Our guide to selling your business
Before you start
Before you start
THE EXIT MINDSET: The path to a business sale is very rarely as smooth as it looks from the outside, requiring tenacity, judgement and luck. Nearly every business will need to understand how they can maximise their value, what buyers want and what they need to do to adapt.
Successful business exits are rarer than you think
The first issue for any entrepreneur with a business sale in mind, is to understand that not only is it a minority of businesses who are ever approached by a purchaser – 70% of the entrepreneurs we surveyed have never had an offer for their business – but an even smaller number end up attracting a buyer: our last round of research put the figure at 7%.
“The number of people who actually sell their business is very small. There are a significant number of people who own businesses – whether these are ones handed down through a family or ones they set up themselves – which they don’t know what to do with. They will have no exit vision or true perception of the value it could be. Worst of all they may have come to a false perception of that value.
These people end up either with the wrong idea of what the business is worth or, despite their great expertise in selling IT or logistics or whatever it might be, no idea about what it takes to make their business a saleable proposition.”
- Chris Gately, Wreahurst
You can never get advice soon enough
One finding which runs through our research is that the ability to achieve a business sale and the extent of its value is largely decided a long time before any decision is made to sell.
This means that getting advice and building knowledge about what you need to change in your business as it grows is critical to maximising your chances of success.
Coutts can help with the thinking.
A business exit is not a business strategy
Although a business sale might be the ultimate objective for an entrepreneur from start-up and through the growth of their business, being overly focused on a business exit is a mistake.
Paul Lindley, the founder of baby food business Ella’s Kitchen, echoes this.
“I never thought about selling the business when I started. It was just I had an idea and I wanted to prove it to myself. I also wanted to change the way babies ate food and I thought business was the best way to do it. It was only at a point during that journey when we were growing hugely that I thought ‘there’s money in here’. But even that didn’t prompt me to sell.”
Creating value by building something unique is critical to ending up with a business that someone wants to buy.
You won't necessarily control the timing of your sale
In a business climate where people commonly talk of their one, three and five year plans which govern every aspiration they have for their business and even their life, it is easy to assume that you the entrepreneur will be able to pick the moment when you sell your business.
This might be the experience for some, but another of the recurring themes from our research among entrepreneurs who have sold a business is the extent that luck – good and bad – plays in the business sale process.
For Dr Paul Atherton, who has started up, invested in and then sold a range of technology businesses, it was only changes in external markets and the arrival of new technology which have allowed him to sell his businesses in the past.
“I have experienced business exits several times and I find it is very rare that the business people sell is the same one that started up. I look back at businesses I have sold and I can see that certain things changed which were totally out of our control.”
There are also unexpected events in your personal life to consider. A change in health, family or financial circumstances can often trigger a sale sooner than you might want.
This was the case for restaurant and retail entrepreneur Nighat Awan, whose business sale to Interflora came too soon.
“I didn’t want to sell but ended up doing so because of the health issues I had at the time. I wasn’t ready to sell but we had been courted by Interflora and it just got to the point where I invited them in to start talking.
That was awful for me because I had done so much to build everything in the business. Looking back I wasn’t as prepared as I might have been.
I didn’t understand how they were valuing the business and separately what value they were getting by including me in the deal. I learnt a lot from that, most importantly, never to repeat it.”
Nearly every entrepreneur we spoke to for this research could tell a story of a failed deal, a change in the markets or a rejected buyer which had a material effect on the nature and timing of their exit.
So whether or not you choose to call it luck, it is critical to acknowledge you won’t always be in control of your own destiny when it comes to selling your business.
It's all too easy to kill your business with love
A final area for which entrepreneurs must prepare is the idea that there will come a time when their business is better off without them – whether they like it or not.
The ability to detach yourself from the emotional investment you have made in your business is critical to a successful deal.
“One of the hardest things to witness is people holding on to what they see as their baby for too long.
They might try to take their business to the next phase of growth when someone else would be much better suited to do so.
This failure to appreciate when it is time to move on can come at the cost of a significant loss of value in their business.”
- Peter Gray, Cavendish Corporate Finance
This can be hard, says Michael Sharples the co-founder of student accommodation group Crosslane who has started and grown a number of businesses, given how much of an entrepreneur’s identity and self worth can be tied in to a business, but unless you can detach yourself, you ultimately put a final deal at risk.
Set the wheels in motion
set the wheels in motion
HOW TO POSITION YOUR BUSINESS FOR A SALE: Your first job is to put yourself in your buyer’s shoes and ask: who would buy my business and why would they want to do so?
