According to recent research, for every 100 businesses that seek a buyer, only ten manage to successfully sell and maximise their value.
Worse, an abortive sale process could cost up to £100,000, not to mention the hidden costs of a distracted management team.
That said, hundreds of companies change hands every year and, while I’d be cautious about the claimed multiples, many of these businesses do realise their true value.
So, how can you seize this once-in-a-lifetime opportunity and avoid the pitfalls that scupper 90% of business sales?
Sunshine Marketing – a case study
A couple of years ago, the owner of a successful marketing agency – I’ll call it Sunshine Marketing - came to me.
“Dan,” he said, “I’ve been building this agency for 20 years. It’s a great business, but I'm now I’m tired of the long hours. I’ve decided to sell. Also, I’m about to make a down payment on a yacht in the Caribbean. It will be ready in six months. Can you help me sell the business by then?”
I said, “Sure, let me have a look under the bonnet.”
We sat down and assessed the 80 factors that influence how valuable a business is.
While it looked like Sunshine Marketing was making a good profit, it wasn’t sustainable. The agency’s biggest client, for example, accounted for 15 per cent of turnover, yet 50 percent of its profits.
The owner was under-investing in the business and doing all the work himself - even cleaning the toilets to save money.
I quickly realised that Sunshine Marketing was in the 90 percent of companies that don't sell.
However, I also knew there was something unique about this business and that we could turn it around.
I explained to my new client that to maximise the value of his business, he had to think about it from a buyer’s perspective. And, buyers want an investment that minimises their risk while maximising their returns. So it's all about risk management.
For marketing service companies, buyers typically manage risk through this simple formula:
V = P x M, where Value = Profit x Multiple
"P” represents the company’s historical financial performance while “M” is its future earning potential and its associated risk.
While from the buyers perspective it’s just a way to manage risk, for the business owner, the formula represents the culmination of your hard work and dedication to your business. It represents all those late nights, the risks you’ve taken, the sacrifices you’ve made and, importantly, the expectations of what the business would deliver to you and your family in the form of future financial security.
Therefore, to prepare a business for sale, you need to focus on factors that will drive the multiple of the business, as this enhances value more than factors that focus on increasing profits alone. And you need to see it in purely financial and commercial terms, not as the product of years of hard work, blood, sweat and tears.
You have to take the emotions out of it.
So, working with Sunshine Marketing, we put a plan together that over the next 18 months, transformed the business, creating some exceptional opportunities to grow the team and the clients. We did this by focusing on the 5 key areas that maximise the value of a business:
1. Selling the story, not the business
It’s important to show a buyer whyyou’re in business as well as whatyour business achieves. This is because it demonstrates a vision for the business’s future. It also enables you and a prospective buyer to assess whether there’s a cultural fit – which could prove critical if the deal involves an earn-out period.
Your story should also include a clear reason for selling. Buyers are all too familiar with the standard "the business would now benefit from being part of a larger entity to capitalise on identified and significant growth opportunities"line, so it pays to be more upfront than less.
2. A history of investing in growth
Underinvesting to maximise profits doesn’t work. Any serious buyer will see right through it. Remember, they’re more interested in your future profits than your current accounts. However, consider carefully what you invest in. Concentrate on areas that will increase future revenue, improve margins and fix the single points of failure in the business.
3. Reducing the number of single points of failure
What could make a buyer nervous about your business?Generally speaking, over-dependence on anything represents a risk. Here are a few examples:
No client should represent more than 20% of your profit.
Change of control clauses in client contracts could cause major issues from a legal perspective - I’ve seen deals collapse as a result of this.
As a business owner, your single greatest responsibility is to assemble great talent - including your replacement.
A risk-conscious buyer will want to see a strong team that’s in it for the long term.
At Sunshine Marketing, we incentivised the team with share options and bonuses so that we were all driving in the right direction.
Use financial data to make informed decisions about the business’s future.
Make sure these decisions will stand up to due diligence.
4. Improve revenue confidence
Historical performance and current profit are obviously important, but a buyer is acquiring your forward revenue streams. This means you need to demonstrate revenue confidence.
For example, the greater portion of your company’s revenue that is recurring and stable, the more desirable your company will be to prospective buyers. Avoid becoming dependent on the day rate trap by productising your services so they’re sold on value, not time.
Look too, to develop multiple revenue streams. The more of these you have, the less affected your business will be by the failure of any single service.
Investing in new business and organic growth is also key, as is getting your team to understand that improving revenue confidence is part of their job description.
Remember, buyers will pay a premium for businesses that can show predictable earnings for the future.
After 18 months of hard work on these first four areas, Sunshine Marketing received an offer, valuing it at £8 million.
But guess what? By now, the owner and management team were enjoying life so much, they decided not to sell, but to stay on and keep growing the business instead!
The owner bought that yacht and, having appointing a managing director, even has time to sail in it a couple of times a year.
By making Sunshine Marketing saleable and getting the management passionate again, we also achieved the 5th and perhaps most critical factor:
5. Sell on your own terms
Nothing destroys value more than desperation. Selling your business shouldn’t be a strategy or the solution to a problem. It should be an option that a well-developed and executed business plan presents you with.
Not being in a rush is one of the most powerful messages you can give potential buyers about your confidence in your business.
In the end, Sunshine Marketing’s owner decided not to sell. However, by putting himself in a buyer’s shoes and adopting a business disposal mindset, he maximised the value of his business, rediscovered his joy of building his company and made time to go sailing in the Caribbean.
Selling your business is not a strategy - it’s an option created by having a well-developed and executed business plan that focuses on growth.
Why? Because incredible things happen when you focus on growth.
If you are looking to grow your business to maximise its value, contact me, Dan Egerton on 07879 845845, 020 8133 1845 or drop me an email.