Grooming Your Business For Sale

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Grooming your business can have a dramatic effect on the outcome of any returns you make from its eventual sale and Peter Lugg, Corporate Finance Partner at Monahans, discusses the basics involved.

Grooming your business for sale should be part of a strategic plan for succession or disposal of the business and the process should start two or three years in advance of the succession or disposal.

Peter Lugg

This will allow time for plans to develop and, also, to be able to record the improved performance of the business in statutory accounts - proven performance is always more valuable than forecasts.

The most common reasons for an exit include the proprietor looking to retire and the proprietor looking to facilitate a management buyout or family succession. It is important to consider these when grooming the business, to ensure that the strategies employed have this goal in mind.

The most obvious sources of value in a private company are associated with profitability, cash flow, the structure and nature of the business and any cash surplus or property.

Profitability and cash flow may be obvious sources of value. However, the structure and nature of the business can also provide value to a niche purchaser or a purchaser engaged in a complementary activity.

All businesses need working capital and premises from which to operate. However, cash that is surplus to normal working capital requirements will clearly enhance the value of the business as will an owned property as opposed to a rented property.

Purchaser's perspective

It’s important to look at things from a prospective purchaser’s perspective.

Maintainable earnings can be broken down into the principal components of sales, gross margin, overheads and the application of accounting policies. It is important that your margins are consistent or, preferably, ahead of the sector expectation. Private companies will often apply prudent accounting policies but it may be appropriate to view these in the context of industry norms.

Having broken the maintainable earnings components down, we would then look in further detail at each component. For example, sales would be a composite of sales people, product quality, point of sale material, brand, sales administration etc. A smaller business with limited resources cannot address all the issues at once. Therefore, it is important to prioritise activity into areas where the biggest gains will be achieved without overwhelming the management team.

Another area which can benefit from grooming activity is cash flow.

A strategic review of credit and purchasing policies is always worthwhile and can have a positive influence on cash flow. A business with a strong positive cash flow will always be attractive to a prospective purchaser.

One Monahans client that we have been helping to groom for a trade sale has moved from providing credit itself to using confidential invoice discounting. We identified the right invoice discounting partner which enabled the business to obtain a one-off cash injection which was used to repay the overdraft and provide additional working capital whilst at the same time saving more than £3,000 a year in interest and bank charges. The proprietor has also been relieved of the personal guarantee given to his bank.

Positives and negatives

No grooming exercise would be complete without considering the issues which will put off a prospective purchaser.

Issues such as a small customer base, unstructured management (i.e. is overly dependant on the proprietor), unresolved litigation and lack of systems and documentation will all have a negative impact on the business value.

Working with the company’s management, direct actions may be appropriate but, also, the strengths of the business can be used to mitigate any underlying negative value component.

There isn’t the scope here to go into some of the tax considerations of grooming a business for exit but, of course, these must also be taken into account.

In summary, any grooming exercise must consider the reason behind the prospective exit, the time available to make changes and, of course, what a prospective purchaser may be looking for.

Visit Monahans web site at http://www.monahans.co.uk to try their free instant Business Valuation calculator and find out what your business could be worth.

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