Selling your company requires a timely, cautious and correct approach. That is half the effort and is the basis for success. Several years spent on the preparation may sound strange, but it is not unusual. Corporate finance consultants refer to this preparation time as ‘getting the company ready for sale’. Usually, companies that are ready for sale are sold faster, fetch higher prices and the transaction is fully in line with the rationale behind the sale.
COMPARE THE PROCESS OF SELLING A COMPANY WITH A MARRIAGE
We at HLG say: ‘Let’s make the girl attractive.’
Our English friends invariably say ‘You need to dress the bride.’ In other words: the company has to be ready for the occasion. It has to be attractive to the buyer as well as the seller.
How do you get your bride or groom to say ‘I do’ and take the plunge? Demonstrate that you have done everything to ensure that they have a good, balanced and successful life together. That creates the confidence for a good future. Your partner wouldn’t want it to be any other way. The same applies to a business. It’s the details that count. The power and the uniqueness of existing and beckoning success. Why your company in particular, and not your neighbour’s? These are all questions that have to be scrutinised in the process of dressing the bride, without masking her true identity.
TIPS
What do we at any rate have to consider? It starts with listening. Listening to your gut feelings. Sensing: sensing what is happening in your immediate vicinity and in the market. Seeing and recognising the (further) ‘momentum’ and acting accordingly. It’s good to have emotions, but don’t lose sight of the reason (for selling). And, whatever you do, follow your intuition. That’s what you do when you choose your spouse too.
And then move on to the practical matters. How can you ensure that you are properly prepared for the sale of your business?
1. BECOME DISPENSABLE
As a general rule, an SME – by its very nature – is heavily dependent on its entrepreneur/founder. This person built the company and the personal involvement and contribution have been decisive for its success. That’s fine if the company continues as such, i.e. it’s not sold. But when it comes to selling, that dependence can be an impediment for the buyer. It’s perceived – rightly or wrongly – as a risk. This in turn may affect the price and/or conditions of a sale.
For this reason, ‘making oneself dispensable’ is one of the first steps that has to be taken during the preparation. Get someone or a team you’re in charge of to take over and carry out the operational tasks (management) and perhaps make strategic decisions too. If you’re the one who is good at innovating, we highly recommend taking a different approach, whether or not in combination with external partners, without giving away any ‘trade secrets’. And the commercial/relational side of the business is often a thorny issue. SMEs are characterised by rather intimate business relationships that revolve around personal contacts. Here we have in mind clients or suppliers that have virtually become friends. However difficult it may be, you have to disengage from these intimate ties without becoming too detached. Relationships come with the company and not you, the entrepreneur. After all, the buyer is going for the business and not the business owner.
2. DO NOT UNDERESTIMATE THE PREPARATION TIME
Start in good time. An obvious consideration in this is the tax aspects. Depending on the reasons for selling, it may be useful to adjust the existing structure of the company to get the best possible sales proceeds (when the company is transferred and going forwards). This could involve having a general partnership, a sole proprietorship or property that is part of a single company. It is also useful to start on time if the company is to change hands within the family. The term for tax optimisation should then be at least three years, but preferably five. Operational matters also require time. How soon can relationships be handed over (in terms of building trust)? How long does it take to add a management layer or to transfer or amend long-term contracts? Another aspect to bear in mind is the optimisation of business processes and management, including financial control. Identifying and enhancing value drivers. You need to have enough time to prepare.
3. VALUE NOT PROFIT IS KEY
Buyers assess a company based on the retention and creation of value. Value is derived from the potential to create and secure good and sound growth in cash flows. That is why aiming for profit is not the objective. Obviously, if a business is not profitable it won’t be attractive. (This is where dressing the bride comes to mind.) Profit is a concept and it does not necessarily imply that money will be made in the long term. As a rule, the selling price for a transaction is not based on profit, but on the value of your business. The value in turn is derived from future cash flow that is (can/will be) generated. Indeed, the buyer’s investment can only be recouped from positive cash flows generated in the future. That is why the emphasis is on the company’s value drivers. Identify these drivers, and try to enhance them. Starting to do so in good time will have a positive effect on the actual price you get for your business.
AND NOW?
Are you thinking of selling your company (in due course) or transferring it within the family? You may recognise what we outline above, or maybe not. Whatever the case may be, we advise you to approach an expert consultant to assist you in the matter. That investment will be money well spent. It will pay itself back. The time limits mentioned are, of course, the most convenient ones, but they are not decisive. So even if you are already in the process of selling, a competent and experienced consultant is by no means a luxury. There are various options and creative solutions for a successful transaction.
We at HLG corporate finance are happy to be a sounding board and a good guide in the journey from preparing to sell company to when it is actually sold. So please don’t hesitate to get in touch with us at info@hlg.nl or call us on +31 (0)33-4347220.
