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business sellers and acquirers

Longer Term Exit Planning Action Areas

Short Term Exit planning for business owners looking to sell their business.

Particularly with smaller owner-managed businesses, buyers are often nervous about the degree to which the business depends on the specialist knowledge and/or relationships held by the owner.  The best scenario from a buyer point of view is that the seller is no longer involved in the day to day running and all the key relationships are now held by 2nd tier management, who are expected to stay.

Minimising the number of processes that only the owner can carry out, diluting customer and supplier relationships beyond the owner and delegating wherever possible, are all useful actions to offset this risk from the buyer's perspective. 

Sellers of larger businesses may want to consider investing in a General Manager ahead of a sale.  Business valuations typically assume an appropriate cost of management to replace the owner and a business with a strong general manager who has been in place for a couple of years is likely to be viewed favourably by buyers.  Although it could be argued that some buyers would not need a General Manager, in our experience it is very unusual for buyers not to want good, operational people even if they have different plans for them after the sale.

Financial Reporting
If the business does not produce monthly management accounts, it is worth investing in a system to ensure they can be accurately generated, with the minimum of fuss.  During the due diligence process a buyer will want monthly updates and having a tried and tested system in place will increase confidence that the business is under control.

Similarly, it is worth investing in an Operating Plan process capable of generating a detailed monthly forecast for at least the the current year and the following year.  The numbers should be backed up by a commentary including the expected sources of sales and analyses of changes to gross margin and expenses.  These forecasts will be an important component of the Selling Document and it is important that they are as reliable as possible.

The process of selling a business requires the generation of a lot of information, particularly in the due diligence phase and therefore a seller should invest time in ensuring that systems are fit for purpose.  Has the business outgrown the suite of Excel spread-sheets currently used? Are stock reports accurate with an appropriate obsolescence policy in place? Can sales reports by customer by month easily be produced? Is there sufficient management information available to easily explain changes in gross margin? These are examples of questions the systems need to be capable of handling.

Revenue & Clients
A significant issue for buyers is customer concentration – how much of annual turnover is with the top customer / top 5 customers.  A business where the owner does not need to lose sleep over losing a particular customer is more attractive than one significantly dependent on 1 or 2 customers.  Consciously looking to dilute the importance of top customers where this is an issue, is a helpful step in exit planning.  Likewise, dependence on a very narrow product range or a single sales channel can affect the value of a business – diversity nearly always mitigates risk.

Serious exit planning will also address new revenue opportunities to ensure that the business can be presented as one that is growing.  Many owners talk of ‘the potential’ of a business if the business marketed properly, or engaged a salesperson.  If there really is ‘low-hanging fruit’, sellers should harvest it and have it reflected in an improved financial performance.  A buyer will likely give little credence to ‘potential’, but will pay in full for a trained and appropriately rewarded salesperson who is demonstrating a substantial contribution to sales and gross profit.

Exit Planning should involve reviewing the company’s short and long term fixed cost base and making efficiency savings where possible. Typically trade businesses are bought at between 3 to 5 times the cash flow they generate and therefore saving £1 in fixed costs can add between £3 and £5 to the price paid.

There are cost reduction consultancies skilled at reducing utility costs, communication costs, commodity costs etc and while the owner might have to share the savings with them for a couple of years, their share is perceived as a one-off cost and therefore a seller can get full value for the savings achieved, when the business is sold.

Balance Sheet
An area which can be considered as part of longer term Exit Planning is fixed asset funding.  When the shares of a Company are sold, the accepted methodology for the transaction is that the Balance Sheet is sold free of Surplus Cash and External Borrowing.  However, Fixed Asset finance does not 'count' as borrowing and it is usually transferred to the buyer.  It is to the seller's advantage to ensure that there is 'enough' fixed asset finance in the Balance Sheet when the sale occurs because this will increase the total value of the business.  

Buyers will often be prepared to pay the seller £ for £ for Surplus Cash above the value of the business.  Subject to confirmation from the owner's tax adviser,this additional amount will also be subject to Entrepreneur's Relief making it a very tax efficient way to remove cash from the business.  This being the case, owners may decide to reduce their drawings from the business in the run up to a sale. 

A good first step to Exit Planning is to have a business valuation today so that you know your starting point.  We are always happy to both provide a free preliminary valuation and also work with the business owner through the period of exit planning and then ultimately a sale.  As specialist business transfer agents, we have links with a number of specialists in the various Action Areas set out above.

If you would like to discuss selling a business either now or in the future please Contact Us or call us on 02476 100476.  Your enquiry will be treated confidentially and on a no-commitment basis.

Anderson Shaw has offices on the outskirts of Stratford-Upon-Avon and provides business broker and corporate finance services for clients throughout the Midlands and the UK.

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