Selling a business: what you need to know
Ben Grinsted
CFO Practice | C-Suite & Boards | Technology, Tech Enabled & Business Services
Selling a business can be complicated, as there is a raft of things to consider in order to achieve the best outcome. Dan Leaman FCA , Corporate Finance Partner at Moore Kingston Smith , highlights some of the ways to go to market.
Selling a business is complex. There is a raft of things to consider and it’s worth putting in the effort to get them right. Whether a first-timer or serial seller, if you are the person responsible for masterminding the sale, you will need an intricate plan of action and a realistic schedule to achieve the best price.
Dan Leaman, Corporate Finance Partner at Moore Kingston Smith, answers some of the most popular questions when it comes to selling a business.
Q: How should a finance leader go about selling a business?
The most important aspect to consider when selling a business is proper planning. More often than not, the entire process takes longer than most people think and involves a lot more steps. Despite every sale being different, there are certain issues that crop up every time which need to be managed.
Q: What is the most common question your clients ask you?
The number one question we are asked by finance leaders wanting to sell a business is “How much is my business worth?” – or its variant, “My business is worth ￡xx, isn’t it?” Unfortunately, this is often the wrong question that needs to be asked.
The actual question people looking to sell should be asking is: “What should I be doing to maximise the value of my business?” Usually, a business building towards a sale can significantly increase its eventual price by optimising the business in advance of the process through measures that include risk management, staffing structures, and up to date financial reports.
Q: How do you value a business accurately?
It’s vital that the business is valued accurately. Any buyer will conduct due diligence to evaluate the business’s historical financial performance, identify the key profit drivers and gauge forecast performance.
While there are several ways to value a business, the best approach to take for SME transactions is to define the sustainable profitability of a business and then apply an enterprise value multiple. This usually starts with the business’s earnings before interest, tax, depreciation and amortisation (commonly referred to as EBITDA). Then there needs to be an adjustment to reflect the estimated ongoing costs base and revenue after sale. Based on this calculation, a multiple is applied which reflects the number of years’ earnings a buyer is prepared to pay to buy the business.
The industry market, together with the specific business’s desirability, growth potential and sustainability, are what drive this multiple. So, the most effective way to boost a business valuation is to ensure that these factors are highlighted and optimised in advance of any formal process.
Q: What drives a business’s enterprise value multiple?
The core areas of the business that drive its valuation in the buyer’s eyes are the same areas that often determine how successful a business will be in the long term. Examples of factors that can detract from a valuation multiple include high customer concentration, poor quality of income, owner reliance, poor financial track record and low growth opportunities.
Q: How do you help a business to maximise its enterprise value?
To start with, in the preparation phase, we normally facilitate a half-day diagnostic workshop with the management team. They review the business against a series of best practice statements across the following areas:
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This enables us to quickly identify where the business is strong and any areas that need to be addressed to maximise its saleability. We then work alongside the management team to plan how to close the gaps, providing practical support throughout the process.
Once a business is ready to go to market and the internal issues are addressed, we progress to a formal sale process where other areas will further boost the business valuation. At this stage, we focus on:
Q: How do you help a business into its best possible shape?
Every workshop diagnosis is different, so every starting point is different.
This approach ensures the management team focuses resources on the areas that will have the greatest impact on the business’s valuation. It requires them to work on their business as well as in it. They decide what they are going to spend more time on and, crucially, stop doing altogether.
We are essentially a virtual non-executive director. We are objective, truthful and straight-talking and we hold the management team accountable to their plan of action.
Q: How long does the process of maximising enterprise value take?
It is never too early to start preparing. In rare cases, a business can turn it round in six months if they have the capacity and vision. However, most aim for a more realistic timeframe of 18 months to two years.
Should you have any questions for Dan Leaman FCA , please direct them to [email protected] .
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