Well before the time comes to sell up, there are a number of actions which every entrepreneur can take which not only increase the potential value in a deal but shorten the horizon for a sale and make the process run more smoothly when it finally arrives.
Unfortunately, our research shows, not enough entrepreneurs understand the actions they need to take or follow the steps to implement them. So here, based on our insight gathered from our panel of post-sale entrepreneurs, are the priority areas for every entrepreneur to address ahead of any sale.
WORK OUT WHO WOULD WANT TO BUY YOUR BUSINESS
One of the first actions an entrepreneur should take in preparation for an exit is to understand who realistically would be interested in taking their business on.
“Each category of buyer will be looking for a different thing and understanding that gives you a good starting point for you to think about what you need to change and how to make yourself attractive to them.
Equally, if you know that your business will never reach a certain size or rate of growth for, say a venture capital buyer, then you can rule that option out and make different plans.”
HIRE PEOPLE WHO CAN BUILD AND LEAD THE BUSINESS FOR YOU
For most buyers the prerequisite for doing any deal is seeing a credible and talented management team who can take the business forward.
“The ability to let go of the reins is something people find very tough but if you want a clean exit or one which brings you the best value, you need to prepare a business that can run without you.”
FOCUS RELENTLESSLY ON BUILDING VALUE
Value doesn’t just come through having the right management team. And although revenue and profitability are important in sustaining every business, most buyers define value in a very different way when they are looking at an acquisition. “It is important to distinguish between revenue, profit and value,” says Michael Sharples.
“Value comes from being a unique business in your market, something that offers great opportunity to a potential buyer that they can’t easily build themselves. Focusing on value is a very different way of thinking about your business.”
IDENTIFY AND ELIMINATE POTENTIAL DEAL KILLERS
The other practical step to maximise value in a business is to minimise the risk of a buyer finding skeletons in the closet when it comes to a deal.
Typically, you’ll find there are lots of simple changes which entrepreneurs need to make in order to increase the chances of success.
In smaller companies these will often be things like VAT liabilities, having clean tax records or sorting out the way dividends are paid. Then there are the processes: the frequency that your accounts are prepared, your forecasting and the systems you use.
“When I sold one of my businesses to Mars we knew that while we ran on monthly reporting, theirs was four weekly. Because we were a well-run business we could do that very easily and adapt our business to theirs. The ability to make changes like that can make a big difference in how smoothly the deal runs and the confidence of your buyer."
- Nick Baker, Sharp's Brewery
START MEETING AND BUILDING YOUR TEAM OF ADVISERS
The time before a deal is when entrepreneurs should start to understand the different advisers they need in the run up to and during the sale.
“You need to introduce your advisers early on and allow time for you to get to know them and them you. A lot of entrepreneurs will say we’ll get someone in for three months. That is way too late, it’s years, not months.
That’s particularly the case for accountants who need to be in early. They are the people who will be able to see the link between the profit you are making now and the value of the business in five years’ time.
They can help you shape the business and communicate the story to buyers: that is the value they add. ”
And although reputation and experience will be prerequisites for any advisers, our panel of entrepreneurs say that in the high- stakes intensity of a deal, it is chemistry and trust that matter just as much and should figure highly when appraising the people you want to work with you.
ADJUST YOUR EXIT TIMESCALES... AND BE PATIENT
If the list of areas to address in preparation for a business sale appears daunting, it reflects the reality that preparing a business for sale typically takes a year or more.
According to James Codling, co-founder of Venture Founders which invests in younger businesses, it is important to temper ambition to sell with patience: not only to realise the best value from a deal but to be a credible seller.
“It seems like everyone is now starting up their business thinking ‘I’m going to be out in three years’ but the reality is that a large number of them fail, and the successful ones - some will exit quickly – will be in there on average for about ten years some even into 15-20 year bracket.
Younger entrepreneurs in particular tend to think ‘now, now, now’ and don’t plan or think about the longer-term strategy.
They have great ambitions of selling but I think the most sensible CEOs I work with have a five and a ten year view, they don’t have a two or three year view. I am sure I am not alone among investors, but anyone with a short view; they tend to just disregard.”
Closing the deal
closing the deal
HOW TO RUN YOUR DEAL: Almost every deal will go sour in some way: you have to go into your business sale prepared for that to happen. When it comes to selling up for the first time, even the most experienced entrepreneur finds a sale process, in which they have little experience and even less control, an unnerving proposition.
