Preparing for sale

A high-value business sale will only be achieved if the dependencies of the business can be reduced, including that of dependency on the original founder. This requires effective delegation of responsibility through promotion of the existing management team or if the quality is not there, then through recruitment.

Day to day operations should be handed down to the management in order to demonstrate that the business is running independently of the owner at the time of sale. I am about to complete a sale of one such business, where the shareholders have delegated to such an extent that the business can virtually run independently of them. That is an ideal business grooming situation.

Much has been written about the importance of people in organisations, especially the key personnel. It is often said that when making investment decisions, funders back the management rather than the business. So whether the management team are being groomed as potential MBO candidates or to attract a third-party investor, an appraisal of their quality and maintaining that team is of key importance.

In the same way that a trade buyer will place reliance on quality management, the backers to an MBO team will also assess the team before deciding to support the deal. Management due diligence is becoming increasingly common prior to a deal and psychometric testing is often used to assess the strength of the MBO team.

We have seen deals fail where the MBO team is seen to be inadequate to take the business forward. Instances of the management team having been groomed by an owner for an MBO, only for the team to leave and set up in competition, have also been seen. So locking the team in early and ensuring commitment is the key.

At some stage in the development of a business, the owners may decide they want to extract cash from the business in exchange for their shares. Obviously the strategy involves maximising exit value. This is improved by the business having a plan in place that will assist a potential new owner in the valuation process and enhance the valuation. Before the business reaches sale time all accounts and business plans including cash flows should be up to date.

Thorough preparation for a sale in advance of sale time improves management focus and will increase the final valuation. Business planning will enable achievable milestones to be set and the monitoring of performance against budget. Businesses are bought on the basis of the past, present and most importantly the future and an investor will analyse achievability based on performance against the plan.

A robust business plan showing a proven track record will always encourage investment. I have (personally) seen this evidenced (first hand) as an FD in industry and have achieved high-value business sales through robust business planning.

If a company is either the subject of or considering litigation, the uncertainties involved will affect the view of any potential purchaser. So any contentious matters should be eliminated as part of the grooming process. Failure to do so may result in a share sale with the associated tax benefits being compromised and leave an asset sale as the only option

Obviously profits should be maximised in the years leading up to sale without cosmetically enhancing performance. Consistent profits growth and maintained margins will attract buyers, as will audited accounts that closely resemble management figures.

A realistic depreciation policy will preserve asset value and quality assets will help to sell any business. Strong asset backing and long term asset funding within the business will encourage competitive bids.

In our experience vendor businesses with redundant or obsolete assets are advised to dispose of these items for cash and extract the proceeds prior to sale. Deals with net assets targets will not produce good value for these assets as the buyer would not be prepared to pay full value when completion accounts are prepared.