Btb Guest Author

John Murray 

All business owners exit their business at some point, the only question is whether they are in control of that process or not.  When the exit happens one of three things will occur:- 

• The business will be taken over by an heir
• The business will be closed
• The business will be sold

Many factors affect the saleability and value of an individual business.  Some are outside your control such as the current recession and credit crunch but many factors are very much within your control.  The value you receive from the sale of your business will be in direct proportion to how effectively you manage the factors within your control before you engage with prospective buyers.

Top Ten To-Do’s to maximise your exit value

1.    Focus on growing sustainable cashflow.

Business buyers pay for future cashflow.  For a small business (turnover between €200,000 and €2m) ‘cashflow’ is frequently defined as Sellers Discretionary Earnings or SDE* and for medium sized businesses (turnover between €2m and €10m) it is commonly defined as Earnings Before Interest Tax Depreciation and Amortisation or EBITDA.

Being able to demonstrate strong historical and current cashflow is key to making your business attractive to potential buyers.

2.    Critically review and tidy up your profit and loss account.

Maximizing cashflow means maximizing revenue and margins whilst minimizing expenses.  Make sustainable improvements where possible and in particular eradicate non essential and discretionary expenses from the business.

3.    Critically review and tidy up your balance sheet.

If there are unproductive assets on the balance sheet dispose of them.  Keep stock levels optimised and focus on getting debtor days down.  This may result in cash holdings above what is required to maintain working capital in which case the excess cash can be extracted from the business prior to sale.

4.    Management independent of ownership.

Businesses which ARE the owner are extremely difficult to sell because all business knowledge and key customer and supplier relationships vest in the owner who is walking out the door after the sale.  Delegate as much as possible to a General/Sales Manager and a Financial Controller.  Buyers want to see a management team who can provide continuity after the current business owner has departed and will discount the value of your business if a competent management team is not in place.

5.    Address internal and external risks to the business which buyers will use to lower value.

• Customer concentration – Are a high percentage of sales accounted for by a small number of customers?
• Product or Supplier concentration – Is the business overly reliant on the sale of a single product or range of products from a single supplier?
• Employee concentration – Is there a key man issue in the business other than yourself?
• Legal disputes – Where possible resolve outstanding litigation prior to starting the sale of your business.
• Ensure HR policies and procedures are in place with compliant contracts of employment for all staff.

6.    Maintain good financial and legal records and prepare for due diligence.

A minimum of three years annual accounts is essential to demonstrate the financial performance of the business and up to date management accounts are important to demonstrate that the business is continuing to perform well.

Due diligence requests from the buyers advisors can be anticipated so prepare documentation in advance.  Speedy and complete responses to information requests convey transparency and confidence to the buyer.

7.    Be flexible in relation to terms and conditions particularly in relation to earn outs or deferred payments.

90% of all business sales involve some element of deferred payment.  Don’t expect all cash on completion of the sale and do expect to compromise – rarely does a sale meet all of the seller’s and buyer’s objectives.

8.    Prepare for a process not an event.

Business sales typically take between six and nine months from the initial valuation and marketing of the business to completion.  Expect many small steps and bumps along the way.

9.    Maintain confidentiality.

Don’t openly discuss or advertise that you want to sell your business. If you do your suppliers will get nervous, your customers will start to drift away, your staff will become unsettled and your competitors will tell everyone that you’re going out of business.  The net effect can be that buyers don’t engage at all and the future of the business is threatened.

10.    Price the business so that it actually sells.

Evidence from around the world consistently demonstrates that one of the key reasons businesses fail to sell is pricing.  Small businesses are much higher risk than comparable medium to large sized businesses and as a result will have significantly lower pro rata valuations.  Your business will only sell if the asking price reflects what the market will actually pay.  Always validate the proposed asking price in cold commercial terms.   Would you pay €X for you’re your business?  Why?  If you correctly price your business to match what the market will actually pay then you significantly increase the probability of selling.

*SDE = (Operating profit before tax + market salary for one owner + non cash expenses + non recurring once off expenses + non business related expenses paid for by the business + interest paid)

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John Murray is Managing Director of Sunbelt Business Brokers Ireland, who specialise in the confidential sale of privately owned businesses with turnover between €200,000 and €10m. Before starting Sunbelt Ireland, John spent twenty years working in a variety of financial and commercial roles within small to medium sized businesses. John was Ireland’s inaugural member of the International Business Brokers Association (www.ibba.org) and the first to attain the Certified Business Intermediary accreditation.