DON’T BE AFRAID TO TALK DIRECTLY TO POTENTIAL BUYERS YOURSELF
While corporate finance houses have a distinct role to play in helping to prepare a business for sale and in sourcing buyers – particularly international trade buyers who won’t even be on your radar – that doesn’t mean an entrepreneur should be shy of identifying potential buyers themselves and then talking to them.
“Most entrepreneurs will know their own industries as well as anyone else and if you have been doing the right things to prepare your business for sale, you should have an idea of who will be up for buying you,” says Nick Baker.
“When I sold Sharp’s Brewery, I phoned up the boss of Molson Coors in the UK and said ‘you should think about buying us’.He said we’ve been following your business for a while, why don’t you come up and see me?’. In the end, they were the ones who bought us.”
Always be ready to walk away
Once you embark on a negotiation, it is all too easy to focus on the freedom and potential cash reward which will come at the end of the deal. However, according to our panel of entrepreneurs, for the health of the business and in the interests of doing the best deal, it is critical that you are prepared to walk away.
“It may not be what you wanted to do but doing no deal is better than doing a bad deal,” says Iain Fairbairn. “You must keep a little bit of your mind free for the thought that you might not do the deal and you might not sell. That way you can be strong enough to be able to stick to the deal you want and walk away if things start to change and the buyer starts to try to reduce the price – something which will always happen.”
a deal will take longer than you think
The reality is that barely half of deals (56%) are completed within 12 months.
The ability to be patient and let the deal run its course is critical to its success, says Professor William Scott-Jackson, because buyers know exactly which levers to pull at different points of a transaction in order to apply pressure and delay at different points.
“Selling a business is like selling a house in that everyone ends up suspecting someone but the money on the table brings a different level of suspicion. You have to anticipate silences, push-backs and pauses. That is very difficult if you aren’t used to it.”
This, says Alex Cheatle, is where the time spent understanding how a deal will work comes to pay dividends.
“As you go through the process people will appear to behave in very irrational ways, but if you have spoken to people who have been through a similar process you will find they are highly predictable. By talking to people who have sold, advisers or anyone who has been there before that, you can see the patterns and be reassured that they are things that just happen in a deal.”
TAKE OUT THE EMOTION AND BE PREPARED FOR A ROCKY RIDE
While some entrepreneurs say that building a relationship with their ultimate buyer can get them the deal they want, the majority of those who participated in our research said it was critical to see the deal as nothing more than a transaction.
According to Nick Baker a veteran of a number of business sales, it is rare that a deal doesn’t end up being anything other than fractious at some point.
“My experience is that almost every time a deal will go sour in some way and you have to at least go into the deal prepared for that to happen.
You might start out thinking you’re going to hand your business over to some nice people who are going to grow it and love it and love your people but when a warranty claim comes, it is the fact that you have gone into the deal with your eyes open and the work that the professionals will have done that will protect you from losing out.”
UNDERSTAND THE VALUE, NOT JUST THE COST OF YOUR ADVISERS…
One clear theme emerging from our panel of entrepreneurs was the love/hate relationship they have with professional advisers.
But whatever the extent of this ambivalence to corporate financiers, accountants or lawyers, when it comes to a deal it is critical to understand their value not just their cost.
“Entrepreneurs may as a breed instinctively want to look after every penny but if you are selling your business for tens or hundreds of millions of pounds you’ve got to get the best advice,” says Chris Gately.
You have to ask yourself: what value is there in saving £50,000 on corporate finance fees when your price is getting chipped by three four or five million pounds?
What’s more, a good commercial lawyer will protect you when it comes to the nuances around the basis for your earn-out, the warranties you have to sign and any restrictive covenants. When it comes to getting the right specialist experience, it rarely pays to cut corners.”
…BUT THE ENTREPRENEUR, NOT THE ADVISERS MUST DRIVE THE DEAL
Advisers will have a place in every deal, but, according to Professor William Scott-Jackson, it is down to the individual entrepreneur to be in charge of the process and the outcome.
“It’s not for someone else to tell you what you should get from the deal. You must have a clear idea of the value you want, how you want to be paid, whether you are prepared to stay in the business and the amount that is governed by an earn-out – everything that will go into the heads of agreement you will both sign before the sale.
Of course, you might want your advisers to help you with some of the detail but their primary role should be to implement what you want in a deal.”
According to Nick Baker, having clarity about what matters in a deal will then help you further down the line when you may have to compromise.
“Write down the three things that matter to you most before you get into the deal. Then if you get into the horse-trading, you are in a better position to compromise and make the decisions you need to make to get the deal over the line.”
