As an entrepreneur, selling your business can be as much of an emotional decision as it is a financial one. Plenty of considerations can and should go into it, rather than just the size of the cheque being cut by prospective buyers. However, in this practice, timing is a crucial aspect too. While pulling the trigger to sell or hold on, is ultimately a personal decision, there are a few compelling factors for why now may be just as good a time as any to put your business up for sale.
- Recessionary risks
2019 saw strong market performance despite being headlined by political and economic uncertainties, as well as rising trade tensions. With this backdrop, it still remains a seller’s market overall. The caveat here though is that markets tend to respond worse to bad news than they do positively to good news. With the overarching issues aforementioned still hanging unresolved, a recession is not an entirely far-fetched proposition. If history is any indication, in such an environment, buyers tend to retreat into their shell until the dust clears, by which time earnings multiples are pushed down due to the prevailing fear of uncertainty. As a business owner, you can take advantage of the current level of acquisition multiples still prevalent that can enhance your return on investment at exit.
- Entrepreneurs’ Relief
In the UK, the Entrepreneurs’ Relief policy enables business owners to pay less capital gains tax when they pursue a business sale. Provided that owners meet eligibility criteria, all capital gains on qualifying assets are taxed at a rate of 10%, which is a strong incentive for business owners to be able to complete a tax-efficient exit. To qualify for this fund, entrepreneurs must be either a sole trader or business partner and own the business for at last 2 years prior to selling it.
- Capital just raring to go
A 2018 study by leading private equity firm Bain Capital published that globally, there is more than $1 trillion of dry powder (defined as institutional capital that has not been deployed into committed investments) available to asset managers. In other words, buyers are still on the hunt for attractive opportunities that they can allocate their capital to. In such an environment, putting your business up for sale can attract significant interest, and if you are the proud owner of a well-run business, there is even better news. Because of so much money chasing quality opportunities, a well-managed business can often attract a bidding war wherein buyers compete with each other in an auction process to submit acquisition bids.
- Cheap financing
Post the 2008 crisis, interest rates were lowered to stimulate greater economic activity by both consumers and businesses. At near-zero levels, there is really only one way for these rates to go over the short- to medium- term. This is great news for buyers as it enables them to obtain debt financing at lower interest rates. This in turn translates to greater appetite for your business as the buyers now have less equity (i.e. less of their own risk) invested in each business.
While hindsight is always perfect when it comes to timing entry and exit points in a business, there are various macroeconomic factors, current policies and other considerations that currently make now a great time to sell your business if you are ready to move on.
Thinking Of Selling Your Business?
1. Is this what you want to hear or what you need to hear?
M&A literature is full of articles noting that valuations are ‘more art than science.’ Reading between the lines, this means that brokers will all value the same company differently. More pertinently for business owners, it can mean that the broker’s valuation reflects the value that the owner attaches to their business rather than a more objective figure. This most commonly plays itself out as exaggerated growth figures. The end result is a valuation which may keep the owner happy but only serves to scare away potential buyers of the business.
2. The use of ‘comparable’ public companies
The ready availability of rich data for public companies makes it easy for business brokers to value their clients’ businesses using metrics obtained from ‘comparable’ public companies. Small- to medium-sized companies are seldom comparable in any way to public companies in their industry. Constantly updated analysis provided by experts like Aswath Damodaran is an excellent resource – just not particularly for private companies. The figures are rarely realistic unless the business broker can provide a watertight rationale for their using them.
3. Over-adjusting financials
Business brokers typically adjust operating income so that it only reflects recurring items. In some cases, this can amount to little more than an exercise whose aim is to massage the company’s operating profit. What’s remarkable about ‘extraordinary items’ is how ordinary they are; a business broker may work under the assumption that a litigation – to take one example of a non-recurring cost – was a one off event. But the next litigation will also be a one-off event. Not accounting for contingencies will ultimately lead to flawed valuations.
4. Misunderstanding what makes the company valuable
An oversight of many business brokers’ valuations is the assumption that cash flow will grow or decline incrementally over a 5-10 year period, overlooking almost all the factors that drive that growth. Their assumption is that the market will grow by 5% and thus, it follows that the company will as well. But it’s seldom that simple. The aggregate market is only one component of a companies’ value – with plenty more decided by changes in technology, strength in IP, management decisions and competitive factors. Failing to grasp where the value in a business really lies will inevitably lead to erroneous valuations.
