Seven things to consider if you ever want to sell your business

For many business owners, selling the company is expected to be the reward for years—often decades—of hard work.

The business has provided a good income and a comfortable standard of living. It may also represent the owner’s largest financial asset and form a significant part of their retirement plans.

However, there can be a substantial difference between owning a profitable business and owning one that somebody else will want to buy.

Preparing for a successful sale requires more than finding a buyer. It means building a business that can continue to prosper after its current owner has left.

1. Is your business genuinely saleable?

A business may generate healthy profits while remaining almost entirely dependent on its owner.

The owner may:

• Hold the most important customer relationships
• Generate much of the new business
• Make most of the significant decisions
• Resolve the difficult operational problems
• Retain essential knowledge that has never been documented

This can work while the owner remains fully involved, but it creates a considerable risk for a potential buyer.

A buyer is not purchasing the owner. They are purchasing the business that will remain after the owner has gone.

If customers, knowledge, decision-making and sales are likely to leave with the founder, the business may be worth considerably less than expected—or may prove impossible to sell.

2. How dependent is the business on you?

One useful question for any owner considering a future sale is:

What would happen if I stepped away from the business for three months?

Would the team continue to perform? Would customers remain satisfied? Would sales continue? Would important decisions still be made?

Or would the business gradually begin to struggle?

Many owners take pride in being indispensable. Customers want to speak directly to them, employees rely on them for answers and they understand every part of the operation.

While this may feel like a strength, it can become a serious weakness when the time comes to sell.

Reducing owner dependence does not mean abandoning the business. It means gradually developing the people, systems and accountability needed for it to operate without the owner’s constant involvement.

This should include:

• Developing a capable management team
• Giving employees clear responsibilities and authority
• Documenting essential processes
• Sharing important customer relationships
• Establishing reliable management information and performance measures
• Creating a consistent and repeatable sales process

These changes can increase the value of the business while also improving the owner’s quality of life long before a sale takes place.

3. Understand what the business is really worth

Owners are often emotionally attached to the businesses they have created. It is therefore understandable that their expectations of value may be influenced by the years of effort, sacrifice and risk involved.

The fact is a business’s value is not what you think it’s worth or your accountant thinks it’s worth – it’s worth what somebody will pay for it. So when building a business to sell you need to put the buyers hat on and think about it from their viewpoint – what will they want to see.

Unfortunately, a buyer will not normally value a business according to how hard its owner has worked.

The buyer will consider factors such as:

• The quality and consistency of profits
• The strength of the management team
• Dependence on individual customers or suppliers
• Recurring and predictable revenue
• Opportunities for future growth
• The strength of the company’s systems and processes
• The level of dependence on the current owner
• The risks associated with taking over the business

Obtaining a realistic assessment of value well before the intended sale allows the owner to identify any gap between what the business is currently worth and what they will need to fund the next stage of their life.

It also provides time to address the weaknesses that may be reducing its value.

4. Do not confuse income with personal wealth

A business can provide its owner with an excellent income without creating sufficient personal wealth outside the company.

This is particularly important when the owner has limited pension provision or investments and regards the eventual sale of the business as their pension pot.

The danger becomes apparent when retirement approaches and the owner discovers that the business is worth less than expected, cannot be sold on acceptable terms or remains too dependent on their involvement.

They may then find themselves in a difficult position: no longer wanting to work at the same pace, but unable to retire without losing the income the business provides.

If the proceeds from a sale are essential to your financial future, two questions need to be answered as early as possible:

What must the business eventually be worth?

What needs to change to make that value achievable?

Building value and preparing a business for sale can take several years. It should not be left until a few months before the owner wants to leave.

5. Consider the terms as well as the price

The headline price is only one part of a business sale.

A buyer may propose that some of the purchase price is deferred or linked to the company’s future performance. They may also expect the owner to remain involved for a transition period.

This can mean that the final amount received depends on the business achieving agreed targets after completion—potentially at a time when the former owner has less control over how it is being managed.

Owners should therefore consider:

• How much will be paid on completion?
• Is any payment deferred?
• Is part of the price dependent on future performance?
• How long will the owner be required to remain involved?
• What responsibilities will the owner retain?
• What restrictions will apply after the sale?
• The level of dependence on the current owner
• What are the tax implications of the proposed structure?

Professional legal, tax and corporate finance advice should be obtained before agreeing to any sale terms.

6. Prepare yourself as well as the business

Selling a business is not simply a financial decision.

For many owners, the company has become part of their identity. It provides status, routine, purpose and responsibility. It may be the first thing they think about in the morning and the last thing they worry about at night.

An owner may genuinely want relief from the pressure while still struggling to imagine life without the business.

That uncertainty can lead people to postpone planning, reject reasonable offers or unconsciously prevent the company from becoming less dependent on them.

A successful exit therefore requires two plans:

A plan for the business and a plan for the owner.

Life after a sale does not necessarily mean stopping work completely. It might involve consulting, mentoring, investing, working fewer days, supporting charitable causes, travelling or pursuing interests that have been neglected while running the company.

The clearer the owner is about what comes next, the easier it becomes to prepare for the transition.

7. Start preparing long before you intend to sell

The strongest position is to build a business that is saleable before there is an urgent need to sell it.

This gives the owner time to strengthen the management team, improve profitability, document systems, reduce risk and demonstrate that the company can operate successfully without them.

It also creates more choices. The owner may eventually decide to sell, pass the business to family, pursue a management buyout or retain ownership while reducing their day-to-day involvement.

The objective is not simply to complete a transaction. It is to ensure that the business built over many years provides the financial security and personal freedom its owner expected from it.

If your business is intended to fund your retirement, do not wait until you want to leave to discover whether somebody will buy it.

Start preparing it—and yourself—while there is still time to make meaningful changes.

At UKBM we help owners build saleable businesses that will give them the exit they want, get in touch for a no obligation, confidential, discussion about your business and its ‘saleability’.