Many readers may well be very experienced in the subject of selling a business but this series of articles is derived from a presentation given at the Business Show at ExCel in May 2019 and is geared towards the SME business owner looking to sell their business who has had little experience of the selling process.
This is the second in a series of three articles in relation to the process of selling a business.
In our experience at Anderson Shaw, many business owners say, in retrospect, that they wish they had done more to prepare the business for the sale. This tends to come into particular focus as the due diligence and legal stages begin and after a buyer has signed the Heads of Terms.
Things that can go wrong at any stage in process
Too much reliance on the seller
Seller concentrates on selling the business rather than running it
Keep your staff happy - key staff leaving during the process can seriously damage the sale
Systems failures – need to keep continued tight controls in place
Necessary investments not being made – capex
Stocks allowed to reduce
Hold back of marketing spend
Things that go wrong at dd stage
Financials don’t stack-up
Buyers Funders don’t like something - not just the buyers
Contracts have change of control clauses
Debtors out of control
Creditors come out of the woodwork
Something wrong with companies records
The longer the process goes on for the more chance that business hits a problem
Whilst every sales transaction is unique, in broad terms, the process typically breaks down into 5 steps:
STEP 1: Establishing the Seller's Needs
STEP 2: Preparing the Sale Document
STEP 3: Marketing the Business
STEP 4: Negotiating the Deal
STEP 5: Due Diligence and Legal Stage
STEP 1: Establishing your needs - above all, the sale must meet your needs, both financially and in other important respects. But you need to be realistic about achieving your targets. This is the time to get a professional valuation of the business and advice as to how any sale may work. If this doesn’t match with your targets then ask why not? It may be there are things about the business that mean the valuation is incorrect; if so talk to whoever provided it and see what they say. Despite what anyone may tell you business valuations are not an exact science. You will know far more about your business than any professional adviser (or not without them doing an awful lot of work). If you think they’re wrong tell them, discuss why and see their view. You will probably be able to persuade them that you may be closer than them; but listen to what they say, they’re normally much more experienced in this area and should have a better feel for how the actual market is. You won’t be surprised, that as for the housing market, things can warm up or cool down, particularly in different sectors.
If you can’t see a sale price that is high enough, it may be time to re-think the sale. If this is the case try to determine what you need to do in the business to get it to where you want it to be. Timing is everything in life and if the timing isn’t right, either because the business doesn’t provide the value you’ve set or market conditions are not right, then you should seriously consider just putting a hold on the sale till the moment is better or you’ve got the business in better shape.
It may be that there are several sellers involved, have you all agreed on the exit strategy and price and importantly sale structure? If not you should probably put everything on hold until you do.
All are shareholders looking to sell? Do they all want to fully exit? Are some involved in the business and others not? If this is the case what does the deal structure need to look like?
If there are several shareholders is it possible to try to rationalise this at all? Will minority shareholders agree to selling their stake ahead of the full sale? Multiple shareholders will always complicate the sale process. Get all this resolved before heading onto the next stages … oh and by the way get anything you agree put in writing and formally signed by all concerned.
STEP 2: Preparing a Sale Document - it is very important to present the business in the best possible light, as well as providing the key information buyers wish to see. This needs to be an accurate and fair representation of the business, yes you can add in the typical “caveat emptor” clauses, but go back to the point about respect, this encompasses being truthful in what you say.
If there is any significant inaccuracy that is put in on purpose and it is found out, which 90 plus times out of 100 it will be, the buyers trust in you will suddenly disappear and the likelihood is that the deal will collapse. This won’t be a fun position; it means you need to start again, it also means that if you’ve done this without the knowledge of your advisers, they may well walk-away as well and it’s amazing how bad news like this does get out, even with all the confidentiality documents that get signed up to. That’s not to say the document will be perfect, in fact you can pretty much guarantee it won’t be, when was the last time your trading forecasts for the next 12 months turned out to be completely correct? Typically you won’t be warranting this information but it should all be to your best belief.
In the document itself, you need to cover off various aspects, but the typical basics are:
- explanation of what the business does
- brief history of the business
- why you’re looking to sell
- something about your market, customers and pricing methods
- how your process works
- your organisation structure and who does what
- your location and details of lease / property etc.
- your usp’s and some ideas of how the business can develop in the future
- any important assets that you have / IP etc.
- a summary of your financial results and forecasts for the future and
- last but not least say what you’re looking for – this will generally include a guide price, sale structure and what level of continuity or commitment you’re prepared to give
At this point it’s important to say that this presentation is really geared towards someone looking to sell their business in its entirety or at least a majority share; if you’re looking to sell a smaller part, for fund raising purposes to help develop the business further say, then the emphasis changes somewhat but the basics will be similar – you just need to make sure you say exactly what your intentions are and what your requirements are.
It’s tempting when this document is being put together to try and make it a powerful sales document (after all that’s what many people call it), but try not to make it too “salesy” – it needs to be factual, show the strengths of your business and certainly highlight all the good points and the opportunities but try not to go too bullish – it can turn buyers off!
Generally people who tend to put too much in make it a difficult read and it may well put non-specialists off!
Oppositely don’t let it get written expecting that people reading it know your business as well as you do – it sometimes happens, but even for trade sales you’d be surprised how different businesses operate.
But don’t let it get too basic - if it’s too short you may not tell your story properly; as in this example
2,200 people set off by boat from Ireland to New York, 700 arrived late and 1,500 departed their journey ahead of New York.
Does that give you any idea of what the story really was …. Well it was the Titanic!
As business brokers, we at Anderson Shaw Corporate Finance Ltd, are always happy to advise business owners about any aspect of selling a business and the processes involved. If you are thinking of selling your business, now or in the future, please contact us for a confidential, no commitment conversation. We will be pleased to provide a business valuation and discuss your plans in relation to your business.