The top 5 things you MUST do before you sell your business.
Having run my own sports business for 12 years, I can tell you there was nothing more daunting than deciding to sell. For me it was an approach from an acquirer that led to the start of a process, so I had little time to prepare the business for sale. Did this ultimately cost me? Maybe. But if you are actively putting your business up for sale you have an advantage over my situation. You can be in control of the timetable and process. You have the luxury of some planning time, a chance to groom the business for sale. My advice is to use it.
Taking some proactive steps in advance of marketing your business will secure a higher sale price for sure, but it will also give you the opportunity to see the business from a different perspective. It will allow you to tackle any niggling unresolved issues that you have been putting off. This could save some awkward and defensive conversations with buyers further down the line and, crucially, will leave your business in better shape to make it through the ups and downs of the sale process. A long and distracting sale process can take its toll on the business as well as you.
So, what can you do before you start?
Here are my ‘Top 5’ tips to ensure you and your business are well prepared.
1. Make yourself redundant.
I’ve listened to owners speak with pride at how they are central to every decision, keep tight control over quality, maintain personal relationships with customers and (my personal favourite) monitor their finances telepathically. In short, they live and breathe their life’s work and lead from the front.
Just what a buyer wants to hear, right? No.
Prospective buyers are looking for competence and trustworthiness in a seller, yes. But ultimately they are investing in the business and not you. In all likelihood, you will depart after the sale. Perhaps not immediately, but eventually. Even if you don’t, your relationship with the business will certainly change fundamentally. So, if you are so central to every aspect of business success, that presents a massive risk and therefore reduces value.
You need to demonstrate that your business will thrive and continue to grow even when you have departed. This means having a second tier management layer in place.
This tip is number one on the list for a reason. Letting go can be very hard. But it is a vital part of creating value. It’s also needs a decent amount of time to put in place; expect to dedicate three months to this as a minimum.
What does 'letting go' mean in practice?
Define your role in the business. Do this honestly, capturing all the areas you get involved in.
Start documenting processes and your decision making criteria. You may be surprised at how many of your interactions are actually quite routine and pretty easy to document and delegate. Create manuals, checklists or flowcharts. This has the secondary benefit of improving your company admin which also adds value (see below)
Review the org chart to ensure roles and responsibilities are well defined. Rather than job titles, define areas of accountability.
Start the training and delegation process. Be upfront with your people – explain you want to take the business to the next stage of its development and part of that is giving people more responsibility so the business becomes more resilient.
The goal here is to disseminate your knowledge and decision making throughout the business.
I am not saying you need to completely remove any trace of yourself from the business. That would be odd. But you need to position yourself as the leader, the strategist and the mentor to your people. This is a vital role, but ultimately one that can be replaced like any other and therefore presents no particular risk to the buyer. In fact many buyers want to take over that role directly themselves, so succession risk is not an issue.
Remember, there is a difference between the leadership or management of the business and the seller of the shares or assets. The former is crucial (you will often hear private equity talk about investing in management teams much more than the business plan). The latter is simply the party that holds the share certificates. Don’t confuse the two.
Finally, don't forget the best way to test whether this process has been a success: remove yourself from the business with a long holiday. If you’re putting your business up for sale, you’re gonna need it.
2. It’s a numbers game
I acquired ten businesses in three years and I’ve analysed scores more. In 95% of cases the financial information presented to me by sellers was poor.
What do I mean by that exactly?
It was slow to arrive, it was light on detail, it was contradictory or incomplete, it contained errors, it wasn’t what I requested, or it was not consistent with the overall story being told.
This can be ruinous for a deal. There’s nothing that strikes fear into the heart of a buyer more than the idea that there could be a black hole in the finances which is exposed after they complete. Why would they take a risk?
It’s fine to give limited financial headlines before Heads are signed, but certainly once the due diligence begins the numbers should be detailed, accurate, consistent – and presented as a work of art. This means:
Stat accounts going back 3-5 years
Monthly management accounts (trading P&L as a minimum)
The most recent balance sheet you can muster accurately
Aged debtors and creditors reports
Cashflow statements if not reported in stat accounts
Trading forecasts for the next 12 months monthly, and next 3 years annually. Be realistic without being unnecessarily conservative.
