10 Steps to Prepare to Move On from Your Business Commitment
However much you love your business, the time comes when you, and the half a million or so owner-managers who withdraw from business every year, want to realise some or all the value tied up in the business. It may be just that you want to buy a yacht and have the time for that round-the-world adventure you’ve been promising yourself; it may be that you’ve taken the business as far as you can and, to realise its full potential, it needs another skipper at the helm; or it may be that your backers, if you have any, want to bail out themselves – venture capital firms often have itchy feet and want to take their profits from one sector to pile them into the next big thing.
Whatever your reason for looking for an exit, to get the best value out of your business follow these ten guidelines.
Monitoring market prices
Timing is crucial when it comes to selling a business. Since 1900, 27 bull markets have existed worldwide, when company shares rise sharply, with corresponding bear markets, the latest example being in 2008–10, when over-optimistic investors get mauled as the bottom drops out of stock markets. These ups and downs can result in steep curves, with business values oscillating by as much as 50 per cent and the changes in the market’s perception of value often having little to do with the actual performance of businesses themselves.
Businesses listed on the stock market have no difficulty in working out what their businesses are worth at any moment in time – share prices are published daily in the financial press and every few minutes on financial websites. But because most businesses, yours in all probability included, aren’t listed on a stock market, you can’t easily keep tabs on market sentiment for the value of your business.
Step forward BDO Stoy Hayward and take a bow. BDO Stoy Hayward’s Private Company Price Index (PCPI) tracks the relationship between the current FTSE price/earnings ratio (P/E) and the P/Es currently being paid on the sale of private companies. Put simply, the PCPI lets a company without a stock market listing get a reasonable idea of what it may actually sell for now.
Valuing your business
Setting a precise value on a business isn’t quite as simple as, say, determining the price of your home. One possible way is to add up the assets and take away the liabilities – in theory, the difference is the value of your business. However, your assets comprise items such as stock that may be hard to value, and debtors who may or may not actually pay up.
Businesses are more usually valued using a formula known as the price/earnings ratio. P/E ratios vary both with the business sector and current market feeling about that sector. The market as a whole generally trades with P/Es of between 14 and 20, with the average since 1870 being 15.
You can check out the P/E for your business sector by looking in the Financial Times, or at ProShare’s website (click Research Centre, and then Performance Tables). You need to register to access the data on the ProShare website, but registration is free. There you can see the current P/E ratio for every company in your sector, as long as they’re listed on the London Stock Exchange. If you want to see how much interest exists in your business sector right now, visit Interactive Investor (select Research, Markets and then Sectors). There you can see the sector whose shares investors have bought and sold the most over the past day, month and year.
Private companies don’t trade on as high a P/E multiple as their big brothers on the stock market. So, if a public company in your sector is on a P/E of 12, then as a private company your prospective P/E is around 8, or a third less. Why? Good question. The simplest answer is that although shares in your business are hard to dispose of, you can unload a public company every business day by making a phone call to your broker. In other words, the premium is for liquidity.
In addition, Daltons offers a free valuation service. Complete a short form and Daltons Business forwards your details to a number of key business transfer agents. These agents then contact you and arrange to provide discreetly a no-cost, no-obligation business valuation based on current trends, current instructions, recent completions and the general activity of the market.
Figuring out who to sell your business to
Determining a selling price is one thing, but finding a willing buyer is a much more challenging task. Price and buyer are inter-related factors, because whatever equation you use to arrive at business value, at the end of the day a business is only worth what someone with the dosh can pay. The following are your options:
Sweetheart deal: Selling out to someone you know or do business with is an easy option. Unfortunately, this method isn’t always the way to get the best price for your business, because only one buyer is in the frame. Not only does it take two to tango, but your sale works better if you’ve at least two people interested in buying your business.
Trade sale: This method is when you sell out to another company, usually a much larger one with access to finance and other resources that may enable your business to have a continuing future. This involves publicising that you’re selling up and creating the environment for several bidders to enter the ring. You can sell the business yourself, perhaps by advertising or by word of mouth. But usually you appoint a business broker to handle the deal, much as you’d use an estate agent to sell your house.
Management buy-out (MBO): You may be able to sell your business off to your management team. That involves them raising the money, perhaps from a venture capital firm. You can find out more about MBOs from the Centre for Management Buy-out Research (CMBOR), based at Imperial College Business School since 2011. The centre monitors and analyses MBOs and is supported by Equistone Partners Europe (formerly Barclays Private Equity) and Ernst & Young.
Management buy-in: You sell the business to a new management team, invariably with the financial backing of a venture capital firm. The team is led by someone, usually from a similar industry to yours, who’s proved successful in building up and selling out a business before.
