Got A Business Valuation? Throw It Away. You Can Sell For A Lot More Than That Valuation!
Had a professional valuation done for your business? Ignore it. Here's how you can get the maximum price for your business ... and it could be a lot higher than the valuation.
Whatever your formal valuation, it has little relevance to what you can actually get for your business when you sell it.
Because valuation is less than half the story. This article is going to explain how you can sell your business for a lot, lot more than any formal* valuation. You , the seller, can add enormous amount of value to the deal to leave you walking away with a significantly higher price!
*Formal valuation is one done by a qualified valuer rather than, for example, the free (and often silly) valuations by business brokers.
Buyers are highly sceptical and suspicious beasts. And they generally want to pay less than the valuation figure, a lot less.
So how do you get them to pay a lot more? There's an art to it!
1. Attract the right NUMBER of buyers & develop competitive tension
It's a simple supply and demand situation. You have only the one business for sale. And if you (or your broker) can find numerous buyers interested in buying your business that helps enormously when it comes to getting a better price.
However, if you have just one buyer that's very bad for price.
Because the sale process is a long one, there is much back and forth, much checking of data and numbers, a lot of "due diligence" (DD) and a lot of negotiations on the terms and conditions of sale. During that process buyers typically find all kinds of excuses to keep revising the number down. Having just one buyer puts you at extreme risk of this "chipping away" at price.
The buyer knows you've invested a lot of time and energy to get to the latter stage of the sale and that there's a high pain level to a late-stage pull out, so he'll push his luck and push his luck and push his luck. However, if you have other potential buyers ready to take his place he will be a lot more circumspect about putting price pressure on you as he's aware you have options.
Important Note: Some vendors invent "other buyers" ie. they tell an interested buyer that they have other buyers in the wings (even when they don't). This is dishonest, yes, but it is also extremely unwise!
When I was buying business I absolutely loved it when sellers came up with "phantom buyers". When I suspected the other buyers were imaginary, there was a simple strategy I used to flush the truth out and make the seller look very foolish. But worse than looking foolish and being proven a liar, he has now exposed his vulnerability: he has me as his one and only hope. That puts him on the back foot and gets me major concessions in the price / terms of the deal!
My advice: No phantom buyers ever! There is no substitute for actually having multiple interested parties.
But it's not just about having numerous buyers, it's about managing them sensitively and diplomatically to ensure the development of competitive tension. That's a tricky tightrope to walk especially if you are conducting the sale yourself as you can't put the buyers all in one room and ask them to bid against each other. And you can't go back and forth and tell B that A offered you £x (B's not going to believe you!)
If your business is large enough I highly recommend having a competent M&A adviser or business broker do this for you.
2. Attract the right KIND of buyers
Most first time sellers are unaware of how important it is to get the right kind of buyer.
But what is the right kind of buyer?
The right kind of buyer is someone who can derive a lot more benefit from your business than other buyers can - a strategic buyer who sees synergies between his business and yours, as opposed to a financial buyer who's looking simply at your numbers.
Let us take an example of a distribution business you own that's making £500K in net profit per year. Let's also assume that businesses in this industry are selling for 5x net profit. A financial buyer would expect to pay no more than £2.5m (£500K x 5) because that's how much he sees the business making over the next five years. (Yes, it's about what they see in the future rather than what happened over the last five years.)
However, a strategic buyer, say a competitor, may be able to extract further efficiencies from your distribution business. On making the acquisition he could combine storage for both businesses and take one large warehouse rather than maintaining two small ones. He could also dispense with staff - why would he need two warehouse managers and two people doing book keeping?
He may see numerous other ways to benefit from merging the two businesses. Perhaps he has some services that you don't currently provide to your customers and he recognises that on making the acquisition he'll have a ready customer base (of your customers) to whom he can offer an additional service.
He might be able to see a future of £600K in annual profit from the acquired business. He could therefore justify paying £3m (£600K x 5), a cool half a million more!
We'd all love to have a strategic buyer, of course! Why would anyone sell to a financial buyer?
Some businesses end up selling to financial buyers simply because the vendor (or his broker) didn't do a good enough job finding strategic buyers. Strategic buyers are not easy to find because, most often, and unlike financial buyers, they're not out there looking to make an acquisition! They need to be found, they need to be wooed, their board needs to be convinced to take the risk - buying a business is always additional risk! - and they need to be persuaded to sit down and talk numbers. This is no easy task by any stretch of the imagination.
And if you want to get multiple strategic buyers, you can do it yourself, but it takes a lot of legwork - literally hundreds of hours of sorting (bought) data on companies in the sector, finding targets, approaching them, following up, generating the interest and gently guiding each prospective buyer.
And that's just to get them to the point of signing an NDA!
Further, it is difficult to generate candidates without exposing your company's identity. A better way is to hire the right business broker. Unfortunately, most brokers are not very good and it's not easy to find competent ones (that's why we exist - to help people find the right expertise in this industry!)
A broker will cost you money in advance fees for all the early stage slog. (How much?) Yes, the competent and successful brokers won't touch any deal where you pay only at the point of successfully selling your business.