5. Capital expenditure projections
Misunderstandings around capital expenditures and their effect on free cash flow projections are quite common, even among brokers. This usually arises from a misconception that capital expenditure is a ‘one off’ expense, when, although in many cases it may be discretionary, sensible capital expenditure is a central component of any company’s growth plan. Brokers that overlook this point risk exaggerated DCF valuations based on the flawed assumption that a company’s existing capital can be used to generate above-market growth.
Lee Smith is Managing Director of Verdani Investments who offer fair business valuations whilst safeguarding employees and creating legacy moments for founders.
To find out more and to get a valuation on your business, contact us by emailing email@example.com or calling us.
Most entrepreneurs are focused on growth and understandably so. However, when it comes time to exit, having a viable exit plan is just as critical as any growth plan. This exit plan takes on a heightened level of importance when selling to an external buyer. In a lot of cases, the entrepreneur has spent years and decades building up the business to the point where the identities of the business and the entrepreneur are intertwined. Selecting the wrong buyer can thus have grave consequences wherein time-honoured legacies can get marred and dissolved. So how exactly do you prevent this from happening to your business?
1) Understand the buyer’s business and priorities
The highest bidder is not necessarily the best buyer who will work to preserve the business’s legacy. By studying the buyer’s business model and operations, you can evaluate what purpose their acquisition of your company would achieve. In a lot of cases, buyers may be looking to buy the business as it would expand their access to new markets and/or products. In other cases though, the buyer may simply be looking to strip out certain assets or even worse, remove a competitor off the market to establish greater pricing power.
From a legacy standpoint, this could be highly detrimental as in such cases, the buyer would ultimately look to realize cost synergies by laying off your former workers (not to mention the adverse impact to the brand that such actions would cause). Therefore, discussing what each buyer would do with the business and understanding how your business fits within their long-term priorities can go a long way in selecting the right buyer for your company.
2) Succession planning
Buyers that don’t have an established or identified management team ready to take over the business are probably buyers that you want to stay away from if legacy is a major consideration. Most business owners will agree that a strong management team is critical to long-term business success. So if the buyer you are courting doesn’t even have a leadership team in place to pick up where you left off, the chances of them being a good fit are slim. Work instead with buyers who have conviction in your business, how it can help them achieve their own growth plans and who will be best-placed to lead it from their end.
3) Buyer culture and brand
History is littered with poorly executed M&As which made financial sense, but faltered because of differing cultures. Therefore, while the buyer would certainly do due diligence on your business, it is also important for you as a business owner to do your due diligence on the buyer. Gaining an understanding of the culture they foster and the external brand they have in the community can enable you to decide whether they are an acquirer who would strengthen your legacy or not. This can be done through multiple ways including stakeholder interviews, site visits, observation, media analysis etc.
All in all, it is important to sell to a buyer whose priorities align with yours as a business owner. While the financial merits of a transaction often tend to overshadow other factors at play, if the legacy of your business is important to you, then work with financial advisors who understand this and will screen, source and present suitable buyers accordingly.
Lee Smith of UK mergers and acquisitions firm Verdani Investments is proud to have received the coveted 2019 award for mergers and acquisitions. Lee received this award for his m&a work in the IT sector where he grew revenues by 520% and profits by 400% in the space of nine months.
When asked about the transactions Lee responded “it was a real pleasure finding like-minded business owners that shared the vision of collaborating and building something of value, without losing control of their destiny.
There are so many companies seeking acquisitions with control and ego in mind, whereas I want to work alongside people and create value and security for all the teams involved. We now have a shared vision to create a larger company and retain the brands that clients know and love”.
In the world of mergers and acquisitions (M&A), there are an increasing number of stories, where organisations obtain a perceived unfair advantage or monopoly over their competition by using creative M&A strategies that the Competition Commission couldn’t stop.
Therefore, With large businesses and corporations gaining ever more control over sectors, I believe the time is upon small businesses to use more intelligent, forward-thinking and collaborative partnerships to remain competitive in the marketplace; and have the ability to retain or win contracts against larger organisations.
Since 2013, I have been heavily involved in M&A, and mergers in particular offer a smart option for companies to remain strong, provide security for employees and offer a real choice for clients.
By leveraging two or more balance sheets, you can gain access overnight to more lucrative projects and reap the rewards of sweat equity built up over the years.
Funding an IPO can be a very expensive experience and you have to jump through many hoops with banks or lenders and end up with a large amount of debt, but there is another way with our IPO funding facility.
If your business qualifies, we may be able to offer you IPO funding, which means no upfront fees for the listing process and only a small monthly payment going forward. Being a PLC has many benefits, not only a substantial route to wealth, so take the pain out of the process and let us help you avoid getting into debt to gain access to the wealth of opportunity an IPO provides.
