By John Young, below, partner in the Corporate, Commercial and Finance team, Kingsley Napley LLP
If you are approaching retirement, wanting out before the economy tanks or simply feel the time is right to sell your business for other reasons, below are six areas to consider to help you get the best price for your asset.
- Think about what you are actually selling
What are the key things your buyer will actually be buying? Is it intellectual property they need, a stellar sales or management team, customer contracts, your real estate portfolio or something else? Once you have worked this out, make sure that you have proper legal protections in place for those assets – for example, you might need to ensure IP ownership is properly recorded, replace employment contracts with more up to date versions longer notice periods and firmer restrictive covenants, make sure customer contracts are up to date, properly reflect the deal with your customers or that you have fully executed and up to date leases of your properties.
- Think about what the key risks in the business are
All businesses come with risks, and a buyer will want to make sure that they have properly been addressed. What are these risks for your business? It could be loss of key clients or suppliers, employment claims (issues around improperly calculated holiday pay are often an issue in sales), tax risks like potential IR35 issues for consultants or historic R&D tax credit claims. `Once you have done this, consider what steps you might need to take to minimise those risks and implement them in good time before the transaction.
- Think about whether there are any gaps you should fill
Sometimes a business is missing a key piece which could make all the difference to its saleability or price. This could be something like not having a presence in a key market, the management of the business being over-dependent on you when you want to leave after the sale, a lack of bulk which could push it into another price bracket or even systems like accounting software which need updating. If there is something like this, consider how you can fill that gap – for example by recruiting new senior management, bolting-on a competing business which can fill the gap or transitioning to the up to date software.
- Think about whether the business has things it doesn’t need or which won’t be appealing to a buyer
There may be non-core assets in the business, like a non-core product line, freehold real estate or investment assets which distract from the main business or the story of what you are selling. If there are a pre-transaction restructuring to remove these assets can make the business more appealing with a clear story – and perhaps even produce tax advantages for you as seller.
- Think about whether you should tidy up your accounts
Most businesses are valued as a multiple of earnings before interest, taxes, depreciation and amortisation (EBITDA). Consider whether there are personal or lifestyle expenses in the business and whether the pay of you, your fellow sellers and your respective family members is over (or under) what market pay would be. While of course these matters can be adjusted for in negotiations ensuring EBITDA is as “clean” as possible by removing those expenses and adjusting that pay can result in a higher headline initial offer, and also reduce the risk of price reductions once financial due diligence starts.
- Think about what the buyer will want to know
This is less of a pricing point, but dealing with a sale imposes a significant burden on you when you are also trying to do the day job. Making sure you have all of the key documentation easily available and properly organised and accounting systems which are up to date and easy to interrogate will help ease the burden on you as the transaction progresses.
Experience shows that proper preparation before you go to market often produces a higher price and smoother, quicker transaction.
John Young is a partner in the Corporate, Commercial and Finance team at law firm Kingsley Napley LLP