Maximising the value of your company for a sale process
6 min read
19 January 2015
There are a host of reasons to exit a business and a plethora of goals, of which the most common is to maximise the price paid. Mark Lucas, of Barlow Robbins, advises nine actions to do just that.
We talk about the life-cycle of business. There are useful parallels between preparing a business for sale and the process of sowing, growing and harvesting crops. The most successful sellers of businesses act like the most successful farmers, sowing what the preferred buyer wants, in the right ground, feeding and nurturing the business, protecting it from predators, harvesting the crop and selling at the right time. The sooner you think about the sale of the business and start to plan for it, the better
What is fundamentally different about the sale of a business is the question of whether the seller wants to be part of it after the sale. In most instances, the business will have more value if it can be run independently of the owner.
It is paramount therefore – and a hugely helpful discipline – to set up the business from the outset so there is no reliance on the knowledge, contacts, skill or labour of the founders. Delegation is all.
Get the right team
Conversely, you need the existing staff within the business to be reliable, motivated and committed – not just to service the existing business but also to be attractive to the buyer.
Indeed, we see corporate deals breaking down when purchasers or investors have little confidence in the management team.
Motive your staff
It is not enough to have fantastic people – they must be appropriately incentivised to do the right thing at all times. Pay good people the market rate. Do not employ staff who do not add value.
Incentivise your management team through equity or through share options (especially through the Enterprise Management Incentives scheme) and by being a great employer.
Plan to pay least tax
In order to maximise your harvest, you need to minimise tax on capital gains. That means using the right structure to incur the least tax. Limited companies and LLPs can help owners to obtain, currently, entrepreneurs’ relief. However, tax regimes change and circumstances vary. One should look at off-shore trusts as soon as they are affordable and consider the issue in conjunction with one’s overall tax planning.
Read more about selling your company:
- Tax planning ahead of a business sale
- If entrepreneurs fail to plan an exit, do they plan to fail?
- How private equity-backed finance directors should plan for an exit
Set firm foundations
We see due diligence causing deal and price-threatening issues all the time. Common “skeletons in the closet” are:
- Material contracts which have not been signed
- Change of control provisions enabling customers or suppliers to renegotiate or pull out
- Non-assignment clauses
- Intellectual property that does not sit in the company or which is not properly registered
- Questions as to whether the company’s shares – especially share buybacks and reductions of capital – have been properly dealt with or are in the control of the seller
- Missing company records, especially missing statutory registers
- Poor contract documentation and records
- Historic breaches of contract or other duties
- Compliance failures
- Rash, unfulfilled promises of equity or bonuses to employees
Take a step back and undertake an objective analysis of the business in a buyer’s eyes now. Ask your advisers to conduct “vendor due diligence” and deal with the issues this highlights.
The largest multiples are paid where there are the greatest synergies in the business with the buyer’s aims. Foresight in setting up or developing the business (and sometimes just dumb luck) help. The other key virtue is flexibility. If your business can adapt to suit the target buyer or market, it will be more valuable.
Larger business usually struggle to adapt quickly as a result of layers of hierarchy and internal politics. As you grow, make sure that the changes you implement allow strategic decisions to be made quickly and implemented easily.
Massage the value
Some businesses do things deliberately to emphasise the value of the business. For example, you could:
- Increase marketing spend
- Cut non-sales related costs
- Lower prices to achieve turnover
- Leave profits in the business
However, these carry risks. You are unlikely to do all of the above but you may be able to do some of them.
Overall, plan, plan, plan and keep in mind in all you do the end goal of maximising your business’ attractiveness to the right buyer.
Mark Lucas is a partner and head of the corporate and commercial team at Barlow Robbins.