DON’T UNDERESTIMATE THE DISRUPTION TO YOUR BUSINESS
The last – and for many – the worst aspect of any deal according to our panel of entrepreneurs is the level of disruption it brings to the business: from assessing potential buyers to initial negotiation, due diligence and the close of the deal.
While advisers can help you anticipate the kind of information they will need and prepare a data room where they can pick through every detail of your business – contracts, accounts and other documents – it is inevitable that you will get sucked in to some extent says Gary Mawer.
“The worst thing about a sale is the questions and the due diligence. It was distracting, they want access to your FD and they want answers to questions by the following day. You can use a firm of accountants but no one knows your business like your FD. And even if you have a team in, they will still take his or her attention away.”
According to William Scott-Jackson, it is at this time, more than any other you’ll need to rely on your management team to focus on the day-to-day business.
“You have to keep as many of them insulated from the process as possible. Yes, one or two of you will be involved on the deal but its vital that the rest of the people go on as if nothing was happening, building value and focusing on your customers.
That way you can be sure you will be in good shape if the deal falls through or in a stronger position when the transaction is finalised because hopefully you will have increased the value yet again.”
WILL YOU STAY OR CAN YOU GO? Once you have sold up, your business may have a new owner but that doesn’t necessarily mean that you’ll be cashing the cheque and focusing on a new life on the day after the deal.
NO SENSE OF AN ENDING
A major reason for this is that part of any deal will involve clauses designed to protect the buyer for a period of time after the deal is done. For some entrepreneurs this represents an unsatisfactory end to what may have been a professional and emotional rollercoaster.
Dan Gill, who sold his double glazing business in 2015, says the lack of a clear ending left him with a sense of anti-climax.
“At the start of the process you have a kind of a vision of a day when you get a cheque and crack open the champagne. But it doesn’t work like that because its so clouded as to when the deal ends.
Even after I had done the deal, I couldn’t walk away for a long time and once I got the money, as I was liable for warranties relating to the sale really, I couldn’t even think about the money as mine. There is never that day when you pop the champagne cork.”
TIED INTO CORPORATE LIFE
Other entrepreneurs find that after selling up, they end up having to adapt to working for their buyer. Whether this is because of an earn-out agreement where certain targets must be met to trigger elements of the sale price, managing the transition to a new owner or keeping their expertise in the business, this can be an uncomfortable experience.
Peter Laithwaite was tied in for two years selling his business with his cash and shares payout contingent on the delivery of a warranted business plan. He says he was counting down the days until he could leave.
“When I sold my company I had never had a boss in my life. But within a week of the sale I was being told where I had to be on different days of the week, how I was travelling there and where I could stay. All I could think is ‘how am I going to put up with two years of this?’. Everything was a shock to me, from the number of people in meetings to the way decisions were made. The day after the restrictive covenants expired, I was out.”
EXIT DOESN’T MEAN EXIT
While some entrepreneurs will always struggle with constraints of corporate life and the lack of autonomy that goes with that, others are happy to take a different view.
For Peter Veash, founder of The BIO Agency, this has so far been a happy experience with the new owners leaving him to deliver growth.
“I still feel like it’s my own business and can make decisions I need to make, operating how we did before. That’s important because we’re culture rich and we do lots of things to make our staff happy so we can keep them with us.
I honestly feel more energised now than in the last few years and that is down to the fact that I have signed up to doing bigger and better things in terms of growing the business.”
Equally for Ella’s Kitchen founder Paul Lindley, who stayed on after he sold up, turning his back on the business was never on the cards.
“Some people can just walk away, take the money and leave the buyer to do what they want with the business but that’s not me. The fact my daughter’s name is part of the company’s brand gives me an emotional connection so I care what happens to my company. I may have sold up four years ago but I’ll always care.”
So while the future sustainability of the business may not be the prime motivation for selling up, many entrepreneurs will find that after the deal they will be tied into its performance whether they like it or not.
get in touch
Looking through the insight shared by entrepreneurs, the one outstanding and recurring theme is how much entrepreneurs can do to increase the chances of a successful business sale and how few take time to understand what those actions should be.
The clear priority for any entrepreneur as their business grows should be to close that gap.
Developing the habit of seeking out the advice and experience of those who have been through the business sale process themselves will not only help you increase the value in your business but will also ultimately reduce the risk of a deal going wrong.
Coutts can help you with all of this.
Already a client?
For more information about our
services, please contact an
adviser or call +44(0) 20 7957 2424.
Become a client
Please get in touch online or call
+44(0) 20 7753 1365 to find out more
about our services.
Calls may be recorded.