You have spent years building your business, and now you feel that it may be time to sell it and capitalise on all the hard work and effort you have put in. However, it’s essential to carefully consider the steps involved and ensure that you are doing everything possible to maximise the chances of a successful outcome.
The current economic backdrop and the limited availability of bank funding have decreased the number of transactions in recent years. There remains, however, an extensive demand from private equity houses and strategic buyers interested in purchasing privately owned companies. Although the sales process is taking longer and price negotiations are more complex, there is an unprecedented demand for wel-managed, profitable companies. If you are considering selling your business, this is an ideal time to go to the market and seek the best terms.
Of course, selling a business is a complicated and often stressful event. It is therefore essential to work with a specialist team to assist you with what will probably be the single biggest financial transaction of your life. Your team can provide an invaluable buffer in the negotiations and can manage the protracted process while you continue to run your business.
Most important, the advisory team can help you through the key steps to ensure a smooth and successful process and the best possible outcome for you.
Step 1 – Preparation
First and foremost, you need to get the company and its records in order. This could take anywhere from two to six months, sometimes longer. During this phase your advisory team will collect information on your operations, your industry, and your historical and projected financial information and prepare a Confidential Information Memorandum describing the main aspects of your business. Work with your accountant and financial adviser to ensure that the sale of your business is factored into your tax planning and longer term personal financial plan.
Step 2 – Valuation
The value of any company at a point in time is usually calculated as the net present value of its future earnings potential. In practice this is determined through the application of a multiple on your EBITDA – Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA is calculated by adding your interest expense, depreciation, and amortization to your pre-tax earnings, found on your income statement. There are many other factors to consider but this is how a business valuation is calculated at its essence.
For the valuation of your business, the EBITDA will be reduced by any capital or other annual expenditures required to sustain the business. The multiples used to determine the price vary by industry and by company but, on average, range from three to ten times. For example, if you generated £2 million in EBITDA last year, and you have good prospects for continued profitability, you would estimate your purchase price at roughly £8-12 million. It’s this number that a high quality advisory team can help improve by factoring in your reputation, goodwill, intellectual property, and other less tangible parts of your business which will have a value to any potential purchaser.
Step 3 – Identifying Prospective Buyers
Strategic buyers in your industry and financial buyers, such as private equity firms, are your best prospects. Your advisor will be aware of those who are currently in the market and seeking to make acquisitions. They will help develop a list to determine your best prospects.
Step 4 – Contacting Prospective Buyers
Your advisory team will contact prospective buyers and have them sign a Confidentiality Agreement before they receive any specific information regarding your company. Your team will then deliver a Confidential Information Memoranda to interested parties.
Step 5 – Responding to Buyers’ Questions
You and your advisory team will work collaboratively to provide details to interested buyers explaining any areas of uncertainty and clarifying all matters to the satisfaction of the proposed purchaser.
Step 6 – Receipt of Letters of Intent
These non-binding letters outline the price and structure of the proposed transaction, as well as the broad terms and conditions of the prospective buyer. They form the basis for negotiations leading to the final deal.
Step 7 – Negotiation of Final Letter of Intent
A very important intermediary role for your advisory team. This is when the major terms and conditions of the transaction are negotiated and finalised.
Step 8 – Buyers Due Diligence
At this stage, the buyer will want to review all legal, accounting, tax, banking, human resources, IT , real estate, and other material contracts. The buyer will also investigate your products, customers, any outstanding litigation, environmental issues, and so forth.
Step 9 – Legal Documentation
Your team will work with the lawyers on both sides to negotiate the details of the transaction that will be found in the legal documents.
Step 10 – The Closing
The documentation is signed, funds are transferred, and the business changes hands. And now it’s time to celebrate!
In a financial climate that means that sadly some businesses are living one month to the next, it is essential that we plan carefully. That we consider not only where we are now, but where we want to be and the bumps and lumps that might crop up along the way. As such, keen financial sense and, in some cases, financial advice from an IFA professional will be the difference between knowing where you are heading and getting there.
If you’re thinking about selling your business, then you might also be thinking about the retirement dream. To learn exactly what you need to do for a retirement paradise, download this free e-guide: Your Twelve Step Retirement Checklist.