Gez McGuire is a serial entrepreneur and investor. He works with businesses throughout the UK to facilitate purchases. Gez owns a successful digital advertising business, which he has committed to growing through acquisition and is looking to partner with likeminded owners in the marketing and advertising sector.
Selling up can be one of the most testing times for business leaders. Handled correctly it can lead to a life-changing sum of money and the freedom to explore new ambitions and aspirations. Handled incorrectly, it can sap the drive of the owner and the business can be left wilting on the vine losing value.
Understanding how a deal will be structured and what an investor will be looking for is one of the key differentiators between businesses that sell and those that don’t.
Is your business sellable?
One of the first questions to ask yourself is; do I have a business to sell, or am I the main value creator? All too often, in smaller organisations you can find that while there’s a decent turnover and some staff in place the relevant management systems and contracts are missing and the current owner is still doing too much of the day to day operation. In some cases, this can occur in organisations with as many as 10 or 20 employees. That isn’t to say that there isn’t any value in the business, but the likelihood of securing a life-changing amount of money is massively reduced as the business isn’t packaged for a sale yet.
Preparing for due diligence
Any serious investor will be looking for a full history of trading, or if not at least three to four years of accounts. Getting your books in order is an essential pre-requisite for securing a sale. Likewise, having contracts in place with key clients vastly increases the appeal of a business to a given investor as it presents a guaranteed income from day one. All too often owners face unexpected delays or are unable to complete a sale because the relevant contracts aren’t in place or have expired.
When to sell
It may seem counter-intuitive, but the best time to sell your business is just after you’ve secured your biggest client to date. While the temptation is there to go on and continue to build value, the potential gains are outweighed by the risk of a significant loss. As business leaders and entrepreneurs, we’re all aware of those organisations who have soared to close to the sun only to be brought down by a sudden change in the economy. In many cases, putting the business forward for a carefully considered acquisition would not only have allowed for greater personal gain for the owner, but a new approach to the business from a capable investor could have ensured that it continued to thrive.
An alternative route to adding value
Increasing your customer-base isn’t the only way to add value to your business. Understanding how a deal will be structured and presented to financiers can make the difference between multiple offers and none. When considering a potential investor, it can be easy to be drawn into the fantasy of a cash rich buyer able to provide payment in full on the day of purchase. In reality, the majority of deals will require some form of external finance and will be structured to provide a closing payment followed by deferred payments over a number of years. In most cases lenders will require a financial forecast before releasing funds. Compiling this in advance through a reputable firm will significantly increase investor interest and help to demonstrate value.
The biggest mistake a business owner can make is to get an unrealistic valuation early on. Nine in ten businesses advertised for sale will never sell for this reason.
In part, this is due to a brokerage system that favours high valuations as a means of securing business and maintaining healthy percentages, over ensuring successful completions. With a single sale netting the chosen broker tens of thousands of pounds in commission they can go high, in the knowledge that even if only one in ten completes they will still see a healthy return.
Understanding how a potential buyer will value your business and undertaking the calculations yourself can help put this in context. This means calculating the company’s EBITDA (earnings before interest, tax, depreciation and amortization) which is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments. As a rule of thumb, a typical service-based business will attract the attention of serious buyers and investors with a valuation in the region of three times the EBITDA, although there can be some sector variations.
As with any enterprise, understanding your potential clients and customers and what they are looking for from you or your organisation is key. So why wouldn’t you take the same approach when selling a business? With a small amount of homework, most businesses will find that is easier than they thought to turn their business into a sellable asset which will make it a lot easier to secure a suitable buyer.