How to prepare to sell your business for maximum value

When it’s time to sell your business, there are many elements that should be considered. For example, how it is packaged, marketed and presented will affect the final price achieved, and so too will the management of the sales process. This will influence the quality of potential buyers attracted, which in turn will directly impact on the valuation receive.

At Hyman Capital we have developed a short list of hits and tips which we have found help businesses generate the best offers from the right buyer at the right time.

1. Business as usual

Selling a business will take time and effort, however we all know the purpose of any business is to satisfy client needs, so this must not be interrupted at any time. If it is, then the business you are selling will not achieve its best value.

It is essential that during any sales process the business continues to function as normal and ideally continues to grow. You may need to look at operations and staffing to see how the allocation of your and other relevant company members’ time may be affected. Planning and foresight are essential to maintain balance.

2. Confidentiality

Keep the confidentiality of an intended sale and only give information to managers and staff on a need-to-know basis. This will help maintain the status quo and ensure that the day-to-day running, output and achievements of the business are not disturbed.

3. Define what you are selling

What is it that you are selling? Bigger businesses may need to split up portions of the business for sale. If you are splitting a business to sell only a portion you have to work out the costs associated with the part that is being sold. Put in place costs for required external services (for example, those the company may currently source internally, but will no longer be able to do so after the split and sale). These budgeted costs need to hold up to third party scrutiny and must be in-line with current market prices.

4. Price expectations

What price can you realistically expect? If you are a listed company you need to look at the listed market valuations and sales. If you are a private company look at the sale prices from the last two to three years to form a benchmark price for your company type, scale and size.

You might want to engage an external adviser who may have better knowledge and access to this information. Hyman Capital offers a valuation service to support exactly this requirement.

5. Preparation for sale

If the business is an SME, you will need to identify shareholders’ expenses that are charged to the business and other “one off” expenses that may have been charged to the profit and loss account. These figures may need to be added back to the P&L to establish the underlying recurring profitability of the business.

Buyers like to see consistent trends and therefore a sale may need to show a track record of two-to-three-year period. However, this needs to take account of the industry, the market, typical sales cycle and ideally demonstrating a targeted growth curve.

6. Teaser, Information Memorandum and financial model

As part of any sale, a teaser, information memorandum (IM) and financial forecast model will need to be prepared. It is usual to have the support of an external party to do this as they will be able to present the information in a way that is targeted at potential acquirers.

Hyman Capital has a separate document which identifies many of the items that should be included in the teaser, IM and financial forecast. Critical information in a sale will be the market outlook, the competitive landscape of the products or services the company sells and an open description of the management team that will remain behind once the sale is completed. Any IP or patents held by the company will also need to be described.

A potential purchaser will be interested in what capabilities will remain once the purchase is complete, so the know-how, core processes, people systems and tools will need to be described and evidenced.

7. Digital Data Room

Its good practice to have available a digital data room which after appropriate NDA can be accessed by interested parties. Hyman Capital have a detailed document that describes what should be in a digital data room, however the digital data rooms sould include: Financial information, last 3 years accounts, management accounts and forecast, Legal information, certificate of incorporation, legal structure, ownership structure, building leases, Contractual information, copies of top customer and supplier contracts, Employee information, number of employees, organisation structure, employee standard contracts, holiday entitlement, pension arrangements. Also included would be any insurance claims or legal disputes settled in the last 3 years or current.

8. Vendor due diligence

It’s a good idea to get external legal and accounting companies to do due diligence on your own company – so you know what may come up when a potential acquirer looks at your records. This kind of work is commissioned by you, and the term of references are such that they can be handed over to a potential purchaser at the right time during the sales process. The genius of this is that it highlights issues that you may not have been aware of so that you can manage them in advance. Being forewarned means there will be no nasty surprises which could led to an unexpected price reduction. This situation can be avoided if time is taken to ‘dig deep’ before the sales process commenced.

Checking your own business sale fitness before any due diligence from potential buyers is particularly important in the SME environment. This is because accountants often finalise accounts without clearly explaining what the adjustments at year end are for and what their impact has been.

9. Taxation

It is imperative that you understand the impact of any sale on your business’ own tax position; be that corporate and/or personal tax. Depending on the shareholders involved, it may be possible to shape the consideration to enable the tax payable to be legitimately minimized.

10. Warranties and Indemnities

These are important legal terms meaning that in any sale you have to warrant the information to the purchaser i.e. you must be able to truthfully say that it has been prepared on a proper basis and gives a true and fair view of the business you are selling.

In addition, be aware that if certain items come to light a purchaser may be entitled to make a warranty claim. The sale and purchase agreement will therefore need to have a procedure to deal with this.

You will also need to give various indemnities on the taxation position of the company, i.e. guaranteeing that the position of the company is as you say it is. Should any issues come to light, then again there will need to be a procedure to deal with this, including a notification process if you need to make any payments as a result.

11. Completion Arrangements

Ensure you fully understand the “completion statements”. These deal with the cash and other assets within the business and lay-out what happens when the sale is completed. By being fully aware of these you can ensure that everything is in good order on completion.

12. Transition Period

There is an awful lot of information that needs to be prepared for in a sale and it is unlikely that you/the company can handle it on your own. A project team will need to be created with a project manager assembling all the data and information that the advisers will require. This is a worthwhile investment of time and money as this will make the deal process more efficient, identify any issues that need to be worked on or that may require careful consideration on how best to present them to potential vendors.

13. Time

You need to allow appropriate time and resources to manage the process. Vendors are often surprised by how much time and effort the sales process can take. So, allocate the appropriate time, energy and resources to do it properly.

Finally, to achieve the maximum value from your exit, remember that the two games - running the business and running the sale - will need to be run simultaneously and successfully right through to the very end.

ABOUT THE AUTHORS

Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and

acquisitions, interim management, board management and governance, deal structuring, and company turnaround. See: www.hymancapital.com

Nigel Ransom is Head of Operations at Hyman Capital and offers expertise in business strategy, procurement, supply chain, IT, processes systems and tools. See: www.hymancapital.com