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Selling at a premium
5:05pm Thursday 16th February 2012 in Finance
Tim Wallbank, partner at Banbury accountants Whitley Stimpson, offers tips on getting best value when selling a business in a harsh economic climate
Any corporate finance adviser will tell you that now is perhaps not the best time to contemplate selling your business.
The continuing financial uncertainty hanging over the Eurozone, the faltering growth of our own economy, the lack of funding available to the SME sector are all factors contributing to the low prices we see being paid for businesses that do change hands compared with the ‘boom’ years of 2006 and 2007.
But, life goes on. If you are an owner/manager looking to retire, or move on to new pastures, then you may have been hanging on grimly since the start of 2008, waiting for better times to return.
Unfortunately, there are few if any pundits willing to give odds on that happening anytime soon. So, if you are going to ‘bite the bullet’, there are still things you can do in your business to make it more saleable and attract a premium price.
There are many factors that influence the price of a business, but most price negotiations start with a simple calculation: profit times a ‘multiple’, where the profit is the sustainable bottom line of the business and the multiple (known as the P/E multiple) is what the market is prepared to pay in your particular sector.
Given enough time, you can influence both elements of this equation.
Profit n Carry out a review of overheads and then drive through the cost reductions you identify.
n Clearly identify any exceptional and non-recurring costs in your accounts, so the true underlying profit of your business is clearly visible.
n Reduce staff headcount to optimum levels n Carry out a margin review (against the competition) Multiple This is harder to influence but there are some drivers of value worth considering.
n Management team: This is absolutely key in most transactions. Are there any gaps? If you are a retiring managing director, work out what it is you do in the business and groom someone to take over.
Promote the management ‘stars’ to the board of directors and issue detailed job descriptions.
n Unique selling proposition: Work out what it is and nurture it. Is it a brand name, intellectual property, high barriers to entry? If it is excellent service, build on it by using customer satisfaction surveys, staff training and good marketing.
If it is product-based, use good research and development and customer feedback to stay ahead of the game.
n Contractual Income: It may not be possible but if you can make your sales line more reliable, it will have an influence on the value of a business. Can you offer more maintenance contracts on your product range, for example?
n Intellectual Property Rights (IPR): If you have any IPR in your business, for example, a secret process, product design or trade mark, make sure it is properly protected by patenting it if necessary.
n Balance Sheet: Look at the assets that sit in the balance sheet. Are they all contributing to the bottom line? If not, you may not get best value for them when you come to sell.
For example, does the company own freehold property that is not fully utilised? You may get more value by selling and then renting smaller units as necessary. Are stock and debtor levels too high?
n Remove any surplus cash in the business, if it is tax efficient to do so. If not, clearly identify it so you can get paid for it by the purchaser — it is usually tax efficient for you and does not disadvantage the buyer.
Finally, when it comes to the selling process, position your business carefully: n Know your buyer: It may not be a direct competitor and could be a company looking to break into your market, or a business that has similar processes, distribution channels or customer bases, who would benefit from the synergies of bringing the two firms together. Think outside the box when targeting potential buyers.
n Corporate strategy: Be careful about taking long-term decisions for the business that a potential buyer may not agree with. Consider whether you need to diversify to make the company more attractive.
And a key point is to sell when you do not have to — buyers can smell fear and desperation!