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Whether the time has come to retire to the South of France, to forge a new stage of your career or to access some capital to achieve your dreams of business growth, you may be considering selling all or part of your business. Whatever your reason, preparing well for sale is vital.
Understanding what type of buyer you’re likely to attract, knowing the terms that will apply and getting your operational 'ducks in a row' can all help you to achieve a smoother sale at the best possible valuation.
If you want to get the best price for your business, forward planning is essential. Think about why someone would want to buy your business and focus your energy on those specific areas. For instance, if a likely buyer wants recurring revenue, then channel your efforts into developing that in preference to one off sales.
Then examine how you can maximise profitability now by restructuring or reducing unnecessary costs, rather than trying to convince a buyer to give you the value for potentially higher profits in the future.
Your reason for sale will often influence the type of buyer you would like to attract. Are you looking to retire, secure investment for growth or perhaps de-risk your investment by banking some of your business’ value today?
Buyers of businesses fall into three main categories: trade buyers, private equity (PE) and family offices.
Trade buyers particularly suit a business owner who is looking to exit fully, perhaps to retire or to do something different. This type of seller doesn’t want to have a commitment to the business past a handover period and they want to see prompt upside. In these cases, sellers often know some likely buyers although expert advisors can help them to identify others.
Trade buyers can often justify a premium price because they understand the likely synergies, savings and cross-selling opportunities. They may also undertake less stringent due diligence than other buyers, because they know what’s involved in the business.
PE buyers are typically involved when business owners want to sell up in part to raise capital. That can be when they want to derisk and take some money off the table or when they need capital to expand but don’t want to take on debt (or can’t access the right credit terms).
When PE gets involved, sellers usually stay involved with their business, either to lead its scaling or to steer it toward their eventual exit.
Family offices are typically seeking to deploy funds in a safe haven that will generate steady returns. They are more likely than other buyers to want the team that has been running the business to stay in place. If you want to sell up and leave yourself, you need a strong management team in place.
Ideally, your business will have achieved year-on-year revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) growth over the past two to three years. This is a positive indicator of the business's potential, as is being able to show scope to build your customer base, develop new products, access new markets or acquire other businesses.
In addition, a strong management team that can take over the running of the business post your exit will be important for most buyers. If you as the founder or owner of the business are absolutely central to its success, that makes it a high-risk prospect for a buyer. Make sure you develop your management team, help them build staff, client, vendor and partner relationships, and try to make yourself somewhat redundant.
Typically, businesses are valued on multiple of EBITDA. For example, a business with a €5m EBITDA could be valued at a multiple of seven to give a sale value of €35m.
It’s also quite usual for deals to be on a cash-free, debt-free basis with normalised working capital. Taking the previous example, before agreeing a final deal price, you would add cash at bank to the €35m, subtract any debt and also give your buyer the normal level of working capital needed to run the business, so they don’t need to invest additional money into it immediately just to keep the doors open.
With this in mind, a company should aim, well ahead of time, to tighten up working capital management which includes stock management, collecting debtors as quickly as possible and utilising credit terms with trade creditors. As the figure for working capital is usually based on a 12-month average, it’s in the seller’s interest to reduce the normal level needed well in advance of an anticipated sale.
While the valuation is important there are other important factors to consider when selecting a buyer; is the consideration all up-front, is some deferred or is it subject to an earn-out which has certain conditions or milestones attached. If the seller is going to stay on for a while, the relationship between seller and buyer also becomes important.
If you don’t already have a strong finance function in place, prioritise it as part of your sale preparation. It’s critical to have quality financial information to share, while also gaining an improved understanding of profit drivers and cost centres.
Likewise, if you have a solid budgeting and forecasting system and proper KPI reporting in place, it will help prove value to buyers and show the company is run with rigour.
A strong finance function can also help defend against potential price chips during acquisition negotiations.
To ensure due diligence and other administrative tasks around the sale don’t end up causing things to drag on for longer than needed, sellers need to put the work in ahead of time.
Make sure documents and policies, such as contracts, company filings and GDPR policies, are up-to-date and any outstanding legal actions are closed off. Buyers are always uncomfortable with outstanding legal actions or uncertain ownership of assets. They never fail to see the worst-case scenario and discount their offer accordingly.
Bear in mind that whenever physical retail, office, warehouse or other property is involved, delays are common, so again prepare ahead of time by locating title deeds, licences, certificates and other documents. Ensure any property related tasks such as planning permission applications have concluded.
Buyers will also appreciate if you can provide accurate records and documented processes to help keep the business running smoothly in the transition period.
Remember too to think of retention. Consider what golden handcuffs you can put in place for valuable senior managers needed to steer the business past your ownership. These could be share options, performance bonuses or other incentives. Ensure key employee contracts include non-compete clauses to give confidence to potential purchasers.
While those selling for personal reasons have to weigh up their individual decision, those who are keen to grow their business further may gain confidence by taking some money off the table. Having derisked to a degree, they can drive the business harder and take more (calculated) risks.
You don’t have to decide the exact portion to be sold ahead of time. The optimum deal structure usually gets decided midway through the process.
Whether you’re selling to acquirers or investors, timing is also important when it comes to appealing to buyers. If you try to squeeze every last drop from a business and leave nothing for the next person, buyers won’t be forming a queue.
At Grant Thornton, we have extensive experience supporting businesses with full or partial sales, from assessing potential buyers through to seeing deals completed. We offer in-depth tax advice beforehand, conduct sale preparation and vendor due diligence.
Our international network means we have excellent support across the globe, often reaching out to member firms to make warm introductions to potential buyers in their local markets.
Among recent deals involving Irish businesses on which we have advised were Crystal Air’s sale to Mitsubishi Electric, Coll-8 Logistics sale to Evri, Liftrite’s sale to Amplex AB, Rose Confectionery’s sale to Melior Equity Partners, and Acacia Facilities Management's sale to Apleona.
Grant Thornton Ireland ranked #1 Deal Advisor for 2024 by Experian and PitchBook league tables. To find out more about how Grant Thornton can support your business, talk to our deals advisory team.
