on the price you get for your business. You should plan well ahead so that you can pick the best moment rather than being rushed into a quick sale.
- When times are good: Timing will depend on your personal motivations and objectives but an ideal starting point is when your business is doing well and you are not desperate for a sale.
- Financial performance: Aim to sell when profits are increasing and look likely to grow further. Consider the impact of sales cycles or seasonal fluctuations in your business - you might have fuller order books at a particular time of year.
- Economic considerations: The general state of the economy - and your sector in particular - can have an effect. It's easier for a trade buyer to fund a purchase when interest rates are low, and banks are keen to lend.
- Attitude and approach: You need to be in the right frame of mind and be 100% focused on the sale. It will be the culmination of years of hard work, a complex process, and emotionally challenging especially when you have still have to keep working to keep the business fully operational at the same time as the sale proceeds. Putting your business up for sale can’t be a passing fancy. You need to be serious about selling, have the right attitude to it, and be committed to following it through to its completion. You need to have the right attitude to the sale transaction process as well. The buy side is not interested in sellers with a ‘we’ve run out of steam… we don’t know what to do with it… we think someone else can do a better job’ attitude. Throughout the sale process, you will need to demonstrate that you are flexible and co-operative. A buyer will expect you to show that you would also be willing to spend some time after the sale helping the buyer get acclimatised to the business. If you think it will help the sale, be prepared to work for the company for a fixed period after the sale is completed .
- Think ahead: Preparation and planning is crucial to achieve maximum value and ensure a smooth and timely transaction process. The sale process will typically take 6 to 9 (possibly 12) months from when you first start formally marketing the business for sale. Therefore you need to start preparations 3 to 4 years before you actually want to exit. Make sure you understand what a future buyer will be looking for and what factors they consider to be attractive in a business. Potential buyers are looking to see consistent revenue growth, proﬁts, and a long-term client base. The attractive factors of your business will be things that you would want in place even if you were not selling your business.
- Tidying up: Preparing your business for sale well in advance means doing some seller due diligence on your business to weed out any issues that could eventually cause an obstacle to a potential sale or adversely affect value and/or to engage in any restructuring of it to make it more attractive or increase value. Going to market when you are in ‘housekeeping’ mode is never a good idea and could seriously undermine your chances of success. Beware also of commencing the sales process and identifying a buyer too soon - you want to avoid being involved in the process of putting things right in the business when you have your potential buyer and their advisors observing and scrutinising your progress. Typical tidy up areas include managing unrecoverable debts, mitigating any potential claims/disputes, ensuring written contracts are in place with customers/suppliers, and having a sound business model / plan is in place.
- Tax considerations: The detailed timing of a sale may also depend on the tax consequences, and any forthcoming changes to tax rules, something to consult with your accountants and tax advisers on.
The Sills & Betteridge LLP Corporate Team have extensive proven experience helping business owners throughout South Yorkshire and East Midlands across all sectors achieve their exit objectives. If you are consider selling your business now or in the future, our Corporate Team can assist you every step of the way. We have the legal expertise, business skill sets, and service delivery approach, to manage and co-ordinate the transaction smoothly and effectively and to get it completed on time, within budget, with least business disruption, and minimum stress and hassle for you. For an informal chat or to arrange a coffee meeting, please contact Martin Walsh, Corporate & Commercial Partner, on MWalsh@sillslegal.co.uk or 01522 542211.