Do you seriously want to sell your business? I pose this question because I’m not convinced that many business owners really do. They may say they do, and convincingly believe themselves that they do, but the way they have set up their business and the way they are running them often suggests otherwise.
I’m not sure that selling a business is right for everyone. Many businesses are better as lifestyle businesses. In other words they will give the owners a decent standard of living but are probably not set-up to be owned by someone else. Often these businesses ARE the people who own and run them and couldn’t be run by anyone else.
So how do you go about selling a business?
I believe it starts when you initially set up your business. I have always had a five-year plan in my mind. It’s a fairly fluid plan and is likely to change along the way, but it does have a strong underlying mission to it. For example, ‘I want to be the best in this market’ or ‘I want to disrupt that market’.
At the start it is hard, and wrong, to be too defined because things change and I think some the best businesses today are the ones which can adapt rapidly to changing market conditions. My most recent business Mubaloo, a smartphone app developer, needed to constantly change what it offered to keep up with the fast changing mobile market; but overall it was very well defined - ‘We want to be the best Enterprise app developer in Europe.’ Over the years many opportunities have come and gone but we have stuck to the underlying mission of the business.
Having a well-defined proposition also enables your marketplace to pigeonhole your business; as humans we like things that are tightly defined, we remember them better. This makes marketing easier and enables you to target your marketing budget in a more effective way.
So why is focus important when selling your business?
When a business is looking to buy another business they generally have one of 3 reasons:
1) to enable them to grow their top line revenues
2) to fill a hole in their business strategy
3) to buy out the competition
By definition you would have to be a large company to fulfil reason 1 or be in direct competition to achieve reason 3 and therefore most small businesses are bought because of reason 2: to fill a hole in another company’s strategy. This is the area I will focus on.
Your business, therefore, needs to be a well-defined piece of puzzle that will fit the missing piece in someone else’s puzzle. I’m sure you’ve heard of the maxim, ‘Get big, get niche or get out’. A niche strategy can be industry focused or product/service focused. For example my first business, Mason Zimbler, was a full-service marketing agency whose niche was the technology sector and my most recent business Mubaloo offered a niche service, the development of mobile apps, but we weren’t specific about the industry sector.
One of my current investments, ForrestBrown, is again a niche service business, R&D Tax Credit consultancy, but it works across all industry sectors. Mason Zimbler and Mubaloo were bought by businesses who wanted to plug a hole in their strategy - we were the missing piece of their puzzle.
So to recap - you have developed a business within a well-defined niche. You’ve grown it to a decent size, you have an established brand with customers and employees, and you’ve started to think about selling it. At this point there are a multitude of companies that will help you do this. To quote another maxim here, ‘you pays your money, you takes your choice.’ All of these M&A (Mergers & Acquisitions) advisors will take a percentage of the sale price, assuming you are successful in selling the business. Most will also charge a monthly fee to get you to the point of selling.
My advice in this area is to find an M&A advisor that plays in your market, understands your business and knows the landscape you play in. In other words you need to find an advisor who sees the value in what your business does and can prove that value to a potential purchaser. Do not worry too much about how much these businesses cost (within reason). They might seem expensive to you but a good one will find the deal that will pay for themselves. Lastly find one that you like; you’ll be spending a lot of time working with them, so it’s important you get on well.
Valuations are usually based around a couple of figures: Revenue and/or EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) or effectively your profitability. A valuation is often a multiple of one of these figures and that multiple varies widely from industry to industry, business to business, so it helps to have an expert from your sector who can guide you on this and set your expectations.
Selling a business always takes longer than you think
My first took 10 months, my second, nearly 17 months. After you have chosen an M&A Advisor to work with the first job is to put together an IM (Information Memorandum). This document basically describes your business in every way - products, customers, processes, finances, etc. It’s the document that will hopefully get someone excited about your business. Your advisors will then put together a one-page Executive Summary of your business based on this document. They will send that to everyone they think might be interested (and you can specify who they should not send it to e.g. clients/competitors).
Hopefully a few of those will want to see the IM. At that point it’s good to meet with the interested parties and present your business. This will not only give them an opportunity to see your management team in action but it will also give you the opportunity to see if they are right for your business. Ideally you want someone who is falling over themselves to buy you and ideally you want at least two companies who are keen. You also want to make sure there is good chemistry between your management team and their management team.
At this point it is important to talk more about your management team. I cannot stress enough how vital it is to develop a strong team who will take over the running of your business. There are two reasons behind this. Firstly the actual process of selling a business takes a huge amount of emotional and physical effort - you can become overwhelmed by it. So you need to have a great team behind you who can continue to run the business in the meantime. Secondly, anyone buying you will be looking at the management team very carefully as they will effectively be the ones who will be running the business, post acquisition.
When you have whittled the potential acquirers down to one the next stage is a HoT (Heads of Terms) - this is basically an agreement as to what that company is willing to pay for your business and the structure of the deal. Some business like to use the ‘earn-out’ process to purchase a business, which can work well for certain types of business but beware that someone isn’t just trying to buy your business out of your profits.
Post acquisition your business will inevitably change
Depending on the sales agreement you may end up losing total control and that could start to affect your profitability. Your M&A advisor should help in this area. An earn out can be a year, 3 years or I have come across 5 years. Be careful not to tie yourself into a deal which won’t work for you in the long term - you are no longer the owner, you become an employee.
The next phase is due diligence. This is where the acquirer’s advisors, their accountants and lawyers, will pore over your business to make sure it is the business you’ve been telling them it is. This can be a long-winded process. To shorten it I highly advise that early on in your business’s development you hire the services of a good Financial Director who can tell you what financial and legal information you need to build and document as you grow the business. This will save you a huge amount of time and stress when you come to sell it. Acquirers also like ‘clean’ books, it gives them confidence that your business is being run well.
Following on from due diligence the acquiring company will then put together a sales agreement. This will probably include warranties against any outstanding financial (tax or otherwise) which may not be clear at the point of sale. It is basically a guarantee that there are no skeletons in the closet that they haven’t uncovered in due diligence.
The final part is then simply signing the sales agreement, which can be very long winded depending on how many equity holders there are. And that’s that.
The process of selling a business is not for the feint hearted. It will take longer than you think. It will be more stressful than you think. But it can also be the most interesting, exciting, and rewarding part of owning a business. Good luck.