Selling your business Part 3. Gearing up for sale

In the final article in his series about preparing your business for sale, Peter Savage outlines the strategy that leads to success even in a slowing economy.
Last month we were left with a conundrum: how do you sell a business when the company clearly has a value but the market, and consequently the performance of the business, is in reverse? This month’s article looks at how to gear a small business for sale.
Plan for continuity
As last month’s article showed, if the company has a profit, and if the business can continue without the key manager (you) in place, it can be valued at five times the super profit (a value that is based only on profit and loss figures).
However, many business owners don’t recognise the importance of the key person in the business – usually themselves – and get the value wrong. They have a misplaced view that the business will continue happily at the same level because of the brand they have built or their strong customer base. This is not usually how things work out. So you, as the owner, have to make some clear decisions – long before you sell. You need to have an exit strategy and work towards it.
First you have to pick a date by when you want to be out of the business. This can’t be a random date – perhaps thinking you’ll sell when you stop enjoying it. It must be a fixed date set well in advance – perhaps deciding you’d like to be out of your business in five years’ time.
You must then plan for this, in effect working to make yourself redundant by that time.
You must also try to structure the business so that there are enough key people, of sufficient caliber, to run the business and continue to take it forward – without you. If you achieve this you will be in a strong position to sell the business at five times its superprofit – and enjoy the proceeds.
Negotiate a compromise
If you aren’t able to restructure the business so it can be successful without you, and you face a low offer for your business, you do not have to sell and walk away disappointed. You can negotiate a compromise. This will usually mean accepting a lower price for the sale of your business – and remaining in it, working alongside the purchasers to help them make up the value of the sale price you want to achieve.
What does this mean in practice? The most common compromise is to stay in the business, working for a fixed period, either as a consultant or an employee, to prove that the business is worth the price you want overall. You’ll be asked to achieve a target – such as predicting what the business will earn each year – and receive an earn-out fee while working plus an additional slice at the end if you achieve it. By working for, say, another two years (I strongly recommend it should be no longer) you have the chance to achieve your aim – and walk away content.
Be realistic
It is absolutely standard practice for business owners to believe their business has a higher value than is the reality. After all they have assets they paid huge amounts for. But it is essential to be realistic. Small businesses either have balance sheets where the assets have been written down to nothing but are worth substantially more than they say or, more usually, the other way round. That is they have assets that have no chance of recovering their value.
So back to being realistic when working towards a sale. Make your accountants write down your assets at a steady value over three or four years straight-line. You should also regularly check the current value of your main assets - but don’t rely on one set of figures alone. It is worth asking dealers what they are paying for current makes or models and comparing their values with others’ values. For instance, the TV Bay value of an A500 might be £12,500 but the dealer price might be between £8,000 and £9,000. The real value, if you have five or more digibetas, is somewhere between the two.
For sale?
Once you have worked out the real price of your balance sheet – and managed the business to a position that makes you expendable, or to a point where you could contemplate an earn out period – what’s next?
The answer is not to stick a for sale sign outside. Business sales are best done discreetly. Instead, you should do some homework. Examine your target market. Who would your business appeal to? Where would it be a natural fit? Where would it be a good add-on? Don’t then put the word about. Make direct representations to the right people – and only the right people.
This ensures a degree of confidentiality (the potential sale of a business often raises doubts about its viability which can affect its success thus reducing its value) and it allows the buyer to have a good look at it without feeling he is in a Dutch auction.
So how do you do that? You employ someone to sell the business on your behalf – discreetly, confidentially. Yes I know this may cost you a fee but, in the long run, it could return you more or, at least, maintain your expected price.
Is this something we do? Well not exactly in my case. But I know a man who can.
If you would like to comment on this article, or any in the series, write to me at or contribute to the blog at where you can also read previous articles in this series.

Tags: finance | selling your business | azule | strategy | business for sale | iss020 | N/A
Contributing Author N/A

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