Dominic Marlow from The Business Board explains what you need to do when the time comes to sell your business.
Dominic Marlow from The Business Board, a company from Reading that helps business owners sell when the time comes, presented at The Movers and Storers Show last year. Among the tips he offered was one key requirement for anyone wishing to sell a business and obtain a good price: be prepared.
Dominic said that the thing that makes the most difference is the management team. “If you can’t stay away from the business for a while, it’s not saleable,” he said. “You’ll get something for the assets but not for the goodwill.”
To be attractive to a buyer Dominic explained that customers and suppliers all need to be engaging with the business not the principal. An investor will look for strong management in a business. This includes the people of course but also the systems, processes, management information, financial information, corporate governance and due diligence. “It’s about having a properly managed business. Buyers buy a return on investment. Good management helps to deliver that return on investment.”
The seller should be prepared to start the process early. Dominic explained that it is unlikely in any sale that all the money will be paid on completion. The principle of ‘earn out’ in which some of the purchase price is paid on completion with the remainder coming over time, is common. “You will generally get between 40% and 70% of the agreed value on completion,” said Dominic. “The rest will be under earn out so that you have an interest in staying with the business for some time after.” So, a seller wanting to retire at 65 needs to start thinking about it at 60, start selling it at 62, have sold the business by 63 and have all the money gathered in by 65,” Dominic said. “It’s a five-year process. Very few people in my experience plan anything beyond tomorrow.”
To prepare your business for sale it’s necessary to ensure that the business can run without you. You need to give up your day job. A business that runs without the owner is of much greater value than one that doesn’t. “If you employed a business coach to help enhance your business, virtually all the things they would tell you to do are the same as when preparing to sell,” said Dominic. “You end up with a better business, more sustainable, more profitable and less reliant on you. This is what buyers look for.”
Dominic recommended sellers use a broker, such as The Business Board, or employ an adviser to help with the process. “It’s important that you don’t try to do that yourself.” It will also be necessary to tell people about the business by preparing a document that describes the business, how it works and what it does. “Look at your business as if you were going to buy it and decide what you like about it and what you don’t.”
Sellers should be prepared legally. This will include checking brands, trademarks and leases to make sure they are secure and being able to prove what the business owns and what it does not. Buyers need to understand what liabilities they might inherit. When they buy a company they will inherit everything unless it specifically says in the agreement that they don’t. “The seller wants to relieve himself of as many of these liabilities as possible, whereas the buyer wants to inherit as few as possible. People often do dumb things such as having a legacy shareholder and never buying back the shares or deregistering them. You can’t claim Entrepreneurs' Relief unless you have owned them for two years*.
Small businesses don’t usually benefit much from having tight contracts because customers will probably want something back in return such as very strict Service Level Agreements or substantial discounts. But buyers like regular contracted business and are willing to pay more if the income is guaranteed. By contrast, a business dealing mainly ad hoc with private individuals will be less attractive.
It might be possible for a business to be sold as a management buyout. This allows the people who know the business best to slowly ease themselves into ownership. Even so, it will be necessary for them to see that the business will run profitably without the seller’s involvement.
How much is a business worth? Dominic said that it all comes down to Return on Investment (ROI). As a guide he said that a well-run removals business should be worth between 2.8 and 4.0 times the EBIDTA (Earnings Before Interest Depreciation Tax and Amortization), i.e. the operating profit before accounting adjustments are taken into account. It might be necessary to consider depreciation as it is a significant factor in moving businesses because of the falling value of vehicles. The final value will depend of the factors above, especially the efficiency of the management.
Concluding, Dominic said that it is essential for sellers to start the process early and make sure that their business is as attractive as possible to a prospective buyer. He said that an element of earn out is inevitable but sellers should never accept less than 40% or expect more than 80% payment on completion. They should also take professional advice from a broker or adviser, and their financial and legal partners to ensure that they take full advantage of any tax opportunities.