Preparing to sell a business can be a lengthy and complex process. The mass of regulatory and legal hoops which owners must overcome make them susceptible to mistakes which can, at best, negatively impact the valuation or, at worst, result in an aborted sales process. Through proper preparation and careful planning, business owners can avoid these classic pitfalls and create a stronger bargaining position from which to secure the highest multiples.
Robust preparatory strategy ensures optimal valuation
Before preparing to sell a business, companies need to ensure that a strong exit plan is in place in order to achieve an optimal valuation. This plan should include a strategy which will both expand the business and target the desired exit multiples. By differentiating their offering, investing in new platforms, diversifying their client base and learning the language of their prospective buyers, businesses can provide a solid foundation that poses an attractive investment or bolt-on acquisition and also demonstrate its potential for growth – elements that are essential for any buyer.
Differentiate what the business offers
It is vital during the building phase to be able to differentiate the business’ offering in the market and establish a niche. While businesses do not necessarily need to create an entirely new market, it is important to identify and properly communicate their USP to give interested buyers a reason to consider their business as a strategic acquisition. Once that niche is identified and centralised, the focus can move to retaining the reputation built through the business’ corporate identity and that intellectual property that makes the brand valuable. In terms of the products or services, the emphasis should shift from positioning them as being essential to having strong growth potential. Businesses should capitalise on any innovative aspects, cutting-edge technology and ground-breaking applications in order to help convince buyers that the products/services of their business have a strong future not just in their target sector but in other sectors more widely.
Once that niche is identified and centralised, the focus can move to retaining the reputation built through the business’ corporate identity and that intellectual property that makes the brand valuable. In terms of the products or services, the emphasis should shift from positioning them as being essential to having strong growth potential. Businesses should capitalise on any innovative aspects, cutting-edge technology and ground-breaking applications in order to help convince buyers that the products/services of their business have a strong future not just in their target sector but in other sectors more widely.
Invest to take the company to the next level
Once the niche is identified businesses should consider investing in platforms that can take the company to the next level. Digitisation, for instance, is one option which can allow business leaders to create new sources of customer value, and new ways to turn that value into revenue. But businesses should make sure each investment adds value and is profitable for the business model.
It is not worth implementing digitalisation if this will not add value to what the business can offer. Perhaps the best route will be to combine the two sides of business (analogue and digital) to give an organisation a new way to compete with something that is unique and a basis for future innovation.
Diversify the client base
The next step should involve diversifying the client base to improve the resilience of revenue streams. Building a broad clientele will open up more streams for revenue and build connections which can demonstrate the potential for business’ products or services to apply and appeal to different sectors. Businesses should analyse the target market and adjust their method of expansion accordingly while staying true to their niche. For instance, owners can either extend the reach of their marketing and promotional efforts or release a new product or service to disrupt or the offerings of their competitors.
Understand the buyer
Usually, the main types of buyers are competitors – companies in related markets, or financial buyers such as private equity groups and overseas buyers. Once business owners have identified the most likely purchasers, they should make their business as attractive as possible to them by investing in the areas they value. While this may require restructuring the business offerings if the company spans several sectors, it is important to ensure it is exposed to the highest multiples. The largest determinant of the EBITDA multiple achieved is the sector in which the business operates and how it ranks in that sector.
It is possible to take ownership of this by reconfiguring business models, adding new product lines, and tilting business offerings towards specific customers. For instance, software as a service (SAAS) companies sell at around 3-5x sales, while digital subscription businesses trade at profit multiples in the 10-12 range. Businesses can use PR to increase their profile within the sector with the highest multiples and implement a clear growth strategy to maximise EBITDA in the lead up to a sale.
Demonstrate a compelling expansion strategy
Businesses will need to demonstrate that they can hit key milestones and realistically achieve their growth targets. However, although a compelling expansion strategy is important, they will not be convincing to a buyer unless businesses can clearly demonstrate that they have the funds to finance their targeted growth. Doubling sales in a year, rolling out a franchise nationally and improving margins – these are predictions for which prospective sellers need to provide compelling evidence and a clear business plan.
Spurious claims will not survive the intense scrutiny of the due diligence process, so management should be objective when establishing a growth forecast and show a track record of achieving major milestones. It is important to have either credible finance options in place, a facility agreed with a bank, a cash injection from an investor, or be able to demonstrate that forecasts show that expansion can be covered from the funds generated by the business.
More established businesses, for example, may consider making an acquisition of their own to facilitate this growth, or open offices abroad to demonstrate growth potential.
Speak the language of the buyer
Perhaps most importantly to optimise the potential to sell a business, companies must learn to speak the language of any prospective buyer as the secret to successful negotiation is to understand the purchaser’s perspective. For example, strategic buyers or emotional purchasers (such as HNWs who aspire to own trophy brands) will likely be willing to pay a premium and so it is important to mine into the motivational drivers that drive these buyers to make such investments.
Achieving the maximum price for a business depends on a number of factors. The task for business owners is to limit the ones that can be controlled and mitigate for unexpected problems that could harm the overall valuation of the business.
Caroline Belcher is partner and head of exit planning at Cavendish Corporate Finance.