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Preparing Your Business For Sale

When it comes to selling a business, serial entrepreneurs are in their element: having invested their money and usually considerable effort as well, this is payback time if the investment has gone well.

However, for most people a sale is a once-in-a-lifetime occasion and a daunting prospect. Getting it right is imperative to mark the reward for years of building up the business and also for retirement.

The surprise is that when thousands, or maybe tens of thousands, of hours have been spent building up a business, owners often have their guard down when it comes to selling. It is not that they don't want the best price. Of course they do. But frequently, little thought is given as to what the "best price” is or how to achieve it.

More times than I can count, owners have instructed me on sales and, when I ask how the sale price was reached, I am told "I thought it was worth about £X” or "I had an offer for £Y and it seemed about right.”  Yet the same owner would not remotely consider applying the same vague yardstick in pricing the goods or services of the business. So why do it when it comes to reaping the reward of years of hard work? I suspect the answer is that we all have the feeling that, if we have priced the goods or services we offer, we know the value of the business. It doesn't follow. Or the adage comes to mind "A business is only worth what someone will pay for it”. True, but only half-true - the offer may come from someone who doesn't know the value, or does know and hopes to make a killing.

There are many sources where valuations can be obtained: accountants, specialist valuers, business transfer agents.

I recently reviewed half a dozen valuations for a client who was selling: they varied by a factor of ten, which unsurprisingly dismayed the seller.

As well as the most applicable method of valuation being chosen, the outcome for the seller can also depend hugely on how the sale is structured. Here are a few alternatives to be considered:

  • Will the price to be paid in full on completion or will part be deferred?
  • If deferral is planned, on what terms and will any security be offered?
  • Will part of the price be conditional on future events taking place or financial targets being met? How are those to be measured and how will the new owner be incentivised to achieve them?
  • Will the seller(s) be required to stay on after the sale? On what terms?
  • Is 3rd party funding required by the buyer? What guarantee is there that it will be forthcoming?
  • If a sale is not fundable at full price by the buyer, consider secured loan notes, or splitting the share capital with reserved powers for the seller's shares, plus the right to sell the shares later and conversion on default.
  • Is a management buy-out more appropriate?

An early discussion with us before things are "set in concrete” can iron out which alternatives are likely to be viable, before options are unwittingly closed off and money lost.  It is commonly reckoned that it takes around two years to "prep” an owner-managed business for sale, unless you are in the fortunate (but rare) position of having unsolicited suitors beat a path to your door.