In this second post in my series about getting your business ready for sale, I’m going to explain how you can maximise the value of your business in order to obtain the best deal.
Remember, the worth of your business hinges upon how much profit a buyer can make from it, and is balanced by the risks involved. The business profitability based on the sales, costs and asset values is only the starting point. It is intangible factors such as key business relationships and contracts with local businesses or trade partners that may provide the most value to a potential buyer.
The recommended actions for maximising the value of your business fall into five categories:
- Sales and marketing
- On point of sale.
1. Sales and marketing
- Diversify client revenues. Reduce dependency on your top one to three clients. As a guide, no single client should account for more than 15% of your revenue.
- Ensure that the revenues and sales process are not dependent on you. Ensure that someone else within the business is able to perform the complete sales function, from initial enquiry through bid and quote to winning the contract. Businesses that depend on the owner to win new sales, or on the owner’s relationship with existing clients to maintain recurring business, will carry a major risk for buyers.
- Maximise the proportion of your revenue that is generated by contracts. Maintenance contracts, service contracts or retainers represent significant inherent value for the buyer, as they guarantee regular income with little further sales effort.
- Maximise the duration of your maintenance contracts. This will allow buyers more time to get to know your clients before the next renewal. Aim for at least a six-month rolling contract.
- Align your pricing and service with industry standards. Don’t be the cheapest, as buyers will be unable to offer a better package to your clients and will therefore find it more difficult to transfer the contracts. The key concern for your clients is continuity of service. An ideal buyer will be from a similar or adjacent sector, with a service offering and ways of operating that are similar to yours.
- Market your products or services to a broad range of industry sectors. If your client base covers a broad range of sectors, including both private sector and local authorities, this will reduce its exposure to a downturn in any particular sector.
- Grow your business. Buyers will pay a premium for businesses that are growing, rather than stagnant or declining. Develop a comprehensive sales and marketing plan to increase your general activity and spread of clients.
- Leave room for a buyer to expand the business. If a significant portion of the business is recurrent work from existing clients, this leaves room for the business to expand through additional marketing activities. You should highlight how you believe expansion could be achieved.
- Make sure the business functions without you. Ensure that day-to-day issues are not down to you to resolve. The more time you spend on day-to-day activities in the business, the less value it represents to the buyer. If the buyer has to work full time in the business then they will have to pay themselves a salary.
- Pass on your technical expertise to the business. Consider how a new owner with less experience or technical know‑how than you will run your business. Recruit or promote a suitable successor, put a management structure in place, or as a last resort consider providing ongoing consultancy.
- Make sure the business has suitable accreditations and company policies. These not only add credibility to the ongoing strength of your business, but also prove that the right systems are in place to manage the business without the owner. Preferred supplier status with your key customers is also a valuable asset.
- Forecast your next year’s revenue and profit. A buyer will almost always argue the price based on the performance of your business to date, rather than the future they are buying. Your task is to sell them your business on its strength as an ongoing concern. If you can provide your annual forecast backed up by an order book and justifications for the remaining assumptions, this will draw the buyer’s attention to the future revenue and potential for growth.
- Produce monthly management accounts. Put in place a management accounting system that clearly shows month by month the revenue, costs and profits from each client and revenue stream. This will add credibility to your forecast for the following year.
- Know – and be able to show – where your revenue is derived from. Divide out your revenue by service provided and by client. You need to be able to prove that your business is not over-dependent on one client. Again, a clear presentation, for example using pie charts, will show buyers that the business is under control.
- Ensure that your clients settle past due payments. Make sure they are up to date with their payments and continue to pay within your invoice payment terms. Buyers will not want to take on clients with a history of late payment.
- Make your accounts transparent. Maximise profitability, ensure all revenue is recorded, reduce non-core expenditure, and remove private assets. The fewer adjustments needed to assess the total earnings that a buyer could achieve, the more credible the business valuation.
- Take any spare cash out of the business. Leave only sufficient cash for working capital. This money is what you have earned, so take it; do not let it complicate the sale.
- Review your contract documentation. Ensure that your client, supplier and employee contracts, as well as your standard terms and conditions, are clear and not open to dispute or potential claims. I recommend that you have them all reviewed professionally.
- Ensure that client contracts are in place for all work undertaken. Ensure that all work undertaken is covered by contract and your standard terms and conditions. Try to reduce your obligations and risk of penalties. Documented evidence of the work you are undertaking adds credibility and more certainty to the ongoing business, and enables the buyer to identify clearly the level of service being delivered and their ongoing liabilities.
- Ensure that employee and supplier contracts are in place. Your staff are one of your key assets, and the buyer will want to be confident that they will stay on and remain committed to the business after your departure.
5. On point of sale
- Be prepared to sign a non-compete agreement on completion. Buyers will need reassurance that neither you nor your partners or employees will approach your clients for business after the sale.
- Be prepared to offer an earn-out deal. In many cases this can bring you a higher overall value than an outright one-off payment, as it gives the buyer confidence in the ongoing stability and profitability of the business. Moreover, if you are prepared to negotiate an element to the deal that is contingent on future earnings, this may help unblock negotiations where the buyer does not recognise the future potential of the business.
See the deal from the buyer’s viewpoint
As with all acquisitions, your buyer is looking to make an investment, not to buy more work. Think of your business from the buyer’s point of view, make it easy for them to see how they can make a return on their investment, and you will achieve the optimum value for your business.
Remember, the best deals are when both sides win. Help the buyer to make a success of your business.
Finally, first impressions are key. Make sure you present a professional image. A tidy office and a smart brochure will indicate that your business is well organised and efficiently run.
My next post in this series will describe the process of selling a business. In the meantime, for more information or advice on this topic, email me or call me on 020 7099 2621.
If you missed my previous post on this topic, catch up here:
This information was correct to the best of my knowledge and belief at the time it was posted. It is, however, written as a general guide, and is not intended to apply to specific circumstances. The content should not, therefore, be regarded as constituting legal advice and should not be relied on as such. Accordingly, I recommend that specific professional advice be sought before any action is taken.