Michael Best says it’s never too soon to start thinking about selling your business
The importance of discretion
First, there’s an important topic to address: discretion. Even the slightest hint that you’re considering selling your business will almost certainly be unsettling for your employees, customers, and suppliers. At some point they will all need to be told, and possibly involved, in the process. But, until the time is right, it would be better for the selling process if you were discreet. Your employees are likely to be the most perturbed by the news and, to put it bluntly, you risk a potential acquirer’s enthusiasm for the deal waning rapidly if they have any indication that key employees are likely to quit. Acquirers worry about smooth ownership transitions – key employee departures can mean a rocky start for a new owner.
Employees value security and are wary of change. So, when the time comes to take the employees into your confidence (usually some time before announcements to anyone else), break the news thoughtfully, keeping in mind their concerns and insecurities. One technique for retaining key employees is for both you and the acquirer to demonstrate that you value their ongoing participation in the business. A good way to do this is to jointly offer a generous cash bonus. You could pay half at the time of the sale and the acquirer could pay the remaining half after, say, a year if the employee is still there. I’ve found that this works very well.
The question of value
You must have a reasonable idea of your business’s value before entertaining any serious thoughts of selling it. There are tried and tested methods for valuing businesses, but placing these methods in the hands of anyone but skilled professionals is like placing a scalpel in the hands of anyone but a skilled surgeon. This is why I favour a fair market value prepared by an experienced expert as the first step on the road to disposing of your business.
A skilled valuer can quickly and accurately estimate a small business’s value using a few key pieces of information. Your valuer will tell you that most small businesses fall into one of three categories for the purposes of valuation: going-concern value, asset value, or liquidation value. For our purposes, I’m going to assume that the acquirer you’re seeking will only be interested in your business as a profitable going concern, which is most commonly assumed to be an enterprise cruising along routinely doing business and, ideally, turning a profit.
The term ‘goodwill’, in a business sense, refers to the invisible element of value that comes from reputation, established customer relationships, convenience of location, special expertise, and brand familiarity. All of these things contribute to the success of a business, but an acquirer won’t want to pay for something they won’t have after the takeover. A common problem with small businesses is that some goodwill can be what’s known as ‘personal goodwill’, which is attached to the presence of a particular individual or individuals, usually the owner. That is to say that the success of the business directly depends on the owner’s presence. This might be because of a particular skill set, personality, or some other unique factor that attracts customers. So, when the owner leaves, the source of the goodwill leaves. You don’t want the success of the business to be associated with you personally – that’s creating personal goodwill for which a buyer should not be willing to pay.
Many an owner has told me that their small business should attract a good price because it has amazing potential. It’s often true that a business has good potential, but why would a buyer pay for it? If the potential hasn’t been realised and the acquirer will have to do the work to realise it, why would they pay you for it? It’s a bit like a house seller expecting the buyer to pay a premium for the house because it has the potential to look fabulous with new windows and a coat of exterior paint. That’s not to say that you won’t be lucky enough to persuade a buyer to pay for potential but, barring extraordinary circumstances, I just can’t see why anyone would.
Price negotiations can begin with the fair market value if it has been properly prepared using a fair set of assumptions. However, the ideal conditions envisaged by a fair market value are unlikely to exist in reality. There can also be the impulsive and unpredictable elephant in the room affecting the eventual negotiated price – individual priorities. You may be keen to sell for any number of compelling reasons. You may be tired of the business and the industry and impatient to undertake something completely different, or you may have health or family reasons. In such cases you would likely be prepared to settle for an amount less than the fair market value, just to conclude a deal.
The acquirer may be determined to buy the business for as many reasons as you want to sell. He or she may have an opportunity to integrate your business with an existing business to realise economies of scale, or may have always harboured romantic notions about owning a business like yours. There could be any number of circumstances motivating the buyer, so they may be prepared to pay a premium over the fair market value, just to conclude a deal. These and other influences, when introduced into the negotiating process, inevitably result in a final settlement different from the fair market value. This is normal.
Finding the acquirer
Unless you’re one of the lucky few to be approached by a qualified acquirer, you’re going to have to find one for yourself. A good place to start your search is within your own industry. Sometimes you need look no further than a competitor, or even employees. A business broker is another option. But regardless of the route you choose, ensure that absolutely everything is documented, and have a trusted lawyer review it all – your lawyer, not the broker’s and not the acquirer’s. Your professional business valuation advisor may be your accountant, but if they aren’t specifically familiar with business valuations, ask for a referral to a business valuation specialist.
Between your lawyer and accountant you should expect to be covered in such critical areas as confidentiality agreements, determination of value, and sale agreements. A good way to initiate a discussion with a potential acquirer is to prepare a package that makes the case for why acquiring your business is a good idea. A well-worded document with well-chosen images and persuasive arguments can help smooth the passage to the next stage of the discussion. A word of warning on the topic of potential acquirers – qualify the inquiry before giving access to proprietary information. Be careful of fishing expeditions, particularly by competitors. In these cases, a confidentiality agreement is of little protection. It can’t stop them from stealing ideas and information for their own use.
You may be wondering how all I’ve discussed here squares with the multimillion-pound acquisitions of small businesses by big businesses that we hear about from time to time. It doesn’t. Those are exceptions. They are few and far between and usually involve a small tech company with a specific invention that a large player wants to incorporate into its own business before one of its competitors does. Most of us are unlikely to ever open the door to a Google or Apple representative with chequebook in hand. Instead, we have to build profitable businesses with the intention of one day making them attractive to acquirers.
You’ve earned it
When an opportunity to sell your business presents itself, by all means grab it with both hands. You built it, you rode the rollercoaster of small business elation and anxiety, and you catered endlessly to the whims of a cast of characters. You’ve earned the right to that bag of money.
Characters Who Can Make Or Break Your Small Business is a new book from accountant and print industry veteran Michael Best that identifies the issues faced by small business owners and offers advice backed up by real life examples. It is available from www.smallbusinesscharacters.com and Amazon.