As in most things in life it starts with the objective: What do I want out of life?
This objective may change as you plan for your succession. However, it does not mean it cannot be established at the outset. Only when it is established can you determine how you are going to reach it. If it changes usually for circumstances outside your control, then so be it.
How do I achieve the plan to leave my business?
There are in my experience three high-level areas for you to consider when you leave your business. These are as set out below. They are the affects upon your business from outside and need to be looked at and detailed before a realistic exit plan can be mapped out. The list is not comprehensive and others factors may be relevant to the outside effects upon your business.
So, these are the three areas for you to consider:
1. What is happening in my market place? To answer this question you really need to look at the big picture.
- Something like 60,000 small business are wound-up each year where there has been no succession plan.
- Over the next ten years there will be a large number of 70 year old people.
- There are millennials (those born after 1995) who do not want to take over the “family” business.
- Health care will massively increase in size including the social care sector.
- Rental of assets such as music and cars is already happening and this trend is predicted to continue into the future.
- When will austerity come to an end?
- Austerity has taken large amounts of cash out of the economy and will this trend be reversed?
2. We are in a period of slow growth.
- What’s happening in your sector, market place and your industry?
- In recent years Management Buy-outs (MBOs) and family “Take-overs” have reduced since the employees and family are not
- interested and MBOs are becoming more expensive.
- The recovery to higher levels of growth in the economy will be a slow process.
- An ageing population.
- The movement of wealth from the Western economies to those in the East and as a result the balance is shifting away from the UK.
- The growing risk of a disorderly process known as Brexit pulling down consumer confidence and spending on higher value goods.
- There is more of a desire to spend money on “experiences” rather than goods across all age groups.
3. Buyers of business are looking to increase shareholder value.
- Larger businesses are now being forced to look at an acquisition to grow their business. They are unable to create shareholder value rapidly through organic growth.
- So what they are looking for is a saleable business. The characteristics will be in future economies of scale and synergies. Moreover the effective use of IT in both social media and traditional marketing will increase the multiple. Consequently value will be added.
- Buyers really look to purchase business they can buy at a low multiple of profits. After a suitable period of time they aim to sell on at a higher multiple. Consequently, scalability comes high on their shopping list of businesses to buy at a very early stage of the acquisition process.
- By many counts in August 2019, we are likely to enter a recession, so how resilient is your business? Will your revenues and profits hold up when the economy is shrinking? If they did not in the last recession is there a chance they will not in the next? So a buyer could well look at the revenue and profit numbers between 2007 and 2010 to ascertain whether there were any big falls. If your business has high fixed costs and low gross margins, then its break-even turnover will be quite sensitive to change in revenue. If your business did suffer in the last recession, then be ready to compare it to what it looks like now. To what extent has it changed in any way to reduce or stop the risk of profits falling again?
Valuation methods of Businesses
As set out earlier, the words “multiple of profit” has been used. So, what am I talking about?
It is one of the ways a company’s shares can be valued, that is a multiple of its profits.
This can be used as a basis to value a business but does not always work for accountants, lawyers
There are important t elements in a business that will increase the multiple. In looking to put together an exit plan to achieve a succession in your business these need to be considered. By looking at these both the value of and the attractiveness to a buyer of your business will increase and as a result a potential buyer will make an offer for it.
It is not intended in this note to go into any detail on the rules of valuing a business, since it will detract from the purpose of it – exit planning
Look at other deals in your sector and see, if the data is published, the type of multiples being paid. If it is not published, then speak to an expert in selling business like myself. I can research the deals for you and may come up with an answer.
So, how do you achieve the higher multiples for your business?
There are a number of areas and these are mainly common sense. They start with the business being less dependent upon you. Sustainable profits and cash flow are essential as are economies of scale in people and buying. Moreover increasing profits shown in the forecasts and supported by the evidence from a marketing and sales pipeline will help.
Likewise recurring revenue and the estimation of the lifetime value of a client will all help . As a result all of these areas will increase the multiple someone would use to value your business.
So, are you ready to enhance the value of your business?
The aim would be to put it into a position whereby it could be sold even if you do not want to, then how do you build shareholder value?
Firstly, you need to be in complete control of the whole process.
It is fine being reactive when it comes to exiting your business but you really do need to be ready to leave.
Secondly, sometimes selling to the family is one of the options.
- If so, the necessary discussions should take place with all the necessary family members. I would be happy to chair as an independent person. During the course of these discussions it will be decided whether or not this is the right option. If not, then other options need to be discovered.
