Many business owners considering selling their company delay doing so because they want to get their company into what they believe is the “perfect shape” for potential acquirers.
While, on the surface, this makes complete sense, there is also ultimately an underlying flaw in the logic of this approach because it assumes each acquirer shares your belief on what the “perfect shape” of your company is.
There may be up to 200 (or more) individuals, family offices, private equity groups, search funds, competitors, and companies in complementary sectors interested in your company. What each of these potential buyers have in common is that:
• they all have their own and often very different reasons for wanting to acquire your company and
• the ways they would run your company under their ownership would be unique to them.
In most cases, you should not embark on a multi-year transformation project to turn your company from what it is now into what you consider a “perfectly shaped” company to add value. You might be wasting your time and the high likelihood is that a new owner would reverse some or all of those changes anyway.
There are, however, some qualities in a target business which all acquirers want regardless of their reason for wanting to buy your company and what they’d do after they took ownership.
In this article, we cover those universal value-adding qualities and how to make your business more attractive in the eyes of potential acquirers. We examine:
● the importance of being able to step away from the day to day running of your company,
● increasing revenues and lowering costs,
● the value of a diversified customer base and in marketing to a wider number of sectors,
● why clear financial and operational transparency is critically important to buyers,
● remaining invested in your business prior to completion day, and
● the benefits of engaging with an M&A expert as soon as possible.
STEPPING AWAY FROM THE DAY TO DAY RUNNING OF YOUR COMPANY
With the exception of some individual investors who actively seek existing and profitable businesses they want to run themselves, most of the parties interested in acquiring companies want arms-length ownership in management terms.
The family offices, private equity groups, search funds, competitors, and companies in complementary sectors want a strong, competent, and committed management team already in place in the businesses they buy.
The less connected your involvement in the company is to the generation of sales, the management of staff, strategic planning, business operations, and supplier relations, the better.
The more you are needed personally to ensure the company operates profitably, the greater:
• the risk that the takeover will fail financially if you’re not there,
• the chance that your senior staff do not have the ability to do their job well in your absence, and
• the amount of personal time and attention the acquirer and their management team will have to put into running your company and incorporating it into the acquirer’s wider business interests.
You will substantially increase the value of your business by sharing your knowledge, expertise, and insights with your members of staff and by giving them the opportunity to show that they can do the work that you do. You will also make your own life a lot easier.
The less centralised the knowledge, expertise, and decision-making structure in a company, the better a chance it has of surviving if an owner is incapacitated for an extended length of time. The better the chance a business has of surviving without your involvement, the more valuable it is to an acquirer.
INCREASING REVENUES AND LOWERING COSTS
Acquirers seek companies whose revenues and profit margins have increased year on year for a number of reasons, the main one of which is that it implies there is momentum in your business.
Acquirers want to buy a company with momentum behind it – momentum is the fuel which drives teamwork, a greater number of sales, and a desire to improve profitability on sales made.
Acquirers value a senior management team not reliant on you for decision-making in a company whose revenues are increasing and where proactive measures are being taken to reduce costs. In that team may also be a talented member of staff whose skills may be deployable in different parts of the acquirer’s business portfolio
GREATER CUSTOMER AND MARKETPLACE DIVERSIFICATION
One factor examined at length during the due diligence process is your company’s reliance on key customers.
If your firm’s revenue and profitability are reliant on a few important clients, the value of your firm will be less to an acquirer because it is acutely vulnerable to one of more of those clients not continuing to place orders.
This vulnerability means much greater risk for the acquirer and it may not only reduce the price you achieve for the sale of your business – it may cause a potential bidder to completely withdraw their interest.
You should try not only to increase the overall number of clients buying from you to reduce your exposure to the withdrawal of business from key customers. You should also look for opportunities in complementary sectors previously untapped for new trading opportunities.
CLEAR FINANCIAL AND OPERATIONAL TRANSPARENCY
The purchase of your business represents a significant financial and operational risk to the acquirer because not all acquisitions work. In some cases, failure to run a purchased company well may endanger not only the acquirer’s wider business structure but also the acquirer’s personal finances.
Following the agreement on a price with your enquirer and the signing of a letter of intent, the deal will enter a process of due diligence during which your acquirer’s solicitors and accountants will request significant amounts of documentation, paperwork, and statistics about your business. This is so that they can truly assess the state of your company to see whether it offers the opportunity your acquirer believes it does.
Upon engagement with IBA Corporate, we recommend strongly that you, your solicitors, and your accountants start to assemble the following:
• your company’s financial statements
• company documentation
• who works for your company at management and staff levels
• the Intellectual Property you own
• contracts you’re signed up to
• previous and ongoing legal disputes
• any current debt facilities ongoing
• compliance requirements
Although you and your enquirer may get on very well personally, they will rely heavily on their own professional advisors to find reasons to either reduce the purchase price they’ve offered you or to withdraw completely from the bidding.
An inability to produce accurate and timely documentation, paperwork, and statistics requested when needed will provide your acquirer’s advisors with the reasons they need to drop the price or to leave the bidding process altogether.
REMAIN INVESTED IN YOUR BUSINESS DURING THE SALES PROCESS
Activity around taking your market to business, dealing with potential acquirers, and the due diligence process will take up a lot of your time and attention but you mustn’t lose sight of the fact that you’ve still got a business to run.
During this period, continue to share your knowledge, experience, and insights with your staff and devolve more and more power to your senior management team. Continue your keen interest in revenue, profitability, cost control, staff morale, and more.
During due diligence in particular, management accounts and other financial information will be requested regularly by your acquirer’s professional advisors. What you send them needs to show a profitable, sustainable business with momentum behind it not reliant on your involvement personally to remain profitable and sustainable.
ENGAGE WITH AN M&A EXPERT AS SOON AS POSSIBLE
As soon as you begin contemplating selling your company, contact an M&A advisor straight away. This will be one of the most important financial transactions of your life and you need to be sure that it’s executed properly from the start.
Your M&A advisor is not only there to find you a buyer – their role is to ensure that you achieve the most favourable outcome possible on the price you sell your business for and on the terms governing the sale of your business.
Please call or email us as soon as possible for an initial consultation.