BIMBO is a combination of a management buy-in and buy-out, usually involving an external managing director being brought in to run your business with your management team and financial backing from a venture capital firm.
Employee benefit trust: This involves forming a trust to hold shares on behalf of employees, so that the employees can in effect end up owning a substantial slice of the business. Some tax incentives are available to retiring owners who sell (or gift) shares to such a trust. You can find out more about this option from Employee Ownership Options. This organisation’s goal is to raise awareness of the business options available to small firms when they’re threatened with closure, as a result of succession problems or as a result of divestment.
Going public: You sell shares in the business to the public through a stock market flotation. In that way, you can realise some of the value in your business gradually over a period. This is a complicated and expensive process and you need professional advice. The Ernst & Young website has a useful guide to going public; go to the website and follow Services, Strategic Growth Markets, Initial Public Offer, Your guide to going public.
Passing on to the family: Less than 33 per cent of family businesses are passed on to the second generation, and barely 13 per cent survive through to the third generation. So much for the bad news – the ones that do can be really successful. Among the world’s biggest family businesses are ALDI (short for ‘Albrecht Discounts’); Michelin, controlled and run by François Michelin, his son Edouard and their partner René Zingraff; and Mars, founded by Minnesotans Frank and Ethel Mars, who invented the Milky Way bar.
The following are organisations dedicated to providing education and networking opportunities for family businesses, as well as helping with succession planning: the Family Firm Institute; the International Centre for Families in Business; Peter Leach LLP, who started the Family Business Centre at accountants BDO Stoy Hayward and now runs it as a stand-alone venture; and the Family Business Institute.
Selling the assets: If you can’t sell the business, perhaps because it’s unprofitable, or because your business is a one-man band and has no prospects of operating without you, then the remaining option is to sell off the assets, pay out what’s owed and pocket what’s left.
You almost certainly already know the name of the buyer of your business. Make a list of all the competitors, customers, suppliers and employees who you believe may benefit from taking over your business. Then trawl the financial press to see who else has bought or been involved in any way in the sale of a company similar to yours.
Making your business look its best
Whoever you plan to sell your business to, you should plan ahead to make the business look its best. Blemishes such as poor profit performance, bad debts, credit downgrades and being dragged through the courts by ex-employees claiming to have been unfairly dismissed aren’t desirable. Try to make the three years prior to your exit look as good as possible. That means profit margins should be consistently high, the sales and profit curve should be heading upwards and strong financial control systems should be in evidence.
Check out these organisations to see how your business is likely to appear to a would-be buyer.
Creditgate.com is among a growing number of companies that offer a comprehensive range of credit reports instantly online, including credit check, credit rating, company profile, credit score, credit reference, credit limit, company directors and county court judgments (CCJs). You can get your own business rating from one of these agencies to see how you appear to a would-be buyer.
The Centre for Inter-firm Comparison helps businesses of every kind improve their profitability and productivity by providing expertise in benchmarking, performance measurement and financial control. It gathers financial information on industries based on detailed information that participating firms provide – in absolute confidence – on a comparable basis. The centre then provides the information showing industry average and best and worst performance standards, without, of course, revealing the individual participants’ data.
When you want to bring a purchaser to the negotiation table, you need to prepare an initial marketing document called a sales memorandum. The management write the initial draft and your corporate adviser then polishes it up. It should
Make the business sound attractive and feature product literature, photographs, charts and tables.
Be a source of solid information, but not over-full of numbers and analysis. The buyer and their adviser will get your accounts themselves.
Show that the business has scope for improvement and development if someone with more money and wider skills and experience takes it forward. Otherwise, potential buyers struggle to see what value they can add.
Contain no detailed confidential information or commercially sensitive information, such as the name of customers or suppliers. No buyer makes a final decision on the basis of a sales memorandum, so you can provide this information later to serious buyers only.
Be tailored to meet the needs of different potential buyers. For example, competitors know a lot about the industry and your products, so you don’t need to explain that to them.
Finding business advisers
The information here should give you an idea of what you need to know in order to exit from your business successfully. But although you should know the questions, you need advice to find the answers. These organisations can help you find professional advisers and advice from those experienced in selling businesses:
HW is a national business advisory and accountancy firm with a network of over 60 offices strategically placed throughout England, Wales and Scotland, offering advice on a range of financial matters including specific help with selling your business.
BDO Stoy Hayward, an accountancy firm, has a number of publications that help with selling your business and set out its service offer to entrepreneurs planning to sell up.
