IS YOUR BUSINESS EXIT-ABLE?
Even if you haven’t approached your business with a well-defined exit strategy in mind, exiting the business is something that inevitably happens. For an unlucky few, it’s the business going bust or death. For others, it’s retirement, and perhaps passing responsibility on to a family member. For the phenomenally successful businesses, there is a stock market flotation. And somewhere in between lies the sale of your business to a third party. But not every business is genuinely appealing to a buyer.
What Makes the Sale?
When investors or businesspeople are on the lookout for potential acquisitions, they’ll have three main questions. Is the business profitable? Does it have valuable assets? And can it work without the original owner?
The first question is the most important. If a business is loss-making, without a clear direction on how it will return to profit, then its attractiveness to a potential buyer is drastically reduced. Without proven profitability, a company is only valuable if it has tangible assets, a market share that could be leveraged into profit, or some synergy that would make it work as a department of another business. To be blunt, if your business lacks these things and you don’t see a clear way to profitability, an orderly winding up is probably the only way to proceed.
The Asset Issue
However, most businesses have some kind of tangible assets. Equity value in property is the most obvious potential asset, but so too is the intellectual property of the company, the company’s usable equipment, and contracts that the company has. The value of these assets is, obviously, extremely subjective – a designed but non-manufactured product, for example, is only useful to a buyer with the wherewithal to manufacturer or improve it. Usable equipment is easier to value, but its worth is likely to be slight, while the value of contracts depends on two key factors. Firstly, the longer and more legally watertight they are, the better. Secondly, and more importantly, any serious buyer will investigate how profitable it is to service them. While professional valuers are useful, the value of company assets entirely depends on a potential buyer’s capacity to use them.
Independence from Ownership
Even if a business is profitable, with healthy assets, it can never be sold for much if it cannot function without the owner. Obviously, in the early days, a business’ owner-manager is its engine – he or she is emotionally invested in its success and, if anything needs doing, will be to the fore. But if a company is still in this mode, where the owner is essential to its day-to-day operation, potential buyers will be nervous. Would you hand over a six-figure sum to buy a company, only to see the old owner quit and have the business collapse? I didn’t think so.
To some extent, every business depends on its owner-manager, but there are ways to help it stand on its own two feet. Firstly, if sales depend on your personal relationships with clients, then getting long-term contracts in place is an obvious first step. Also, look to gradually ease another employee into the role of managing the customer relationships, so that clients won’t be presented with a completely new face if you do leave. It’s difficult to gauge how independent a business is of its owner. However, we’ve found a good litmus test: if you went on a holiday or a leave of absence for three months, would you have a business to come back to? If the answer is ‘no’, then you’re not ready for a sale.
Even if your business is succeeding according to the goals you’ve set, some work may be needed to get it to a point where you could actually sell up. This can be tricky for many owner managers, and we do work with companies looking to achieve this, from accounting to everyday management. If you’d like more advice on this, please feel free to contact us [link] and set up a free initial meeting.
Eamonn Garvey,
Partner,
DCA Accountants and Business Advisors.
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