If an exit is on the horizon, now is the time to tighten your strategy. Kevin Uphill, chairman of sales, mergers and acquisitions specialist Avondale, offers his dos and don’ts when preparing your business for sale
DO have a business plan in place which shows potential buyers there is a strategy to take the company to the next level. If you’re exiting, ensure a second tier of management is in place to drive – not just run – the business. If you’re younger or more ambitious it could be an elevation transaction with you remaining to take the company into the next phase.
DON’T go into the market with a price tag that is driven by you personally. Really successful entrepreneurs exit when it is right for the business – not necessarily when it’s right for them.
DO have the right attitude. The buy side is not interested in sellers with a ‘we’ve run out of steam… we don’t know what to do with it… we think someone else can do a better job’ attitude. The buy side is as much on a shareholder value plain as the seller. Most deals are done because sellers intend to sell or to push shareholder value up; it’s not just about profit.
DON’T think of selling without doing due diligence on yourself a year before putting the business on the market. The buyer will go through it anyway. Some companies look six or seven years out because they are mindful that, with entrepreneurs’ relief (ER) at 10 per cent, there is more money in getting the sale than there is in making profit. Start engaging with advisers three years before.
DO appoint a valuation expert who understands the sector. They should take time to understand the business inside out, point to other deals and not be biased in taking you to market solely because their income depends on it.
DON’T look like a polished presentation. Buyers see through that. It’s about making sure that you have a strong and strategically interesting business. Buyers are very happy with a business that has been set up with a mindset that it might be sold one day, but they don’t want to see one that has been specifically prepared, polished or presented.
DO ask yourself if you’d pay the asking price. If you’re making £1m a year, and you want to sell for £10m, it better be a damn good business proposition. If a buyer puts £10m into property they’d get seven per cent without the risk. Use this return on investment calculation: is it good for you but sensible for a buyer versus what they could do with the money?
DON’T be afraid to generate competition between bidders with a ‘we want, we need’ motivation in your strategy. The two main drivers for that are recurring revenue and strong growth that is threatening other people. It will generate competition among buyers who will think that they cannot afford not to do this deal.
DO think capital versus income. Most sellers think gross not net, but you need to do your calculation on what likely capital proceed you’ll receive after tax versus the income you’re making after tax. Most income is taxed at 50 per cent (in terms of corporatation tax or dividends), whereas if you’ve got a capital sum you will only pay tax at 10 per cent on the first £10m under ER.
DON’T ignore at board meetings the new products, strategic alliances and acquisitions that will influence your value in the next 18–24 months.
DO remember these four points: the personal drivers for a sale; the strategic business position (is it right for the company to let someone else take it to the next level and are they the right person to take it?); the taxation treatment of income versus capital; and the buy side ROI versus your expectations.