Achieving Optimal Sale Price on Exit

Over 270,000 mid-market businesses are expected on the market in the next five years, as the Baby Boomer and Builder generations prepare their businesses for sale. However, with a limited pool of buyers, competition is expected to be fierce.

The latest research reveals that 48% of business owners plan to exit their business by 2020, yet in spite of this, over 70% would be unwilling to sell their business at its current value.

Preparing your business to achieve the optimal sale price takes time, energy and commitment. And the earlier you start, the more opportunities you afford yourself.

Identifying your buyer and the business’s value drivers

The first step in preparing your business for sale it is to consider who is most likely to buy your business. Generally the buyers of private businesses fall into one of the following categories:

  • Investors looking for a business to operate for themselves
  • Venture capitalists or private equity firms
  • Industry participants, competitors or suppliers
  • The current management team, with or without third party funding.

Each buyer will have a different perspective on which qualities are considered attractive.  For example, an investor may be attracted to a business with a highly qualified and experienced management team who can assist in running the business following the departure of the vendor.

A competitor who wishes to integrate the business into existing operations, on the other hand, may be interested in creating synergies or acquiring key assets such as technology, intellectual property or customer lists alone.  For this buyer, the presence of an expensive management team may be disconcerting as they could be faced with the prospect of having to fund a number of redundancies in order to reduce overheads.

By recognising the key characteristics of potential buyers and the value drivers sought, it will become easier to groom your business towards this market. Generally, however, businesses that attract high sale prices are those with the following characteristics:

  • Strong underlying revenue with sound profit margins
  • A strong management team that is not heavily reliant on one or two individuals
  • Comprehensive and detailed financial records
  • Procedures implemented to continually review performance, particularly in comparison to competitors
  • A clearly articulated business plan on the future growth opportunities for the business including budgets and a comprehensive understanding of the market including competitor analysis and industry trends

Business owners who are conversant with the desired value drivers for a purchaser are better able to identify and highlight them in their business prior to sale.

Detect impediments to sale

It is equally important to identify issues which may challenge the sale of your business or depress the sale price.  Business owners who are unprepared for sale often only discover such weaknesses during the buyer’s due diligence which will invariably have a negative impact on their position in negotiations.

The most common impediments to sale include:

Business and Market

  • Low market share
  • Reliance on a few customers
  • Reliance on too few products or services
  • The business is too diversified
  • Poor growth prospects

Financial

  • Inadequate financial records
  • Gross profit margins below that of competitors
  • Static or declining turnover
  • Existence of redundant or non-core assets
  • High working capital usage
  • Lack of protection of intellectual property
  • Lack of written agreements and records, or statutory compliance
  • Obsolete technology

The first step in rectifying weaknesses is in their identification; as such a thorough review of the business should be conducted.  A professional advisor can facilitate this process by undertaking preliminary vendor due diligence and conducting an indicative valuation.

Plan for remediation

A thorough plan should then be developed to highlight value drivers and minimise the impact of any impediments to sale. Some issues may take little more than common sense to rectify, while others may be considerably more challenging.

Generally, the biggest determinant in achieving a favourable sale price is the business’s bottom line (maintainable earnings) and its growth prospects.  Having implemented strategies to improve the value of your business it is important to allow at least a year for the improvements to be translated into financial results.  One of the most common mistakes made by business owners is to leave preparation of their business for sale to the last minute.

As a business owner, you spend time and money presenting business products or services for sale; why not give the same care and attention to your business?

Are your ready to sell your business?   Use our Exit Smart Checklist to find out.