Merger and Acquisition activity has reduced compared to the levels seen prior to the Financial Crisis.
This fall in acquisitions, coupled with the mobilisation of Baby Boomers as they prepare for retirement has resulted in a saturation of private businesses on the market. As such, it has never been more important to ensure that your business stands out from the crowd.
Few business owners, however, are aware of the steps required to prepare their business for sale.
It is important to consider issues that may affect the value of your business as early as possible; it can take up to five years to implement some of the strategies required to optimise the value of your business.
The first step sale is to consider who is most likely to purchase your business. Generally the purchasers 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 purchaser 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 and such as technology, intellectual property or customer lists alone. For this purchaser, the presence of an expensive management team may be disconcerting as they could potentially 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 purchasers 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:
- A comprehensive understanding of the market to which they belong, with regular analysis
- Strong protected 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
Business owners that understand the direvers of value are better able to identify and highlight them in their business prior to sale.
Similarly it is crucial 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 purchaser’s due diligence which will invariably have a negative impact on their position in negotiations. Some of the most common impediments to sale include:
- Low gross profit margin
- Static or declining turnover
- Low market share
- Reliance on a few key customers
- Lack of protection of intellectual property
- Non-transferrable goodwill
- Inadequate financial records
This list is not exhaustive; each business will have its own unique impediments to sale. 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 through undertaking preliminary vendor due diligence and conducting an indicative valuation to assist in the identification of any impediments and the implementation of strategies to minimise their impact.
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 biggest and most common mistakes made by business owners is to leave preparation of their business for sale to the last minute.