You Are Ready to Sell Your Business – BUT Is the Business Ready?
Being mentally ready to sell your business doesn’t mean the business is physically ready for sale. Equally there may not be a ready supply of suitable buyers. Selling businesses for the right price is often a matter of good timing. You can improve the price you get by simply being prepared. In my experience getting ready for a sale adds a whole lot more additional value to a business. You effectively tie up loose ends, get rid of inefficiencies and dead wood. You take a look at your business from a new perspective. Preparing your business for sale is a bit like preparing to sell your house. Getting the “house doctor” in maximises its value.
Finding a Buyer with Cash
In recent years finding buyer has become more of a challenge. Back in the early 2000’s when I started my first business funding was more easily come by. Banks were open to more liberal criteria for supporting business acquisition and growth. Any savvy investor is going to expect lot more oversight of the value of businesses when it comes to funding a transfer of ownership. Business sales dropped in volume and are only recently showing signs of increasing. There is a lot more caution being exercised by acquirers.
The Economy
According to the Office of National Statistics Quarter 4 (Oct to Dec) 2018, the total value of inward mergers and acquisitions (M&A) was £33.3 billion. The highest value since Quarter 4 2016 (£85.2 billion). Yet the total value of inward M&A for the whole of 2018 (Jan to Dec) was £71.1 billion and is broadly explained by the acquisition of Sky Plc by Comcast for just over £30 billion. This was a sizeable increase on the value reported in 2017 (£35.2 billion) and still considerably lower than the value recorded in 2016 (£190.0 billion).
Domestic M&A (UK companies acquiring other UK companies) was valued at £5.0 billion in Quarter 4 2018. It was similar to the value (£5.2 billion) reported in the same quarter of the previous year. The total value for domestic M&A during 2018 was £26.5 billion, the highest value recorded since 2008 (£36.5 billion).
Start Planning
As a responsible business owner, it makes sense to start your exit strategy when you are ‘at your peak’. Ideally when the business is doing well, and you have the energy and enthusiasm to make the appropriate changes. Many business owners are finding it hard to keep up with technology and the new competitive environment that brings. If you feel defeated and lose market share your business value will diminish. It’s better to start the process when you still have some fight and passion for your business. You may need to grow your business to make it more attractive to a buyer. You may need to transition client relationships gradually to a general manager.
Begin With the End In Mind
In the current market the best chance of success is to prepare and plan ahead. “Begin with the end in mind”, and you are much better prepared for making the right decisions along the way, following the steps towards your long-term vision. If you start preparation early, you will get a deeper understanding of the potential value of your business and have the time to make positive changes to increase your chances of a good sale.
A well-planned business exit will enable you to attract a higher sell price and let you minimise tax on the proceeds. Use of staged payments and pension contributions allows you to take full advantage of tax concessions. If you put your business up for sale suddenly, you are often met with a tax bill just when you don’t need it.
According to the 2018 December House of Commons briefing, there are 5.7 million active businesses in the UK. Only 8,000 (less than 1%) of these businesses are classified as Large. About 88% of privately-owned businesses in the UK are owned by families. Family firms turnover an estimated £1.4 trillion annually, some 35% of total private sector turnover. In the UK, family firms pay £149 billion in tax each year – 21% of government revenues.
Succession or Exit?
Finally, if you do have to exit from your business unexpectedly due to poor health or other issues, the further you are down your exit plan, the better the outcome is likely to be for you and your loved ones. A poorly planned or poorly executed succession will often lead to dispute, poor customer experiences, business decline and financial pressure. Is that what you have worked all these years for?
As business owners approach retirement, most will cease to own their businesses, however, over 42% have no defined or documented business succession or exit plan. The PWC report on family business states that 43% of family businesses intend to professionalise their companies in the next five years. A significant number expect to have some transfer of ownership in the next five years. This represents a large number of transitions over the next ten years and the largest inter-generational transfer of wealth in history.
The transfer of ownership represents a significant stage in entrepreneurial activity. It is through this transition that the founders remove themselves from the business they own. This relates to ownership, decision making and generating a capital surplus for their efforts.