For larger businesses we offer a service to help find you the right professional expertise. Get in touch to book a free initial phone consultation. If your business has less than £2m in sales, you can book a paid consultancy session to discuss your accounts and your business circumstances and get advice specific to your case on how to extract maximum value. Get in touch.
3. Attract buyers with the right KIND of funds
If they are funded, they are funded. Money is money, right?
There is a growing disease of "buyers" out there who pose as funded buyers but actually don't have their own money. They may claim to have investors behind them, to know a lot of high net worth individuals, to have "access" to funds, whatever. But they won't be able to provide a bank statement to prove liquidity.
They are buyers with the wrong kind of funds.
Doing deals with people who don't have the money is extremely difficult and stressful. Most of these deals fail, and they fail right at the end after you've put many, many hours of work into it (and, probably, professional fees for a lawyer etc). Well over 90% of these deals fail at some point.
This is why they fail: The "buyer" speaks with you, asks some initial questions, looks at the accounts etc. He then makes an offer and if you accept he'll go hunting for finance. The investors behind your "buyer" aren't just going to give your "buyer" a big chunk of money. They are going to want details of the deal, want to know what cut they are getting (yes, they want a chunk of equity) etc etc. Your "buyer" has to effectively negotiate a deal elsewhere and that can take weeks ...or months.
If he does negotiate that deal, it'll likely be for only part of the agreed price as the investor wants your "buyer" to have skin in the game and put in some of his own money. So your "buyer" is scrambling to raise a part of the price using his own resources. More time wasted.
All this pressure on raising finance means that the "buyer" will want to use some of your assets on the day of the sale as security for a loan from a finance company. Or he'll want you to agree to less of a cash payment up front and more of a deferred payment element. These are further complications that spell bad news.
In the highly unlikely event of all the above working out smoothly, the deal moves to the due diligence (DD) phase. But here you have not one buyer, but a buyer and his investor (or investors) plus a finance company. More people sticking their noses in, raising questions, posing objections, dragging out the due diligence. And through DD all of them will want to keep renegotiating and renegotiating the deal to get your "buyer" better terms.
Even if you agree to every price cut, every deferred payment change in terms, every unreasonable demand, it'll take just one party pulling support and your "buyer" can't proceed with the deal.
Unfunded buyers are a PITA and, unfortunately, it's not easy to spot them. I've got some tricks up my sleeve and can smell these people from a million miles away, especially as several of them have attended training courses on "how to buy a established and profitable business without using any of your own money". There are certain subtle signals they give out which I've learned to spot. But it takes experience.
If your business has a turnover of at least £2m, get in touch and I may give you a tip or two on how to identify and deal with unfunded buyers posing as funded buyers.
4. Prepare the business properly prior to sale
No, it's not just about the profit figures and attracting the right number and type of funded buyers. You need to be prepared for sale!
Most small businesses go to market without any prior preparation and as a result suffer when it comes to price. But what is preparation?
A good adviser / broker - or a good exit planning book - would help you on the preparation but it involves, broadly speaking:
- getting together the records, figures and documents that buyers are going to want to see. No, you don't already have them! Buyers, through the due diligence process, ask for hundreds of documents and records, sometimes thousands, many of which you'd need to create from scratch!
- doing a dummy due diligence (pre-sale diligence) process to anticipate the type of issues buyers are going to raise when they do DD and ironing out any problems before buyers see them. For example, your T&Cs may have been written before GDPR and may need revision. Or your physical stock doesn't exactly match the value of stock in your books. Or the contracts your employees signed are not completely in line with employment law as it is now;
- cleaning up and tidying up the property, tax matters, records, accounts, legal matters ... and a hundred other things;
- extricating the owners (dealing with, for example, personal guarantees they may have issued in the past to banks / suppliers);
No matter how good your records and how well you've run your business there are numerous "flaws" that need fixing if you are to get the best price. Because when buyers come in to ask difficult questions you'll be prepared for them, you'll have the answers ready. You are not floundering and looking foolish (and giving the buyer an opportunity to hammer price or, worse, simply walk away).
5. Provide credit, it can double your price!
Most deals involve some element of credit; buyers don't generally expect to pay the full price on the day of the sale itself. However, when I speak with business owners looking to sell their business it's almost always the case that they start off expecting the entire price to be paid in cash! It takes a while before they are fully convinced of the merits of offering credit (and how it can be done safely).
Those sellers who still insist on being paid in cash on the day of the sale end up losing a lot of money. Their position may be they want all cash "because my business is worth it" or because "I can't give credit to someone I don't know from Adam".
They are losing out on price in a big way. Why is this?
Let's say a business owner has a price expectation of £2m. If he expects an all-cash deal he will attract only those buyers who have £2m+ in cash. However, if he is a bit flexible on payment terms he could attract a wider pool of buyers including those with perhaps just £1m or £1.5m. And these buyers understand that they need to pay a higher overall price to compete with the buyer who has £2m in cash!
So a good negotiator would get them to commit to a price of, say, £2.5m with £1.5m in cash on the day of sale and the remaining £1m to be paid in installments over the course of 12 or 24 months.
