Selling your business?

Selling your business?

At some time or another every business person considers the question of selling their business. For some there is an unpleasant realisation is that a sale is probably not feasible because the business is them (i.e. a one (wo)man business). If a business is all about a central character or family, then it is hard work to sell that business (brand and clients) if the absence of the person would mean no business existed.

Surprisingly, even quite large business suffer from that same flaw – being identified with a particular key person, or restricted in some other way such as location, client base, specialities, business culture, public perception.

Fortunately, you do not have to be stuck in a no-sell market. The key is to have a full and independent view of your business, its client base, its growth potential, its sustainability and its attractiveness to potential buyers. And the second key is to do this three to five years ahead of your exit timetable. Why? Because it could take that long to change your business model to make it saleable.

Here are some key areas to look at to increase your ability to sell your business at the best price possible.

  • Your trading name
  • Reliance on one or two key people
  • Reducing debt
  • Long term commitments – a benefit or a burden?
  • Understand your business and your market
  • Getting legal and tax advice early

Let’s look at these areas and some simple solutions to improve saleability (think of this as a ‘make over’ to put you back on the dating scene).

1. Your name. No seriously, it does matter. Who, for example, is going to buy my business if it is called “Anne’s Diner” if their name isn’t “Anne”? While that may not be the best example, if your personal name is the public connection to your business then you are likely to have a problem. Either the buyer cannot get leverage without the named person in the business (so will discount the purchase price accordingly), or they carry on the business name and the vendor’s personal reputation is at risk by the actions or inactions of the new owner.

Consider this example, Bob Fuller’s Fishing Charters has a good reputation, and everyone wants Bob as the captain on their charter hire. Bob sells to Michael Brash, who continues to trade under “Bob Fuller’s Fishing Charter”. First, even if Bob has given a restraint of trade for 1 or 2 years, at some point that restraint will legally end. But with Michael owning the trading name, Bob is in effect restrained from using his own name in the future for a new business, often wider than the specific business sector. For example, Bob Fuller’s Fish & Chip shop is probably too close a connection to the old business. Secondly, what if the old business suffers an accident or negative publicity. Does Bob really want to see his name front page news, or worse a reported court case, on a near miss accident, tax evasion, under size fishing, a drowning?

One solution is to rebrand before you go to market, so that when it comes to a sale customers know that Bob Fuller’s Fishing Charters is now known as BBF Fishing Charters.  Some businesses do a double change name, from Bob Fuller’s Fishing Charters, to Bob’s Best Friends Fishing Charters, to BBF Fishing Charters. By changing the name but keeping the branding the transition can be seamless.

2. Stop relying on one or two key people. Apart from the obvious risk if a key person is incapacitated, it also means that you cannot get away from the business for a break, and any potential buyer may struggle to maintain the business without those key people. Buyers are always wary of taking on a business where the owner is the glue to the success of the enterprise, or where a key employee can make or break the business. Make sure that you have employment contacts, and they have restraints of trade in them. The buyer will not be impressed if key employees can leave at short notice and set up in competition!

If Bob has two other skippers, plus 3 first mates capable of running his fleet and a good back office, then buyer Michael will have confidence that on Bob leaving he has a continuing business. This is not the same if Bob does the administration, does all the sales and is the only skipper with experience in the area. I have seen businesses where the husband and wife go on holiday leaving sales, admin and contractors to get on with it, only to return and find they didn’t. Particularly with long term sales and production businesses the slowdown may not even be noticed by the owner. An external accountant or business advisor should be able to spot these anomalies to enable the owners to address these matters pre-sale. Because you can be sure that a potential buyer will spot it.

3. Drive down debt. While a valuation of a business is often based on EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation) if your business has too much debt it will put off potential buyers. The other risk is that too much debt reduces your ability to invest in growth. Buyers need to see actual historic growth as well as potential growth. After all, most buyers are not looking to settle for what they buy, but to improve on the business and on-sell.

4. And consider long term liabilities. Will a potential buyer be impressed or depressed to know that they are locked into a lease for another 7 years? Depending on how key location is and what other premises are available, the offer to buy may exclude taking over the business premises and other long term commitments. You may then be stuck with finding a subtenant, or cancelling a lease – factors that will affect your bottom line exit profitability. So work on flexibility here, say a lease with multiple rights of renewal, but without the obligation to renew.

5. Know your business, know your market. BBF Fishing Charters might just be that, or it might have a fish and chip shop division, a deep sea diving business and a licenced restaurant. If so, know what each division makes, what makes it profitable (are they cross subsidising) and determine if potential buyers would be interested in the whole thing or separate parts. If separate, can they operate separately? A strong niche market may be more attractive than a wider business (“BBF is the only charter business around”). But one solely reliant on one sector of the market (high end fishing charters) can be at risk in certain cases, say if there is a recession, all the fish are poisoned for some reason (oil spill?), there is a fishing sanctuary declared in your area. Think about what you can do to mitigate your risk and make the business more attractive to a buyer.

6. Get legal and tax advice. You might have secured the best sale price, but through bad documentation or tax considerations the net return is poor. For example, in New Zealand restraints of trade payments can be tax-free, but only in some circumstances. Structure the sale right and you get it tax-free and immediately, or wrong and you either pay tax on it or have to wait before it can be accessed.

Remember, a bird in the hand is worth more than two in the bush. If you accept anything other than cash for the sale, be prepared to not receive full value. If you accept shares in the buyer, will those shares hold value, and when can you realise that value? If you accept another asset in part payment, what is the market for that asset and how long will it take for you to sell it? If there is a deferral of part of the settlement pending turnover / profit realisation make sure that the formula for calculation is robust and auditable, and excludes deductions or reductions that are caused by the purchaser (such as management fees to another company, changed business practices or events that as vendor you have no control over).

Running your business is your business. Helping you buy, operate and sell it is ours.

Posted: Thursday 18 February 2016