How to get your SME ready to sell - brought to you by NatWest

Thursday, 05 December 2019

They say the best time to plant a tree is when you buy your new house; similarly, the best time to start thinking about selling your business is well before you want to exit.

There’s an acid test for all business owners who are thinking of selling their business: just try picturing yourself a month after the sale at the golf course, probably playing alone because everyone else is working, and checking your voicemail only to find that, for the third day in a row, absolutely nothing interesting or urgent has come up.

If this sits well with your vision of life after selling up, then great – but you’re probably in the minority, because waving goodbye to the status and buzz that go with running an enterprise you’ve built up from scratch can be a lot harder than many people anticipate.

“I was devastated, to be honest,” says angel investor and board director Zack Feather, who sold his healthcare staffing company the Pathology Group in 2013. “I felt a bit lost. In fact, I sit around a table every six months or so with about 10 other people who have all sold a business, and it’s like going to an AA meeting.”

It took Feather a couple of years before he could look back on the sale in a more positive light, precisely because it can be so hard to ‘let go’. The fact that his business was in such good shape, having gone from zero to £62m in seven years, perhaps made the farewell all the more painful.

If we’re trying to define the number one golden rule for all would-be sellers, therefore, it’s probably to make sure that you’re mentally prepared for it.

Sell – but at what price?

Next in importance, says Mark Rogers, who sold his financial planning business Clay Rogers to Succession Group last year, is to work out what price you need to make the sale work for you. Valuations often have a ‘finger in the air’ feel to them, but if an owner feels they need £2m because they never want to work again, this can help them see what he or she needs to do to get the business to a place where someone else may think it’s worth that.

“Then,” says Rogers, “what you need to do is clean up your business and know every part of it. It’s pointless going to due diligence and having things come out of the woodwork – you’ve got to anticipate what might be issues and sort them before you put yourself up for sale.”

Rogers still works for the company he sold to, because, he says, “we sold to up our game rather than cash in and retire. Obviously yes, the money helps, but we sold so that we could be part of a bigger organisation that is taking professional financial planning to the next level.”

Belief in management team

In fact, buyers are usually very attracted to firms that they think will run smoothly once they’ve been acquired, and Peter Kroeger of acquisitions, exit planning and business sales specialists KLO Partners, says they’ll usually want to keep the existing management team.

“I’ve never known an acquirer say, ‘Oh, I’ve got a spare management team – let me buy a business for them to run,’” he says. Case in point: when Gary Dixon sold his financial services compliance consultancy CS Compliance Solutions to a larger firm in 2007, he and the management team were kept on to run the business – though Dixon ultimately decided to leave for retirement later on.

A mental preparedness, then (Dixon admits he got bored with retirement and has recently launched a new compliance business named Momentum GRC), followed by price, getting your house in order and having a great team in place for the handover are all cornerstones of selling a business. Below, Peter Kroeger details the actual process a little more fully.

The four key steps to selling your business

1. Get the business ready to sell

In a period that typically lasts anything from six months to three years, the owner’s job is to get the business in tip-top shape, so it can be sold. The goal, says Zack Feather, is to be an efficient-looking business that still has growth left in it. “You’ve got to leave something on the plate for the next owner,” he says.

Kroeger says: “For an SME with a business worth less than £5m, say, the value of the business is really the value of the owner, so you need to be able to show that you have a strong management team to take over the running of the business when you go.” He says buyers will be interested in every single aspect of the business, including everything you can tell them about your customers, any existing contracts you have with them, proof that you have a marketing programme that delivers qualified prospects and evidence that you have a sales programme that converts them into sales.

2. Ask where you might find a buyer

Kroeger says the purchaser will come from one of six places. Of these, four are premium buyers: suppliers who want to secure their main channel to market; one of your customers (which only tends to happen if you’re a very strategic manufacturer of a product that they have to have); people who do what you do but don’t compete directly; and people who do different things to you but have a similar customer base.

The other two will be ‘discount buyers’. “[These] are generally direct competitors who are looking for an easy way to take you out of the market, and management or family candidates who will typically need to borrow money,” says Kroeger.

3. Approach the buyer

When Kroeger is brought in to help an owner sell, he says he will identify around 200 possible candidates, and then whittle the list down to around 50 companies who may be interested and can afford it. He then calls them up – usually the MD – in reverse order, from least likely to the best match, so he can perfect his pitch.

“You have about 15 seconds before they start to lose interest,” he says. Initially, it’s not about the hard sell; it’s just about seeing if they’re interested enough to go through to the next phase. If they are, they’ll be sent more details, and, if they’re still interested, a non-disclosure agreement, as you enter ‘discovery’, which will help them to place a value on the company. “That will take around three months and you’ll likely end up with about 10 businesses who want to meet the company,” says Kroeger. “Around six will typically bid, and three of them will be on the right page.”

4. The (nail-biting) final hurdle

Once you’ve accepted an offer, what’s likely to follow is around four to six weeks of to-ing and fro-ing between accountants, lawyers, tax advisers and commercial investigators as due diligence runs its course. “What they’re trying to ensure now is that all the information you gave them in the discovery process is true,” says Kroeger. “And if it isn’t, you’re going to get nailed.”