Preparing Your Business for Sale – Part Two

 

 

The problem for many people when they sell their business is that they leave millions on the table – just because they don’t understand how business exits work. When selling your business, you need to be “Investor Ready” which means that you need to reduce the risk in the business and increase the profitability.

 

Selling Your Business Ben Killerby

 

In the last post, we looked at two of the five things you need to do to prepare your business for sale.  Here we look at the remaining three things.

 

Get The Valuations


An essential preliminary step is to get a valuation of the land and buildings, the stock in trade, the plant and equipment and other items such as the intangibles (goodwill, value of the brands, intellectual property etc.).

 

There are usually a number of valuers involved :

  • A specialist plant and equipment valuer,
  • A real estate valuer, and
  • An accounting firm to value the business itself.

The valuations serve two functions:

  • They set a baseline to measure all your offers against, and
  • They give the directors comfort that they are discharging their duties by seeking a proper price.

The business valuation differs from industry to industry and from one valuation method to another.  Many business valuations ascertain the average earnings before interest and tax (‘EBIT’) or earnings before interest and tax, depreciation and amortisation (‘EBITDA’) over the previous two to three years.  For non-publicly listed companies, the average EBIT or EBITDA is then often just multiplied by an industry multiple – or 2, 3 or 4, depending on the industry.

 

Another valuation method is a Discounted Cash Flow (“DCF”).  This method is often used for start-ups, IT companies or fast growing businesses. A DCF uses projected future cash flows and then discounts them back to a present value.  It essentially looks at the money the company will earn in the future and works out the present value of that money.

 

A third valuation method is simple asset valuation plus an amount for goodwill, rather than on a DCF or industry multiple of EBIT or EBITDA.

 

There are a number of other general valuation methods, as well as specific industry rule of thumb valuations such as a multiple of revenue, value per customer or value per subscriber.

 

Unlock Value Outside the Valuations


Where vendors can do well outside valuations and multiples, however, is in expert negotiation by professional negotiators brought in to do just that.   For example, if you use a professional negotiating team, there are dozens of techniques to pick up extra cash without even arguing about the sale price.  For example, you can pick up an extra half a million dollars or more in the sale of a $2m-$20m business by using these two techniques:

  • Negotiating the timing of the sale to occur after your biggest revenue month, which could be December for example. If the sale occurred in January, the December revenue goes into your account, not the buyer’s.
  • Negotiating the timing of the sale to occur before your biggest expenditure month, say the month with the biggest production runs. Cash then stays in your account and does not have to be spent on a business activity from which you won’t derive a benefit.

Do a Vendor’s Due Diligence


A prospective purchaser will want to know all about the business and this is done through the due diligence process. Most vendors wait till they have a prospective purchaser and then respond to a series of questions posed by the purchaser. This is wrong. It is tactically better and always cheaper to do a ‘vendor due diligence’ and give it to the purchaser up front than to let the purchasers come ranging through the business for months on end.   This means that prior to even approaching purchasers, your advisors and lawyers need to give you a due diligence request that mirrors the ones expected from prospective purchasers.  You and your team then go through the business records and assemble the due diligence documents.  You file them under headings such as financial information, assets, material contracts, litigation, employee matters, taxation, marketing and the like.  Since there is no transaction under way at this stage, there will be time to fix problems and find missing documents.

 

Sometimes you find that a whole series of documents are missing and they need to be created or amended.  Imagine, for example, that your workforce did not have up-to-date employment agreements, or your IT vendors still owned the copyright in the software that they wrote for you.  Not only is there time needed to draft fresh documents, but there is the human element in getting people to sign them.

 

If you don’t do a vendor’s due diligence in advance and instead you wait for a purchaser’s document request, it just takes too much time to get everything together. This time lag will be interpreted by the purchaser as disorganisation. If there are documents missing or problems uncovered, you will look even worse.  The purchaser will invariably come back to you with a long list of these perceived problems and then use them to bargain down the price. How much do you tell a prospective purchaser?  Often vendors are concerned about making statements about the business that might come back to haunt them – so they say things like, “You will have to make your own enquiries” or even say nothing at all.  This turns potential purchasers right off.  They simply walk away and you are left with no-one.  It is far better to give them all the information known and then get the lawyers to make the appropriate disclaimers so that any issues do not come back to haunt you.

Spend the time assembling copies of everything there is to know about the assets, then (depending on the size of the business):

  • Scan it and put it on a drive, or
  • File the documents all in lever arch folders.

Potential buyers sign non-disclosure agreements (and preferably, data room access agreements) before they are allowed access to the documents.  In bigger transactions, scanned documents can be stored in a virtual data room where access and copying by potential purchasers is strictly controlled.  In smaller transactions, a computer with the electronic files or the lever arch folders can be stored in a physical data room where inspection and access can also be controlled.

 

Summary


The first step in being “Investor Ready” is to ascertain the position of your shareholders, stakeholders and key management.  This is critical so that you have alignment with all of them on a sale.

 

You then need to document your exit strategy for both financial buyers and strategic buyers. You need to get the valuations of land, plant and equipment, IP and the business itself – then spend the time on adding to those valuations before going to market.

 

Finally, you should anticipate the due diligence questions you are going to receive and prepare all the documents and spread sheets that will answer those questions long before you go to market.  This ensures the purchaser doesn’t use delay or incomplete due diligence as an excuse to reduce your asking price.

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