If you’re a small or medium enterprise (SME) owner, and considering an orderly move towards your business’s “Out” door in these changing and challenging times, rest assured that, as outsourced Finance Directors, we completely understand the economic pressures upon you.
According to recent figures from the Office of National Statistics (ONS), in early October 2022 more than a third of businesses reported economic uncertainty was having an impact on their turnover, with over 20% expecting their turnover to decrease in the following month, and 25% reporting their performance in September 2022 had decreased year-on-year. So, it’s tough out there.
But it’s important to understand that selling up, whilst a perfectly legitimate way to move on from a business you’ve built, isn’t a quick fix for a temporary downturn – at least, not if you want to maximise the sale price – because exiting your business successfully requires forethought, preparation, and counsel.
We advise business owners on their exit strategy practically every day – and here’s what we tell them.
Don’t underestimate time or complexity
First off, selling a business successfully can’t be done overnight. It typically takes 2 – 3 years to effectively prepare a business for sale and complete the transaction.
Consider everything you have to achieve in that time: a full understanding of who might buy and why; the sales collateral and promotional materials you will need to produce to demonstrate the strength of the business to different types of buyer with differing priorities; the due diligence process and the sheaves of documentation you will have to produce to satisfy it (terms of trade, contracts, legal documents, Board reports, management accounts, and more) … and this is only scratching the surface.
As we explore below, there’s typically also much to be done to the business itself to make it saleworthy – and this is all in addition to your “day job”, so it’s not unreasonable to ask for outside help.
Fix everything and do business as usual
One of the interesting paradoxes of selling a business is that, in many ways, you have to be more invested in your people, processes, systems, and performance than you were before you decided to sell. And all this whilst coping with the everyday pressures of continuing to run the business and achieve existing Key Performance Indicators (KPIs).
You will have to put in place training and processes to enable people to step up and shoulder more responsibility as you gradually scale down your day-to-day involvement in the business. Buyers will look very hard for this evidence that the business won’t collapse once you’re gone, and will probably even insist you stay on for a handover period after the sale is completed.
At the same time, this is absolutely the moment to thoroughly examine where processes, tools, and technology (including the business’s website and digital marketing channels) could be improved, extended, or bought anew to deliver better on conversion, productivity, efficiency, cost-effectiveness, and risk.
Financially, however, all this can be a delicate balancing act. Investment to increase the value of the business and optimise its sale price must be combined with careful cost management elsewhere in the business to keep expenditure at an essential-only level.
This is something many business owners will struggle with unless they have additional Finance expertise and support available to call on.
Beware the buyer: challenges ahead!
Perhaps surprisingly, the biggest logistical challenge in selling a business is often dealing with the high volume of enquiries, and triaging those prospects into viable and suitable potential buyers.
It sounds like a nice problem to have, but in reality many business owners are caught off guard by the influx and can’t manage both it and the day-to-day running of the business without outside help.
It’s important to understand that the business that acquires or merges with your own as a result of the sale is not looking to continue your life’s work – they’re looking for a return on their investment in the shortest possible time scale, end of.
They could therefore be either a competitor – in which case they’re typically either in it simply to acquire your order book, poach some great staff, or close your business down, and all at a price that is often rather lower than your true market value – or a company whose products or services your business complements or completes, or provides an additional route to market (e.g. geographic) for.
What is critical here is that the considerable flexibility for you to negotiate the sale price based on how effectively you can convince the buyer of your business’s value can often, unfortunately, be offset by the logistical headaches of making two businesses one.
Drastically different cultures and systems, for example, can make the transition difficult for all parties involved, and it’s important to remember that the buyer still has the option to simply close the business down after the sale if the integration costs and efforts prove too high relative to the returns – a consequence that is likely to prove emotionally difficult for you, your close colleagues, and the business’s employees.
In short, whilst you need to position your business as an attractive asset – or potential disruptor – to current businesses within similar and competitive industries, a healthy balance sheet and compelling messaging won’t be enough.
You’ll also need expert advice on how to plan for and execute systems and process integration, particularly with regard to business-critical disciplines like Finance.
“The value of your investment can go down as well as up…”
The phrase is familiar to all of us, but it’s been brought home even more sharply to those considering selling their business by the Capital Gains Tax (CGT) changes in the latest Budget statement, which could wipe a significant sum off the amount you’re likely to net from the sale of your business.
To put this into perspective, the annual CGT exemption has been cut from £12,300 in the current tax year to £6,000 in 2023/24 and £3,000 in 2024/25, with any gains that exceed the exemption being taxed at the existing rates of 20% for higher and additional-rate taxpayers and 10% for some basic-rate taxpayers.
It’s a sobering reminder that the sale of a business is just one more transaction the Government can choose to make less profitable for you and the Autumn statement tinkering might be the start of a direction of travel for future budgets – and it highlights the importance of seeking expert Finance advice to put in place timely mitigating strategies.
Plan now – exit successfully later
In summary then, there are four points we’re making here.
Firstly, whilst “getting out” might seem like a sensible option in an economic downturn, you’d be better advised to seek advice on how to rationalise costs to survive now and how to plan for a successful exit (rather than one that doesn’t deliver what your business is truly worth) later.
Secondly, your business is a complex and organic creation, but buyers want pegs that fit holes, so be prepared to carry out a lot of hard work to reshape your organisation’s processes, data, and management information to close the sale.
Thirdly, start now.
And fourthly, we’re here to help you with all of the above – and what it won’t cost you is the salary of a full-time Finance Director or CFO!
For more information on how you can use EFM’s team of Finance and business management experts on a pay-as-you-go basis to prepare your business for a successful sale, get in touch today.