Selling your business
Retirement, better plans, or just time to let someone else enjoy it? Selling a business should never be a quick decision. A little planning can massively enhance your exit valuation and reduce risks.
Selling a business is almost never as easy or sweet as one dreams of when friends and rivals talk about it.
Whether you are using complex valuation formulae based on Net Present Value of Discounted Cash Flows, or simpler “rules of thumb”, or staring at the latest Plimsoll Valuation for your business and dreaming of second homes in warm places, it remains quite unlikely that you will see those large numbers appear as cash in your bank account unless you and your team put in the work beforehand.
Sales are a team sport, and sales of businesses doubly so. The whole team needs to get behind it, and your advisors can help a lot.
The areas that are proven in multiple studies to be most likely to add value prior to any exit are these:
1. Become Faster, Better, Harder, Stronger – powering up your financial performance by more efficient operations, shorter sales cycles, faster innovation, quicker time to cash
2. Making it Rain – generating more free cash by finding non-diluting sources (accelerating revenue, winning grants, optimising tax reliefs, using supplier finance, enhancing debtor collection, and tying them all into enhanced and active cash flow forecast and management planning systems)
3. Effortless Income – having long term contracts and recurring revenue that comes in with as little effort as possible, minimising the risk that revenue will decline after you leave
4. Cutting Out the Fat – ensuring value is pushed into the valuable parts that can be sold, and removing waste and non-essential parts. That might mean dropping low returning offices, or products, or processes. It might mean slimming down teams to show focus on efficiency.
5. Hitting the Right Spot – having the right Market Sector and Growth Potential, which might mean slight changes so your company is perceived as being in a “hot” space
6. Stealing the Light – having dominance in an area that sets you apart from competitors and which shades them out when people are talking, this has to be factual and not just PR, but PR matters
7. Satisfied Customers – who come back for more and give a high net promotor score / Trust Scores
8. Spreading the Risks– reducing dependency on any one person, process, or customer. This is the hardest for most founders: you have to bring in people who are BETTER than you to take over the business, or who are clearly able to support the new buyer in a constructive way
9. Internal Strength – having a solid business structures and controls that is ready to handle anything. Detailed, documented, tested, and proven to work. No more post-it notes on the walls; consider ISO standards and internal audit.
You would need to work on all those areas at the same time to deliver the potential value of the business. Getting all of them right might double your exit value, and, honestly, it is no more work that not doing it right.
Is it worth it?
The mathematics are simple: by delivering an increase in free cash flow and improving the multiple of valuation that is applied to them you get a substantial value uplift. Parts 1 to 4 improve free cash flow, part 5 improves the valuation multiple, and parts 6 to 9 reduce risk and indirectly improve the valuation multiple.
A common valuation method uses a multiple applied to Earnings Before Interest and Tax (“EBIT”) for the last few years. If you can increase EBIT, then it increases your company value. A simple two year plan might be:
EBIT for last 3 years of £500k, gross margin of 40% on sales
increase sales by £500k to generate £200k of gross margin
improve gross margin from 40% to 50% by using new suppliers and improving manufacture adds £50k of gross margin
cut two headcount to deliver £100k
reduce admin costs by £100k
capture marketing support of £50k
EBIT in year 3 of £1m
That would double the exit value on its own.
Some sectors are seen as “hotter” than others, and this changes over time and as media and trade enthusiasms change. You can take advantage of that.
As an example (taken from the USA, but applicable globally), a company makes computer parts. It has generated about £1m EBIT for the last few years. Nothing glamorous, but it sells direct in bulk. It has been tickling along under SIC Code 26200 Manufacture of computers and peripheral equipment. A simple change to SIC Code 46520 Wholesale of electronic and telecommunications equipment and parts can have a dramatic effect
Valuation as a multiple of EBIT
26200 10.9 times EBIT so company worth about £10.9m
46520 25.6 times EBIT so company worth about £25.6m
That value would be a starting point for other, detailed and complex, adjustments by any potential acquirer or investor, but the benefit it clear.
To obtain that benefit, the sector which is most desirable must be clearly the right one and clearly adopted by the company everywhere: on the website, in brochures, at Companies House, and in internal and external branding. Those changes need to be in place at least a year before any exit, so they can be “picked up” by sector analysists. The precise timing will depend on a lot of factors, including your accounts filing dates.
Now do both
Now consider doing both: improving EBIT and being clearly seen to be in more valuable sector. The company would go from £0.5m at 10.9x (say £5.5m) to £1.0m at 25.6x (say £25.6m). that is nearly 5 times the original valuation, for some fairly straightforward plans and focused effort.
Time is a factor
The best time to start is now. The best outcomes are delivered over a 3 to 5 year timescale, but massive improvements can be made in 2 years. It is very hard to deliver in less. So start now.
We can help
Drop us a line, and we can start this process with you. There are hundreds of little things that add up to deliver success. It is never to early to plan to retire.