Most businesses never actually make it to the point where they can be sold for a decent price. The main reason for this is that the owner didn’t set out to build a business to sell; when they started the business, they just wanted an income to replace the salary they earned when they had a job.
So what if you are one of the lucky few whose business does get to be a “commercial profitable enterprise that works without you” and you are in a position where you would be happy to sell your business? (Remember, wanting to sell and having to sell are two completely different situations!) Well, when you get to this situation there are a few possibilities, all with upsides and downsides. Unlike most commercial transactions, where it is a case of “buyer beware,” with business sales it is very much a case of “seller beware.”
So, to whom could we sell our business, and what do we need to look out for?
1. To family, friends or the management team
This is by far and away the most common form of business sale. After all, it is more than likely that they are already working in the business so they will most likely be around when you feel the time is right to sell. The good thing about selling to these guys is that the trust, both ways, is already there. You know that the business will continue as they have the same core values as you do and it will be in safe hands in the future.
The challenge comes when you consider that this is never going to be an arm’s length transaction and therefore it will be hard to negotiate a good price as the seller. Also it is very unlikely that you will be able to let go completely, especially if you are handing over to the younger generation, who you may see as barely out of nappies and unable to cope, and likewise they will see you as a support to rely on in times of difficulty.
The best way to overcome these challenges is to make the ground rules really clear from the outset. Write down how they see the future of the business and how you see it. Let them set a compelling vision for the future, put in place clear roles and responsibilities and remember that, if you are to remain as a shareholder, you do not have the same responsibilities as a Director, so you must ensure that you back off from the day to day running of the business as soon as you can. I would even recommend that you take an extended holiday from the business (maybe even 6 months) so that they get a feel very quickly of what it is like to manage without you. And one final thing – let them make their own mistakes. Protecting them from failing will mean that you will never get to leave the business.
2. To suppliers, customers or competition
This is an often overlooked possibility, but in reality it makes total sense. Your suppliers and customers should know your industry well, and you may form a major part of their success. Buying your business will give them more control of the supply chain and a chance for scaleability. The challenge comes in making them interested in your business without making them worried or losing credibility with them. To ensure that you can pull off such a sale successfully, start building relationships with potential buyers well before you plan to sell your business. Find out what their plans are for the future, research their financial position (reports are available from Companies House) and ask who their big suppliers and customers are. You never know, maybe you could both make a strategic sale to somebody further up the line.
3. To external investors
Traditionally this is the form of sale that most people think of, but it is actually the one that happens the least. Professional buyers are notoriously ruthless when they want to buy. Venture capitalists want to make big money quickly, so your business needs to be at the start of a high growth curve for them to take an interest and they will put in senior management to “help” you run the business.
Angel investors are more entrepreneurial, but they will want you to stay in the business, as they have no interest in running the day to day operations. This might be a good option, if worked in with a management buyout. Both parties have large amounts of cash, but only expect a good payout if you have a sound profitable business that works without you and has good potential for growth over the next 2-3 years.
Purchasers for an open market sale will usually be people with a windfall of money looking for a new venture. These are good potential buyers for you as they will want to take control very quickly, allowing you to exit fully with no strings. They have cash to spend, so you have the security of money in the bank. The only problem is that they will have limited funds, normally up to a few hundred thousand pounds, and they don’t come along very often. Business brokers can be a good source of buyers, but you need to start early and hold out for a good price.
This is my favourite form of sale, because you can retain ownership of the franchising part of the company while selling the operational part. It also gives you great scope for growth, and when you come to sell the franchise, your profit multiple will be much higher, as you will be selling a tried and tested system that has a bigger upside than one business. The challenge is that they take more effort to set up, and you have to realise that you will be running two businesses for a period, one the business itself the other the marketing and selling of the franchises.
The best approach of course is to build your business from the start with the potential to be sold to any of the types of buyers described above. In that way you will have many more options and of course, if you have more than one party interested in buying your business then the price you get will not only be higher but you will have a better chance of ensuring your legacy continues in the way you wanted. So go on, take ACTION – build a great business and sell it for a fortune!
(NB: the tax planning aspects of selling a business have not been considered in this blog post. Before making such decisions, I recommend that you obtain appropriate tax and legal advice.)
If you’d like to discuss how you can get your business ready to sell profitably, call us and book a complementary session with one of our brilliant business coaches!