Following a recent thread asking about the process to value and sell their online business, and my brief answer there, I thought I'd take some time out to explain the wider issue of how the small business owner can go about extracting the value they've built in their business. Readers may be best off treating this as a "view from 50,000 feet" rather than a detailed how-to, but here we go:
The question foremost in the minds of most owners of small business is about value, and we get threads asking the question, "How much is my business worth?" Unfortunately, that's the one question nobody can answer, not with any degree of accuracy anyway. EBITDA* based formulae, relying as they do on "multiples of earnings", fail to take into account variables such as the value of assets on the business' books. Various other calculations, involving the likes of Discounted Cash Flow etc., also fail on similar grounds. They exclude key business attributes that add to or detract from overall value.
*EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation
Methodologies exist which may compute the value of a business to the satisfaction of a court dealing in a divorce or probate case, or even to the satisfaction of HRMC, but the only way to know how much a business will fetch in the market is to ignore all the valuation rules / myths and take the business to market to test the market's pulse. Factors that will influence how much buyers are willing to pay include not just the profits and assets of the business; some key contributors to value include:
- The non-reliance of the business on the owner. To the extent the business relies on the owner, buyers often apply what's called a "Key Person Discount" to the price they would otherwise have paid. This is to account for the fact that a key person - you - will be leaving. This discount could be 60%, 70% or more of what the buyer perceives to be the value of the business;
- Steady growth in turnover and profit in recent years. Buyers want upwardly trending graphs, not graphs that have flatlined, or worse, are on the way down;
- Competent and well trained staff;
- Good records especially with respect to accounts (computerised), legal contracts, documented manuals, processes and procedures etc;
- Intellectual property owned by the business;
- And much more.
External factors also influence value:
- The cost of capital;
- how desperate the acquiring company is to get their hands on your business;
- the types of buyers you attract to this opportunity and your skill (or your broker's skill) in creating a competitive bidding environment;
- the number of other businesses like yours currently on the market ie. the businesses competing with you for buyers' attention and money;
- the concessions you're willing to make (such as deferring part of the price by offering the buyer a facility to pay in instalments);
- the risks you are willing to share post-sale (such as making part of the price contingent on the business meeting its projected turnover and profit in the coming quarters / years)
... and many more. My advice to business sellers is to stop dwelling on price. Having a number to hand is pointless; what's more important is to prepare the business well, present it well, promote it well and have an experienced negotiator on hand to get you the best terms.
Should You Hire A Broker Or Sell Your Business Yourself?
Business brokers go by many names - business transfer agents, commercial real estate brokers, deal advisory firms, corporate finance consultancies etc. All exist to sell businesses but they go about it in different ways. Whatever they call themselves, if they are taking on smaller, sub £2m turnover businesses, they are likely to charge no advance fee or a very small advance fee and take the bulk of their payment on the successful sale of the business.
No fees, or low fees, is not necessarily a good thing. A broker charging no advance fee has very little incentive to put in the hard graft required to sell a business. Many don't do much more than create a drab description of the business and post it on one of the various business-for-sale marketplaces such as DaltonsBusiness.com, BusinessesForSale.com, RightBiz.co.uk and others. Creating such a listing for an online marketplace is something that most business owners can do on their own and without the involvement of brokers!
It pays to be extremely cautious about signing up with a broker. Some of the smoothest talking brokers are far more adept at signing clients up than they are at selling businesses but, more importantly, have earned themselves a very bad reputation for the myriad ways in which they fleece their clients! If you do feel you need a broker, there are some tips here on choosing the right broker.
The Process And The Pitfalls
The mechanics of the process:
- Get together all the relevant and important information about your business including annual accounts, management accountancy figures, details about the property (leasehold length, cost etc), details on number of employees and an organisation chart, trading hours, details on the business structure (eg, Ltd company) and ownership (how the shares are split), a list of the main assets - both tangible (stock, equipment, vehicles...) and intangible (brand, intellectual property, licences, awards, trademarks, manuals...). Also consider whether you'd be willing to continue working in the business and whether you'd be willing to provide the new owner with any credit terms if you can come to agreement on price.
- Once you have all those details to hand you could sign up with one of the main marketplaces and fill in all the fields necessary to create your listing. Note that some marketplaces are free, some charge a fee.
- In due course, and if your business is attractive enough to buyers, you'll start getting enquiries forwarded to you by the marketplace/s where you listed your business for sale. It's now a process of engaging with these prospective buyers and answering the "due diligence" questions they raise to better understand your business. These buyers need to be guided towards a discussion of price and terms.
Some of the pitfalls:
- Not all the enquiries are from people with the money and intent to buy your business. Some are competitors nosing around. Others are interested in starting their own business and are snooping around for ideas, tips, supplier names, potential staff to poach etc. It pays to vet them and proceed cautiously with respect disclosure of information.
- Some sharp buyers play a different game of initially agreeing to a price and then finding numerous "faults" with the business to negotiate the price down or browbeat the seller into agreeing deferred payment terms. In fact, there are courses teaching buyers how to play this game and claiming to arm them with numerous techniques and tactics they need to get their hands on a solid, profitable business like yours for a grand total investment of £1! It pays to be alert for buyers like these.
- Dealing with the sale yourself makes it difficult to keep news of the intended sale confidential. For many small businesses it's not prudent to be too open about the sale. It creates an environment of insecurity for staff and even an opportunity for competitors to spread rumours about your business being in trouble. Some sellers of small businesses use their accountant, or a friend, as the initial contact for potential buyers.
- Negotiating the terms of the sale and drawing up the contract are specialist tasks and it's dangerous for the business owner to attempt to do these himself. It pays to hire the right professional expertise, especially a commercial solicitor i.e. someone who typically handles business sale situations, not a generalist who may assist with a conveyancing one day and a divorce the next.
Whatever the reason for wanting to sell your business, it's advisable to take some time to research in more depth how businesses are sold and what you need to watch out for. This is, after all, possibly the largest deal you are going to do in your life; it's worth investing a few days to research the subject rather than succumbing to the easy option of phoning the first business broker you find in Google.