The value an owner-manager places on their business can differ from its actual worth to a buyer, so careful management of the valuation process is essential to maximise business value.
You only get one chance to make a first impression. Business owners often miss a trick by overlooking exit planning until they wish to sell.
We are frequently approached for assistance in negotiating a deal after owners have received an unsolicited approach. Whilst we are very happy to help in such situations, there is inevitably a limit to what can be positioned at that stage, especially if the owners have already supplied financial details to the buyer.
Get an information memorandum prepared
For the best chance of unlocking the full value of a business, it’s best to approach an expert at an early stage. This gives you time to discuss, and act on, development opportunities which arise from the information memorandum.
This document, typically 40-50 pages long, will provide an executive summary, detailed financials, key selling points and, to some extent, identify any problems with the business.
Performing this exercise a year or two in advance of the sale affords you the opportunity to address and correct most issues prior to sale.
Improving business performance can maximise value dramatically, but vendors also need to present buyers with a growth opportunity and achievable margins. What an owner-manager considers issues may actually show prospective buyers where they might have the expertise to achieve growth and add value.
You want interested parties to bid on the same basis and not uncover issues at the point of due diligence. Even if you don’t have the time or resources to address the problem, you can put yourself in a much stronger position by showing that management have identified an issue and have a corrective plan prepared.
It’s not just buyers who will become uncomfortable if unexpected issues crop up, but their funders.
Vendors need to be able to quickly answer buyers’ questions, so if they are in any doubt about their ability to produce quality information quickly, they should ensure this is pre-prepared.
For mid-sized businesses, which typically have more structured management and information systems, value enhancement is significantly about positioning the business opportunities, considering the potential buyers with the most to gain from synergies (or indeed the most to lose if a close competitor acquires it).
Make yourself redundant
Ensuring that your business can operate without its principle shareholders is vital to receiving the return you deserve after years of hard work, but business owners often need help in gauging their business’s worth to a potential buyer.
The market for smaller businesses making in the region of £1 million pre-tax profit can be relatively limited, which is partly due to the ability to raise debt-funding against them.
In many cases, either a second level management tier takes on the business, with funding from a private equity fund, or the vendor leaving some loan notes in the business, or they are part of an acquisition by another organisation in that geographic region.
For instance a small manufacturing business in the South might not sell easily, whereas a similar business based in the Midlands or the North, might be attractive to a wide range of local competitors whose proximity might allow them to run efficiently under the same management team.
Clever cross sales
A modest turnover doesn’t necessarily mean a low valuation; tuning in to synergies and opportunities for cross-selling can transform your sale potential.
We sold a business in the printing sector, for example, which made £300,000 profit for around £3 million. While profits were relatively low, they had excellent IT systems in place which the buyer implemented to increase his own profits by multiple times what the acquired business made.
The most critical element in maximising value is time. If you think you’re likely to exit in a few years’ time, early preparation means that you can move quickly and capitalise on unexpected offers.