4 minute read
HOW TO SELL A BUSINESS
owner set about selling their business?
When is the right and most profitable time to consider selling your business?
The right answer is when sales are soaring, the sales pipeline is strong, your business’s structure is sound and there’s a strong management team in place.
That may be the case for some of the record number of businesses which have sold successfully in the first quarter of 2021, but after more than a year of the pandemic-related upheavals we’ve all experienced, there may be other businesses on the market which, while structurally sound, have suffered a temporary downturn because of the pandemic, or their owners want to pass it to new management and turn their attention to other opportunities.
Whatever the reason, the message from the professionals is don’t rush and plan ahead.
Most people selling a business will only do it once, so do it right.
A well thought-through exit strategy will help secure you the best value.
How do I value my business?
Valuing a business is not an exact science. It will take into account historic and forecast performance, cash flow, turnover, profitability, risk and market conditions.
According to Cheltenham accountants Hazlewoods, there are traditionally four methods adopted for the valuation of private businesses.
Price earnings-based valuation: this method measures a business’s current share price, relative to its per share net earnings. This method is often used to value companies with an established profitable history and can also be used to value unquoted businesses.
Net asset-based valuation: this method looks at a company’s assets, or the fair market value of its total assets after deducting liabilities.
Dividend yield-based valuation: if your company pays out dividends, the dividends can become an indicator of value. Dividend yield is shown as a percentage and calculated by dividing the monetary value of dividends paid per share in a particular year by the value of one share of stock. This method is only typically used to value a minority holding. Dividends paid to owner directors in SMEs are largely at their own discretion and often form part of a tax efficient remuneration strategy (and therefore do not link directly to the value of shares).
Discounted cash flow-based valuation. This method aims to estimate the value of an investment based on its expected future cash flow and how much money the business is likely to generate in the future. Perfect in principle, but impractical in reality – as future cash flows are difficult to predict beyond the short-term.
The vast majority of SMEs are valued on an EBITDA multiple (a variation of the price earnings method), whereby the maintainable level of profitability (appropriately ‘normalised’) is multiplied by a risk factor appropriate for the industry and business size. For example, if sustainable profits are £1 million and the appropriate industry multiple is five, the valuation (before adjusting for excess cash, debt and working capital) would be £5 million.
Whatever method used to value a business, it’s complicated. Take professional advice. Valuing your business wrongly, too high or too low, could mean you lose money and a successful sale is delayed or difficult to achieve.
Is this just fantasy? An escape from reality?
Sometimes the valuations put on businesses can seem fantastic. WeWork in 2019 and Deliveroo earlier this year are two examples.
WeWork, the American real estate business, launched in 2010 selling serviced office space. Soon the company developed a much more enticing offer and the provision of basic serviced office space became “a co-working environment”.
The company took on leases of large office buildings, transformed them into millennial-friendly, multicoloured workspaces which offered not just a desk, chair and internet, but free coffee, snacks, squashy sofas, networking events, “wellness” sessions. Millennials need never go home.
By 2019, the company had apparently been valued at a staggering $47 billion – but it had never made money, in fact by that time its losses were reportedly $1.9 billion.
When the company announced plans to launch an IPO, questions which had always existed on the business model in some financial sectors began to be asked by those who had been dazzled.
A few weeks later, the charismatic CEO Adam Neumann stepped down and the IPO was called off.
Fast forward almost two years, and the company has shaken itself up, and is once again in a prime position to support the post-pandemic model of more flexible working. As of the middle of March it had 859 locations in 151 towns and cities across 38 countries, including London and Birmingham.
In April, the UK-based take-away service Deliveroo listed on the London Stock Exchange. Ahead of the listing, there were various reports of its valuation, ranging from £7.5 billion to more than £9 billion, despite the fact that the company has never yet made a profit. The news of its whopping valuation certainly kept the national headline writers busy and the shares sank on valuation. But the business has certainly grown and has ambitious plans to grow further, so while its initial valuation might have seemed like a fairy story, who knows what will happen to the business over the next ten years.
Who can help me sell my business?
You can do you own research on potential buyers and approach them directly.
However, using an experienced business broker is likely to be able to secure a better price or improved sale terms. Your existing professional advisers (such as a financial adviser, accountant or law firm) can also offer advice. Choose a professional firm which has experience in your sector, or which can demonstrate a number of successful sales.
Professional business brokers will have a big database of funded buyers or investors, a wide network of people around which they can spread the word, efficient marketing teams and back-office administration which can take all the pressure off so that you can continue to keep the business in the best shape possible for when prospective purchasers come knocking.
Don’t rush the nitty gritty to get investment ready
It can take a couple of years or more to get the business in the best shape to sell. In that time a business owner can build the right management team and invest in the systems and processes which ensure the company is trading efficiently.
If you are pursuing a trade sale, your business sale advisers will also be working to discreetly identify possible purchasers.
Negotiations take time too, along with the due diligence required by the prospective purchaser. Last year, not surprisingly, Covid delayed business sales with transactions taking longer to complete. The deal taking the longest to complete in 2020 took 348 days, compared with 272 days for the longest in 2019 and 218 days in 2018.
