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Grooming Your Business For Exit (Part 1)

How to get the maximum value when selling your business

Getting the best price when selling your company is a little like selling a property or vehicle – you should develop a business exit strategy and groom your business before you exit and consider who will make the best potential buyer. With forethought and business exit planning you can attract more purchasers and maximise the sale price.

Smoothing out the Risks

Identify the risks new owners might perceive in your business and manage them. This will enable you to cast your net more widely for potential buyers and increase their perception of your business’ value.

A company’s value is determined by a simple equation: earnings x multiple = value. The multiple is the variable you are trying to influence through grooming and is a function of perceived growth and perceived risk. Although it’s likely to take some time, a business exit plan and grooming your business will help to reduce risk and increase the multiple variable.

A checklist for grooming your business for sale

Being able to demonstrate the following will maximise your business’ sale value:
• You as the owner are not crucial to the business’ continued success.
• Specific industry experience is not essential for potential buyers.
• Clients and suppliers are not inextricably tied to the current owner.
• The business has appropriate management, operational and information systems.
• Key staff are in place and are stable.
• Intellectual property can be preserved and transferred.
• Market position is stable.
• Legal and contractual arrangements are tidy.
• Past performance is credible.
• The platform is right for growth and a profitable future.

Even if you are not ready to actually exit the business, when you have a business exit plan in place your business will run far more efficiently and you will be in a position to choose the level of involvement you want to have on a day-to-day basis.

Who will Buy? Options for Exiting Your Business

Thinking about the best potential buyers for your business and the way you sell your business is an essential part of the grooming process and developing your business exit strategy. There are three main ways of selling: trade sale, sale to management or stock exchange listing.

Trade sale

Selling your company to a competitor or complementary business is often the best way to maximise its value for reasonable sales costs.

Benefits: Trade buyers are often willing to pay a higher price as they understand the standalone value of the business and may pay extra for potential synergy gains by linking your company with their operations. These might include cutting costs by sharing back-office functions and opportunities to increase sales by selling your products in wider markets.

Risks: Trade sales generally require the release of confidential information to prospective buyers, which may be too risky for some sellers. Purchasers may also wish to change the business fundamentally. For example, potential buyers may want the business merely for its customers or brand name and have no need for its management or employees. You may be forced to decide between the highest price and a lower one that protects your employees.

There are two main ways of conducting a trade sale: contestable sales or exclusive discussions.

A contestable sale gives the vendor greater control over the sale by identifying the keenest buyers and introducing competition, but comes with a risk that confidential information may be leaked to the market. It involves a search to identify all potential buyers, the release of selected company information to determine the level of interest, followed by requests for bids.

Exclusive discussions involve speaking to a single potential buyer and tend to be the result of an opportune approach by another company. They offer less risk of leakage of confidential information and may require less effort, but may generate a lower sale price.

Selling your business: a contestable sale versus an exclusive discussion

Contestable sale Exclusive discussion
Wide-ranging search to approach all potential buyers Negotiations with a single buyer
Competitive auction allows the vendor to set the agenda on price, process and terms Less competition so fewer sale options and lower potential price
Acquirers can succumb to deal fever and bid up the price Less structured process that may require reduced time and effort
Greater risk of information leaking to the market and employees, which is disruptive if the sale is not finalised Greater confidentiality with a lower risk of information leaking to the market and employees

Grooming Your Business for Exit (Part 2) will look at other options to consider in your business exit plan.