- Likewise the same process should be undertaken with your key management team.
- If neither of these options is available and you may decide upon a trade sale. A potential buyer may well ask you whether you have discussed the succession issue. Some buyers do not want to walk into a situation where other key members of the family or management are unaware of what is going on. The buyer does not want to have their time wasted if either of these options is on the table as well as theirs.
- In some cases it is preferable to sell the business to a trade buyer. In which case and if suitable arrangements are in place the family and management will receive the money instead.
Thirdly, selling and exiting your business really is stressful.
- It will take up a lot of your time, bury you in paperwork and cause you to juggle a number of balls in the air.
- Can you do all of these tasks on your own? For example
- Do you know enough about deal structures; securing the deferred consideration?
- Do you know how to negotiate an earn-out so you have at least a chance of receiving it?
- Elsewhere on this web site I speak about why you should use my services; what it is I do and how I build trust with you.
Fourthly, you must use a good wealth adviser.
- What is your lifestyle going to be after you have left the business? You need to know what the value of your retirement fund needs to be to support it. A simple example of how this works can be found where the journey to sell my business starts.
- I would document when and how you will leave your business and the sum of money you require to walk away.
Fifthly, when it comes to succession planning, the process needs to be as smooth as possible.
- As a result difficulties need to be avoided. In my experience difficulties do arise. They do so as a result of factors outside your control – a loss of a key employee, a major customer or a supplier. Consequently, you need to undertake a self-assessment of the business. The outcome of this review will be to ensure you have as much control as possible over those factors which are in your control. Some call this process vendor due diligence.
- When a buyer comes along, they will need to “kick the tyres”. Therefore any difficulty they find inside your control will not help to enhance the smooth sale process. If such difficulties cannot be easily rectified, they will have an excuse to reduce the price.
- Even if you sell the business to the family, then it is likely some of the consideration due to you will be retained within the business i.e. vendor finance. For this reason you need to be sure the funds due to you are secure as possible.
As an adviser, I look at the whole deal – not just the price. It is a pitfall to go just for the money as you may never receive it all especially if it is in the form of an earn out. I need to appreciate your
Needs: What you need to have e.g. £…
Wants: What you want to have e.g. the freedom to walk away.
Nice to haves: What would be nice to have e.g. retirement party, looking after employees.
It is so important to me to know these early on in the negotiations so as to know what can be conceded on the less important points.
Usually it is the buyer who offers the right package is the one who buys your business. So, it is not always about money. Good examples here are where a buyer pays all the consideration in cash; they are the ones we trust most or they have the best post-sale business plan.
Most noteworthy can be a situation where there is deferred consideration in the form of an earn out. Therefore trust plays an important part. To secure the chances of receiving this part of the consideration you may have to negotiate to work closely with the buyer’s team after the sale. Much of your money will be linked to the future success of the business and the more control you have over it may increase the chances of receiving the earn out.
The successful sale of a business rarely takes less than six months. It can be a draining and distracting experience. During this time it is vital that the business performs as usual. Buyers will want to see evidence of this. While the sales process continues, you need to run the business as if nothing is going to change. For that reason it needs to be as ready as possible to be sold when the process has started.
Returning to the start of this note and looking at the bigger picture. If the economy or your industry goes against you, reconsider the options open to you. You may need to continue to build your business, prepare for the economy to recover and the uncertainties to diminish.
You only sell a business once, so make sure it goes smoothly by planning the exit as soon as possible.
As you can see from this paper, the exit planning can be quiet crucial. Bearing in mind this process can takes months and moreover it is not something that can be rushed into. It requires a business that is sustainable without you the owner. In other words it has to be sellable in the first place. Moreover, it will mean the systems and processes are in place and you, the owner, are not working in the business.
If this paper is of interest to you then I would be very happy to chat it through with you and see if it is something that works for you and your company.
I look forward to hearing from you.
If you would like to read more of the Overview of Selling a Business, please return to this page on the website.
Andrew is the director of Assynt Corporate Finance Limited and an Accredited Member of the Association of Crowdfunding experts.
Previously a partner and head of corporate finance at Baker Watkin LLP, Andrew has more than 35 years of experience in all forms of corporate finance across many business sectors.
Andrew is also the Chair of Governors at a local school and an Assessor of Expeditions for The Duke of Edinburgh’s Award.
You can find out more and connect with Andrew over on LinkedIn.