From the vendor's point of view, an additional £500,000 is not to be sniffed at!
But what about the risk of trusting a total stranger to pay £1m in the future?
This is not the risk that most vendors usually assume it to be. There are numerous ways of securing that loan - it could be via a first charge on the buyer's home, for example. Or the buyer could come up with a bank guarantee for the entire amount!
Generally speaking, the lower the quality of security provided for the "deferred payment", the higher the price the buyer needs to pay to compensate the seller for the risk he is taking.
But is £2m in cash really better than £1.5m in cash with a further million over 12 months guaranteed by a bank?
Spread the payments over a sufficiently long period - say five years - and it may be possible to double that £2m price to £4m. And that's before taking into account the above market rate interest that the buyer is going to be paying on the loan.
6. Reduce buyer risk, it will increase the money you take home
We've touched on seller risk above in relation to deferred payments, but as a seller you can add value by reducing the risk the buyer perceives in the transaction. The greater the risk reduction, the higher the price you can expect.
When it comes to investments, risk and return are closely related. The reason treasury bonds have a lower return than dividends paid by public companies companies is because bonds are less risky - they are backed by the government.
The same applies to business acquisitions. The lower the risk - or, rather, the lower the risk the buyer perceives - the higher the price the buyer can pay.
And as the seller you can lower risk in numerous ways including, but not limited to, the warranties and indemnities provided in the contract of sale. If this is unfamiliar territory for you, please contact your business broker or M&A adviser to explain the various ways in which you can reduce risk for the buyer.
We do cover negotiation later, but it's relevant to point out here that the best negotiators walk out of the first meeting knowing exactly what the other side want, and what they are able to give. The negotiator then carefully plans a package that gives away the minimum possible to make the deal happen.
The first meeting is not about agreeing a price. A large chunk involves "reading" the opponent. In particular, you want to know his appetite for risk, where he sees risk and what solutions he will accept as mitigating against those (perceived) risks. And it's even more tricky because at this stage the buyer doesn't have a great deal of information about your specific business so he is just guessing on where the risks might lie!
7. Use an expert negotiator, don't do the negotiations yourself!
Negotiation is a specialist job. Even if you've negotiated other deals, the negotiation for the sale of a business is different. There are numerous components to the negotiation, it's not just about agreeing a number!
Remember, the buyer is looking to get away with paying as little as possible. A good negotiator uses a lot of subtle tricks to flush out areas in which the buyer has more flexibility and he pushes the right buttons to extract concessions.
An experienced negotiator may charge £1,500 - £2,000 for the day. Yes, negotiations can last all day, often longer. But s/he would get you, or save you, hundreds of thousands (or more). If you're using a competent business broker or M&A firm they'll provide the negotiating talent. Or you can contact me to recommend a negotiator.
8. Use a tax expert as well, don't assume you can tax mitigate AFTER doing the deal
Would you rather get a million and give HMRC half a million in tax ...or get £800K and pay only 10% in tax?
The important number is not the headline price. It is, after all, the amount you get to take home. Tax planning should therefore be an integral part of the planning even before putting the business up for sale. It should be something that's taken into account all the way through the exit preparation, the marketing, the negotiations.
Your personal tax situation and the deal setup that would leave you with the maximum amount post-tax is what your negotiator should be briefed on before the negotiations even start.
For example, a recent business I advised had built a large cash balance. The directors hadn't taken a dividend for the last couple of years because they didn't want to pay dividend tax with a marginal rate (at that time) of 38%. They had ended up with a bank balance of over £600,000 in a business that needed no more than £60,000 in the bank as working capital. If the owners had drawn this money out prior to sale they would have had to pay a whacking great tax bill on it.
Through proper planning the owners were able to add £540,000 (ie. £600K - £60K) to the sale price of the business with an understanding that the buyer would finance this additional £540,000 from the "excess" cash in the business. The vendors then got full Entrepreneurs' Relief on the £540,000 and paid just 10% in tax.
But arrangements like that don't happen overnight. It took a lot of planning, applying to HMRC for clearance to withdraw the £540,000 as part of the sale price, sending HMRC several reminders and building the tax mitigation into the negotiations with the buyer and into the Heads of Terms and the contract of sale.
There are numerous other tax related issues that need planning. These include the basis for calculation of Corporation Tax due on the profits made in the business up to the day of the sale (which tax burden falls on the seller of the business, not the buyer).
A recent sale of a £10m company in the midlands fell through near the end because buyer and seller couldn't agree a method of calculating work-in-progress and stock - two figures necessary for determining the profit made in the business between the last final accounts and the "completion accounts" created at the point of company sale / handover.
Buyer and seller couldn't therefore agree on how the burden of the current year's Corporation Tax was to be split between both parties ...and the deal fell apart!
The single thing you can do to ensure maximum price on exit is to appoint the right advisers, to appoint them before you do anything, and certainly to appoint them before you've spoken with any buyers.
This is particularly important if you've received an unsolicited offer for your business. Your first step should be not to speak with these prospective buyers but to appoint advisers to act on your behalf (and to raise competing offers ASAP).