Disposing of your business is a significant life event. You might be relying on the proceeds to fund a comfortable retirement, or as capital for the next phase of your business career.
You may know the approximate timing. Quite likely, you have a figure in mind to fund the future you have planned.
But things may not turn out as you hope. In my experience, the target sale figure is often based on the amount business owners feel they need. It may not be a realistic valuation based on trading, assets and projected cash flow.
My first question is fundamental: Do you have a clearly defined strategy to make sure your business is worth the amount you need, by the time you plan to sell?
In the face of day to day business pressures it’s easy to leave it too late to start implementing detailed plans.
Because there’s no strategy leading up to the sale, many business owners end up working on longer than they wanted to. Or they have to change their expectations for their retirement lifestyle.
You will only sell your business once
Selling your business may seem like a far-off prospect but the earlier you start making realistic plans, the better.
A three, five or, better still, ten year timeframe is probably what you’ll need. That way you can take positive steps to make your business as attractive as possible. This is clearly better than hoping that somebody will agree with your valuation aspirations.
Business disposal - the key questions:
What is your business worth today?
How much does it need to be worth at disposal?
How will you bridge the gap between current and desired value?
How long will this realistically take?
Who is the most likely buyer: trade, private equity, MBO or public listing?
These questions are not hard to answer in theory. But it’s practice that counts. Achieving your ambition needs strategy, planning and execution.
“ without strategy execution is aimless, without execution strategy is useless”. Morris Chang, CEO of TSMC.
Bridging the valuation gap
There will almost certainly be a gap between where you are, and where you want to be. This is where the serious work starts. There are questions that need hard-headed answers:
Are you going to enter new markets?
Are you going to sell more? How many more products do you need to sell?
How are you going to do this? Is there enough of a gap in the market?
How could competitors or disruptive business models throw your plans off course?
Are you going to increase your prices? How many customers could you lose from price increases?
Revenue is only one side of the equation. Fixed and variable costs could be affected. You might need more staff, some R&D or a larger sales and marketing team. Could raw material or supplier costs increase?
When you get down to this level of detail the viability of your plans will become clearer. You’ll understand whether your expectations are realistic. Maybe you’ll have to adjust the exit time scale. Perhaps you’ll just have a more realistic picture of how much your business is worth.
The biggest differences are: you’ll be dealing with facts; you’ll have a clear strategy.
How your plan should look
“Plans are only good intentions unless they immediately degenerate into hard work” — Peter Drucker
It's all about seeing the finer detail clearly.
When we work on business disposal planning we put together a forecast model, integrating the profit and loss account, balance sheet and cashflow. The result of this will be a detailed 12 to 18 month plan identifying key assumptions and business drivers against which actual performance can be measured.
For longer term strategic planning, over three, five or ten years we look at the following:
A cost base to support the growth assumptions
A cash flow to see how the growth will be funded
Working capital improvement suggestions – can cash be generated through implementing new procedures such as direct debit for cash collections?
This analysis produces a budget for the next 12 months, against which actual performance can be tracked. Because business owners often don’t have time to review detailed financials (one reason why valuations often fall short of expectations), we implement a bespoke management information pack. A one page summary allows a business owner to quickly understand the performance of their business.
You can easily assess if everything is on track for the overall strategy. You can make informed decisions about whether any shortfalls can be caught up, whether a reforecast is required, or if the strategy needs modifying.
The commercial value of good data
Good financial data and a strong ability to budget and forecast could be the difference between getting the price you need (or maybe more) or settling for less.
Detailed data helps you plan and track performance effectively. You also have hard data to support your valuation. Finally, remember this: any gap in your financial data is an opportunity for a potential buyer to chip away at your price.
The price you achieve for your business disposal has a direct relationship to how early and how methodically you approach the detailed planning.
“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win”
― Sun Tzu, The Art of War
Need help with preparing your business for sale? Get in touch.