Cashflow forecasts, particularly if capex is material
It’s completely understandable that business owners may be out of their comfort zone here. That’s where good professional support comes in. Before you market your business, sit down with your advisor or accountant.
Ask yourself, what is the story the numbers are telling? Is that consistent with my vision for the business, and the story I intend to communicate with buyers? It shouldn't take long to get things order with the right advisor. I do this for my clients all the time. 3. Tighten Up Bad Habits
When I first set up my business, I was living from hand to mouth. I didn’t have time to think about professionalising every aspect of my business. I think it’s understandable in the early days, but I often see mature businesses where questionable behaviours and practices have lingered when they should have been weeded out long ago.
Before you put your business up for sale, look across your firm and be honest about your bad habits. They’re usually easy to resolve and will demonstrate to buyers you have a professional approach and take housekeeping seriously. Just think of it as dusting your mantle piece before you have visitors – it’s courteous to clean up in advance - and doesn't go unnoticed.
Which of these are you guilty of?
Not having staff on up to date employment contracts
Not submitting your expenses regularly. You may think you are doing the business a favour, but it just means the books don’t reflect reality and when you do catch up, you have to explain a spike in the cost base.
Engaging contractors without checking whether they should be classed as employees
Taking drawings from the company without clearly deciding and documenting what they are (salary, dividends or a loan).
Not collecting debts in a streamlined manner. Which leads to…
Paying suppliers late or in the wrong order
Sloppy website – out of date content, broken links etc.
Running personal expenses through the company.
Employing friends or family not at arm’s length
Not documenting procedures or key decisions
Not having the appropriate insurances in place – e.g ‘directors and officers’ insurance is often overlooked, as are cover levels on employers, product or public liability policies.
4. Communicate a clear story and vision
Most business stories are a gritty, imperfect zig-zag towards success - defined by hard work and, let's be honest, a sprinkling of luck. But is that how you would want to present it?
What’s the history of your business and how did it come to be what it is today?
Reflect on your story and how to encapsulate it and verbalise it with clarity. When you go through the sale process you will be telling this story many times to many different people, so get it clear in your mind now.
This is where you can be yourself. No one knows your business better than you. Think about why you got involved and why you are proud and passionate. Don’t play it down. Most people never take the first step to launching a business, let alone survive and get to the point you have, so speak with pride and confidence.
And be transparent. A buyer will understand that a good business isn’t made overnight and some tough times will have been inevitable. Articulate the learnings and how it’s made for a better business today.
Next, explain the future. You need to highlight your plans and what a buyer can expect in terms of a successful future for the business. Explain why evidence supports your decision, by referencing industry data or customer feedback. Ideally, ensure the business has a compelling growth story. If you can, showcase your achievements on the plan so far. Show it has legs. A bit of momentum is attractive for a buyer.
In the SME world this stuff doesn’t have to be hugely sophisticated, but you must communicate something which is well thought through, consistent with the financial forecasts and logical given the resources of the company.
5. Get some support
The two main professionals traditionally required in a business sale will be an accountant and a lawyer.
Your financial accountant will need to be familiar with M&A transactions, ideally with recent deal experience, and also be prepared to be fair with their fees as these can spiral. Most people use their current firm.
Your lawyer is not so vital to appoint early on, but when the time comes you need to ensure they are very experienced. Do not – repeat do not – try to sell your business using a small practitioner without any corporate transaction experience. It is a false saving and in my experience leads to multiple difficulties which can be terminal.
When I started the process of selling my business, I was not mentally prepared for what was to unfold. It was such a long, distracting and challenging twelve months. At times it was very lonely. It certainly distracted me from running the business. Most people who have sold their business say the same.
After all, there are very few people you can lean on for support. You can't tell your employees. Your lawyer or traditional accountant will charge a fortune. And let’s be honest, there are only so many times you can vent your frustrations to your other half before you need a lawyer for very different reasons...
There are a handful of excellent, usually small, advisory services that offer SME business owners long term support through the whole journey of selling a business. I like to think New Path Advisory is a good example. More and more people are reaching out to advisers like us instead of traditional brokers. Brokers can be good at broad-brush selling but may lack professional financial qualifications. And bigger corporate finance firms tend to focus on larger deals so aren't suited to SMEs.