Corporate Finance, Deal Advisory, Transaction services
The importance of planning in advance of selling your business
A significant number of businesses that are “taken to market” to sell actually fail to do so – generally because a buyer cannot be found, or because issues arise and unfold during the deal that puts the buyer off.
Planning in advance of selling your business is critical to increase the probability of getting the deal completed and to help achieve the maximum possible value.
I am a firm believer that there is a buyer out there for every business. The price that they are willing to buy it at may be a challenge, but the first step is finding interested parties before thinking about the price and deal structure. This is why it is crucial to ‘present’ the business in the right way and ensure that future opportunities for growth have enough credibility to make them believable. Being able to articulate the key unique selling points of a business and, critically, the potential sales synergies between the potential buyer and seller, are fundamental in obtaining interest.
We come across a number of businesses that have been run successfully and make founders good money – but this doesn’t necessarily make them attractive for a buyer. A buyer will (normally) want to buy a business with an established management team (that are staying in the business), alongside significant opportunities for growth and expansion. Therefore, they will want to know how future growth is to be achieved, and what evidence the seller has in this regard.
It is essential to spend time in advance of the sale to ensure that you have planned your succession in terms of management and key relationships, whilst also being able to demonstrate the credibility of the growth projections, even at a small scale.
However, finding buyers does not always ensure success. Deals often fall through after this point because of poor trading during the process, and issues arising during due diligence ( such as historical tax issues, intellectual property, litigation against the business etc). Poor trading can be avoided by ensuring that the primary focus of the selling shareholders (and management team) is continuing to run and grow the business. As soon as the business starts to underperform against targets, potential buyers start questioning the business and the credibility of the targets in the first place. Clearly, I am conflicted in saying this, but having a good adviser to take as much of the work relating to the possible transaction away from you, helps to ensure that focusing on the business remains possible.
Regarding due diligence, it is critical to ensure that your business is properly prepared for a due diligence exercise. This process is becoming more and more intense, especially in the current economic climate, where buyers and investors are less willing to take risks. Ensuring that you have no ‘skeletons in the closet’ and that you have all potential issues resolved before approaching the market is critical to help ensure the successful completion of a deal. When a buyer performs due diligence on a business, much like when we do a survey to buy a property, we want to make sure there is a clean bill of health – the more issues that arise (however minor they may be), the more this is likely to put a buyer off, as they may start to wonder what else may be ‘wrong’ with the business.
Clearly, a ‘failed’ exercise to sell a business is disappointing and can be unsettling for the management team that is involved and it may limit opportunities to sell further down the line. This can be easily mitigated by planning your exit as far in advance as possible – in this way, you can ensure that you have started implementing your succession planning, provided credible evidence of your future growth, removed those skeletons, and critically, have everything prepared and in order for when a buyer is found or comes knocking themselves.
The deal advisory services team at Gerald Edelman has significant experience in helping businesses prepare for their exit and would be delighted to have an informal conversation with you. Remember that it is never too early to start planning for your exit! To find out more contact Nick Wallis on 020 7299 1420 or at email@example.com.