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Expert opinion: How should a business be prepared for sale?

Written by Richard Mathews on .

Richard MathewsRichard MathewsWhen it comes to selling a business, there are some common themes that emerge, but one of the more obvious ones – planning ahead and getting the business ready – isn’t often one of them.

Business owners rarely actively make a decision about the timing of the sale, as the decision is usually sparked by an event. For example, they could have had a series of problems – perhaps with staffing, or customers, or family – and they decided ‘enough is enough’ and they want to sell up.

In other words, in most cases a change of circumstance will make a business owner focus on a sale.

That said, some people do actively plan, and invariably in a family business this will be because the owner decides to retire. In other cases, they may decide the market is favourable and it is a good time to sell.

How should a business be prepared for sale?

Planning should start at least three years ahead. However, timing really depends on the structure of the business in the first instance. If everything is on the shoulders of the business owner, then it will take longer to prepare that business for sale than if there is a strong management team in place who already help to run the enterprise.

Client relationships also have a bearing. If the business owner is vital for client relationships to flourish, then it takes longer to move those clients across to new points of contact.

Even if there is a strong management team in place, the presentation of the offer document and impact on the level of due diligence then has a bearing. If personnel files, contracts, health and safety policies etc are not up-to-date or documented then all this needs to be put in place.

Business owners should always remember a transaction can take at least 12 months and often longer to go though and a very high proportion – reportedly 80 percent - fail.

By getting all the ducks in a row – all the documents and business structure in place – then a business owner will have a far better idea about the transparency of a potential purchaser: it will be easier to quickly assess whether they are genuine or just fishing.

Most common sales routes

For SMEs, the most common sales routes are via MBO (management buy-out), MBI (management buy-in) or trade sale to a competitor. Businesses with turnover under £10m don’t tend to attract private equity.

MBO:

This is probably the simplest route, as the owner already has a management team willing and able to take on the business. The disadvantage is that they may not have the finance to buy the company, so the owner may have to help with funding. If the sale fails to go ahead, then you have an unsettled management team, so communication at every stage is important.

MBI:

Again, this can be more straightforward, but the difficulty is finding someone with the right skills to come into the management/new ownership team. If the business owner is strong on sales, or finance, or customer relationships then these are the skills that need replacing and finding a person with the right skills who also wants to buy in can be a challenge.

Trade sale to a competitor

Often, business owners will use an agent to investigate potential buyers among the competition, but this isn’t really necessary at SME level. Agents tend to be looking for a larger market.

A trade sale can work, but the downside is that the business owner is letting the competition know the enterprise is for sale, making suppliers and customers easy pickings for competitors, which makes the business vulnerable.

Common mistakes when selling a business

Valuation: a business owner will seek the advice of someone who isn’t planning to buy the business – such as an accountant – and then focus wholeheartedly on that figure. In reality, every business’s price is bespoke; even two identical business will go for very different prices. The value of a business is dictated entirely by the market opportunity the seller can create and business owners often find that a hard concept.

Taking due diligence personally: during the sales process, a business owner will be questioned and challenged about their business in a way they may not have experienced for years (if ever). Often they aren’t used to this and they don’t like it. The mistake is to take it personally.

SME owners, to a certain extent, down tools as soon as they put a business up for sale, and often stop doing the important stuff like developing and growing their business. In fact, they need to change their mindset and remember they aren’t so much selling a business as looking for a buyer.

Richard Mathews is CEO at Optimum Professional Services and group finance director at RFS. www.optps.co.uk