Our IPO funding option gives you exactly what you want, a public listing, just with a smarter model.
Contact Lee to find out more.
CVA finance can provide the lifeline your business needs to get back to its full potential. Being in a CVA can make suppliers and potential clients nervous as your rating drops the minute you enter a CVA (Company Voluntary Agreement).
There are alternatives to going into a CVA altogether, but most accountants and Insolvency Practitioners will recommend a CVA because they make good money from it.
Lee can help you with either CVA finance or by not getting into a CVA in the first place, which is the best scenario. Lee prefers to work on a success basis so he wont take any fees from a CVA, which pits him on the same side as you, so there is trust from the start.
CVA finance will get you out of debt quickly and will get you back on track to the road to wealth.
Contact Lee now to see how he can help with your business.
Lee offers financial help for small businesses, without the stress and hassle that high street banks give you. In most cases, personal guarantees are not required and you wont have to secure finance against your house or family assets, which will come as a huge relief for business owners. Lee has experience in helping business owners to keep their business running, realise the potential and provide an exit strategy that meets the needs of the shareholders.
Lee works on a success fee basis, so there isn’t and added financial pressure on the business.
Contact Lee now to discuss the options available.
Our turnaround services offer a real chance for your business to not only survive, but thrive for many years to come. A successful turnaround requires commitment, flexibility and above all it requires all parties to agree and work together for the good of the company.
Our turnaround services provide new processes and simple ways to manage cash flow so everyone can see clearly what is happening in the business. Our focus is on improving the profitability of the business and having a clear exit strategy for the business from the outset. This doesn’t mean that the business needs to be sold, but it does give a clear direction and focus on specific targets and goals, which is key for any business to succeed.
As well as focus on cash flow and profitability, we also like to have a plan on mergers and acquisitions, to see if a business in similar or vertical markets could be a good fit and add strengths to the existing business. This can be useful in many ways, one of these is cross-selling services and products to each others customer bases.
There is no one-size-fits-all solution with us, we will look at your unique situation and plan a strategy with you, as business partners, to ensure the best outcome possible and most of all, we don’t charge fees, we work on a success-only basis.
Contact Lee for more information
A business turnaround specialist is a professional person that can provide insight into your business and can also bring valuable skills, tips and tools, that owners themselves would not otherwise have access to. A specialist also brings a unique viewpoint, usually because owners of small companies under £5m in revenues, are typically working in the business, as opposed to working on the business.
In many small businesses, it is far easier for an experienced turnaround specialist to see what is required, as they have an external perspective and are not clouded by emotions and linked to the day to day stresses of managing cash flow, debtors, creditors, staff and customers.
Far too often, a business owner can be reluctant to change and doing things in a different way, although change can be exactly what is required, to not only save the business, but make it thrive for years to come.
How to Choose a Turnaround Specialist
Any reputable turnaround specialist should be able to provide solid case studies and examples of results achieved for other businesses. Just like in any other profession, you need to choose wisely and as long as there are references available, or you can see results achieved before, you should be in a safer pair of hands and ensure you get an agreement outlining some expected deliverables, so everyone knows what is expected of them.
How Long Does a Turnaround Take?
In some cases, a turnaround can take as little as 1-3 months, but each business is different and requires a unique approach. To make it the best success possible, a turnaround requires flexibility, a willingness to maybe do things differently and a partnership between the owner(s) and the turnaround specialist, as they are working on the same side as you and should act in an impartial way and offer experience and insight, that even your accountant and financial advisers cannot bring to the table.
How Much Does a Turnaround Specialist Cost?
There are different ways to work with a turnaround specialist, some will want to charge daily fees, however I prefer to work on a success basis, where I only get paid for results, as I think this is the fairest way for all parties. In this scenario, everyone wins when the results are produced, which I think is critical for the business owner(s) as they need people that are on their side and championing their cause. This also ensures that owners can have full trust and confidence that the specialist is spending his time doing things that will help you and not simply racking up the hours, to collect fees, that may just be causing more pain to the business and adding to any existing cash flow issues.
Where Can You Find Turnaround Specialists?
A good place to start is LinkedIn. Try searching for business turnaround specialist and then interview prospective partners, to see who is best aligned to your needs and goals.
Lee Antony Smith is an experienced, UK-based, business turnaround specialist, with 4 years’ mergers and acquisitions experience. Working with small and medium-sized businesses in a variety of sectors, Lee has taken companies from a state of near closure to sale in the space of 12 months.
Contact me for more information.