Doing due diligence
When you buy a house, you and your surveyor crawl over everywhere with a tape measure to check out sizes, and employ various instruments to see whether any damp, dry rot or other unpleasant infestation exists that may affect its value. Your lawyer makes sure that the sellers actually own the property, no mortgage is outstanding and no imminent plans exist to build a motorway through the garden.
A similar process, known as due diligence, happens when businesses are bought and sold. The accounts have to be correct, tax paid up to date and mortgages declared, and any lawsuits rumbling in the background for unfair dismissal of employees, disputes with suppliers or defective products supplied need to be flushed out into the open.
At the end of the due diligence process, lots of people end up with liabilities. The corporate finance firm and the lawyers are responsible for the quality of their advice, and if they get it wrong, they can be sued. The accountants are responsible on your side for delivering proper accounts and on the buyer’s side for interpreting them correctly. The seller too has to give guarantees that she’s told the truth, the whole truth and nothing but the truth. If that proves not to be the case, she may miss out on a big chunk of the sale price.
A seller is usually required to give warranties and indemnities to the buyer to the effect that every important thing she says about the business and its accounts is true, and that she’s left nothing material unsaid. By way of guarantee, the buyer doesn’t pay a portion of the selling price for a period of a year or so, giving time for the buyer to uncover skeletons.
AllBusiness.com, a website with resources for entrepreneurs including how-to articles, business forms, contracts and agreements, expert advice and blogs, has a free 40-point due diligence checklist.
Earning out your profits
One trick that buyers and their canny advisers use to make sure that your business is really worth all the bundles of dough they’re paying out is to make you do some of the hard work for them. The thinking behind this trick is that because you’ve been running the firm for years, no one’s better qualified than you to make sure that you keep sweet the customers and suppliers with whom you presumably have a good working relationship.
Typically, if a buyer proposes an earn–out (where you have to stay on after you’ve sold up and achieve the profit forecasts made when you sold the business; if you hit them, then the money held back on sale is released to you), this amount is for between 10 and 30 per cent of the sale price and covers a period between one and three years. The rule here is that sellers should resist such proposals and buyers should insist!
Most of the costs involved in selling your business are based on a percentage of the selling price. That figure includes the earn-out amount, whether or not you actually achieve this amount. Certain unique tax implications exist that you or your adviser should check out with HM Revenue and Customs.
Starting up again
Having worked out how to start a business, build it up and sell it on, you may be justified in thinking that you’ve a winning formula for making money: just keep turning the handle. One business founder who came on a programme at the Cranfield School of Management bought out a chain of three pubs, built it up to a dozen and then sold out to a national brewery chain for a healthy profit. He repeated the process three times more. The value he discovered was that big brewers didn’t want to buy a pub or two at a time. That’s too much like hard work. In any event, it takes as much management time to buy one pub as it does to acquire a chain.
A buyer doesn’t want to pay you for a business only to find out that you start up a new business and become a competitor. A buyer expects you to sign a non-compete clause as part of the sale contract. This clause requires you not to compete for a certain number of years within a designated geographical area. The good news – for sellers, that is – is that such agreements are difficult to enforce and aren’t always looked on favourably by the courts, because they restrict an individual’s employment options.
Becoming a business angel
If you don’t want to run a business but do want to stay involved, then you can consider becoming a business angel, backing other people’s businesses with your money and expertise.
Robert Wright started up his business, a one-plane regional airline, straight from business school; he’d already qualified as a pilot. Robert built the company, trading as City Flyer Express, up to a substantial venture and sold it to British Airways for a sizeable eight-figure sum. Over the years following the sale, he took stakes in a handful of small businesses and some not-so-small ones, such as Wizzair.com, using only a modest fraction of the gain made from the sale of his own company.
If for any reason a business appears to have no value, perhaps because it’s making losses and has no assets worthy of the name, it may still be possible to salvage something from the wreckage. In the worst case, your creditors can apply to wind your business up if they’re owed more than £750. They can serve a statutory demand (Form 4.1) for the money due, and if this sum isn’t paid or secured or a settlement isn’t agreed within 21 days, they can appoint a liquidator. The liquidator’s job is to pay off the creditors, starting with herself. No realistic likelihood exists of anything being left for the owner(s) going this route.
Before you reach this stage you should take professional advice urgently, not least because you may be liable for more expenses than you think. In theory, if you’re trading as a limited company, then your liabilities are capped at your stated share capital. However, trading on after the business has become insolvent leaves the directors open to a charge of wrongful trading. In such cases, the directors can be personally liable for the company’s debts.
Talk with your accountant, check out your position by reading the government’s Insolvency Service website or contact a member of the Insolvency Practitioners’ Association – a directory of members is on the website.