Priming your business for sale
- Amanda White
- Mar 10, 2021
- 3 min read
The decision to sell one's business, is often a difficult decision for many owners who have nurtured the business for many years since its infancy. Apart from loving "the game" of pleasing their customers, owners often have built up many meaningful relationships along the way. I am of course referring to a specific type of business owner. Indeed, much can be said about this type of owner - who is deeply interested in ensuring that they hand "their baby" over to capable, nurturing hands. This owner is our brand of Gin.
Ensuring your business is ‘primed’ will make it more attractive to potential buyers, leading to a stronger bargaining position and smoother sale.
Determining the Price
Value is ultimately in the eye of the beholder. There are a multitude of valuation methodologies being used out there - I prefer the 'Discounted Cash Flow method'. However when it comes to the SME world, its worth talking about the most common method being applied, the Multiple of Earnings method - which takes the annual earnings figure and multiplies it by a number (the multiple).
Which earnings figure? Again the most popular being used is the 'adjusted EBITDA' figure. EBITDA is an acronym for Earnings (Profits) Before Interest, Taxes, Depreciation and Amortization. It should be fairly easy to calculate from your financials. EBITDA must then be adjusted for any abnormal or non-recurring expense items, to reflect a 'true' EBITDA amount that a buyer of the business can reasonably expect to have going forward.
What EBITDA multiple can you reasonably apply? Well it depends largely on 4 key factors;
The stage in the Economic cycle at time of sale,
The Type of Industry you're in,
The Size of your business (by earnings/revenues), and
The specific Points of Value within the specific business (See below)
To give you a rough indication of average EBITDA multiples applied in the SME space, based on extensive research/analysis of deals over the last 5 years, the following ranges have been determined;
Example
As an example, if you have a profit before tax of £500,000 and look to your detailed Income statement to see that your net interest paid is £15,000, your depreciation charge is £25,000 and your amortization charge is £10,000, your EBITDA is £550,000. Assuming there are no abnormal or non-recurring expenses and you feel your business warrants an EBITDA multiple of 4.2, the valuation of your business would be £2,310,000.
Points of Value
So what 'points of value' can you use to justify a higher earnings multiple or valuation?
Basic characteristics - Size, Reputation, Time in the market
Future Growth potential
Quality of Earnings - predictable, stable, recurring
Concentration risk - Key customers, suppliers
Financial performance - Revenue growth, GP margin %, Cash generated from operations
Strength/durability of Competitive advantage - Legislative, Psychological, Cost Barrier, Physical ('Toll-bridge', Location), Innovation curve (Time/Data/Experience/Technological).
Overreliance Risk - Owner or key employee reliance.
Strategic value - to the buyer
Internal Regulatory Systems - Quality of reporting/feedback, quality control systems etc.
Housekeeping - financial/ERP system, credit record, tax and legal compliance etc.
Go through these carefully and think them through in the context of your business, perhaps discuss them with your accountant - there is a great deal of value hidden in these points.
Note, these points of value can be used by seasoned buyers as points of discount, as he/she goes around kicking the tires - so be sure to address those points that you can, immediately!
Expectations
Sellers have to be realistic about when they will get the money. Deals often take between 3 to 12 months to close. It’s also becoming common practice for seasoned corporate buyers to insist on a three year earn-out clause, tying the seller in to ensure a smooth transition and that performance targets are met. Apart from being a form of protection for the buyer, the earn-out arrangement also benefits the seller who is able to obtain a higher price!
Any seller who wants a 100% cash deal, with no earn-out, is likely to be viewed with suspicion, unless the price makes it worthwhile for the buyer to take on the risk.
There is obviously much more to this topic, but this is a great primer for SME owners who may be preparing to sell in the near future.
Businesses built on solid foundations, paying attention to those points of value, tend to have built-in resilience and momentum worth paying for - particularly in this competitive, evolving world...
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