Selling your business in a downturn

Those of you who live by satnav might smile at the heading. It’s one of the great lines the device keeps saying (perhaps followed by “turn round whenever possible”). And it is on that subject, negotiating your exit from your business, that this article is based.
It comes by general request so it seems that, in these challenging times, business owners are giving much more thought to how to sell their businesses than they do in boom times, when everyone seems too busy to plan their exit.
In fact, the perfect time to move your business on is when you are going through your most profitable period – but it always seems to be in the down times that people sit back and think “Do I like what I am doing? And, if I don’t, what can I do about it?”.
Well here are a few indicators to help and, if they do help, and if requested, I can expand on them in future articles.
Get your house in order
First, if you want to prepare to exit your business, you need to get your house in order. No one wants to buy, take over, or even look at a company that is in disorder. So how do you do this? You need what we at Azule Finance call “The book” – a collection of information that accurately reflects how the company trades and how decisions are made.
Start by holding monthly, or at least bi-monthly, management meetings that are minuted and that show the aims of the company, its actual monthly performance and other relevant data, depending on the type of business (in ours it is our funding lines and arrears). This information, collected over a period, (we recommend at least 2 years), builds up into a comprehensive review of the business. It also gets managers into the discipline of trying to making decisions – and seeing them through to a result – both of which help to show the viability of your business.
At Azule, we normally start with three main objectives for the year: the first could be the profit level, the second is normally a systems objective (such as improving our customer relationship management policies), and the third is usually some form of add-on (it could be building a new income stream or developing an exit strategy). If putting together this sort of structure seems daunting, ask someone from outside to help. We have helped companies start the process, enabling them to take it over; with some, if they wish, we stay on in an advisory capacity.
So, once your house of disorder has found some order and you have built up accurate records … what next?
Pay to get a price
There are so many people, especially in this market, who think their businesses are worth more than they are. In previous articles I have mentioned firms who base their price on their balance sheet asset valuation and who, when this is revalued, find their assets are worth nowhere near what they thought.
It is very difficult to recommend an exact formula – it always depends on the type of industry you are in – but it must be a mix between the realistic net worth of the company and its future profits. We recently had a firm of accountants run a slide rule over us and it is reassuring to have this valuation when we make business decisions.
So, our advice is to get a realistic price in mind – and be prepared to spend some money taking advice on what the business is really worth.
Now you have a realistic goal, and your house is in order, what next now?
Look at options
It is time to think about the different ways you can exit, such as via a trade sale (to someone in your market), by advertising to someone who wants to buy a business that makes good returns, or you could sell to someone in your business. Each of these merits an article on its own, so let’s start with just one: selling to someone within the business.
Management buy-out truths
More often than not, selling to your own management is perceived to be the easiest move. But it also carries probably the greatest risk. The risk is that, if you fail at a management buy-out, you may well engineer the total destruction of your own management team. What do I mean?
Well, once you give your management the thought that they might buy you out, if they fail (whether through your fault or theirs) you have taken the golden chalice and replaced it with a poisoned chalice: no management will successfully carry on working for that owner after such an event. However, if you successfully negotiate and achieve a management buy out, your current team may itself be in a good position to look to its own exit strategy.
In either case, it is important to be realistic here, too. If you want to sell to your management then make them aware of the realistic price, valued by someone from outside the business. And be aware yourself that, in today’s market, owners who sell in management buy-outs are expected to leave up to 50 per cent of the price in the business as loans, to help support the financiers.
So, our advice is that, before you have any thoughts or take any steps, you should take good advice. You don’t want to go down a year-long road trying to sell to your management, failing and then finding that you have self-destructed your own nest egg. It may be that there is a better option – such as taking a back seat and letting others run the business without you losing the reins – so consider those, too.
If you missed previous articles in this series, or would like to comment via our blog, look at www.azule.co.uk. If you would like to discuss, in confidence, options for your own exit strategy, contact peter.savage@azule.co.uk.