GETTING YOUR BUSINESS READY

Put yourself in the shoes of a potential buyer.

What would you want to know? What would

you want to see when you lift the bonnet? It’s

important to adopt this mindset when getting

your business ready for sale.

What Are Potential Buyers Looking For?

// Synergies within existing operations and strategy
// Access to new geographies and customers
// New product lines and markets
// Complementary services for existing customers
// Efficiencies that come with increased scale
// A good spread of customers and suppliers
// Strong margins and attractive bottom-line profits
// An organised business where everything looks efficient and streamlined
// An experienced management team to run the company
// The potential for future profits and a good return on investment
// An absence of hurdles or pitfalls that may derail the sale

The buyer will be looking at your business through a critical lens. They will want to see what is performing well, and they will pinpoint where improvements are needed.

Fundamentally, they will want to ensure their investment is sound, with as few hurdles as possible.

We have outlined key considerations for maximising the value of your business and getting it ready for a potential buyer throughout this chapter.

GROWING YOUR BUSINESS//

It’s an obvious one, but growing your business ahead of going to market can add significant value to its sale price.

There are two main ways of growing your business: organic and inorganic. No matter which strategy you choose - or if you choose a combination - you will need to align your business, industry, and objectives before going ahead.

Organic Growth

Growing your business organically involves using your own resources to make improvements and investments over a longer period of time. You need a very clear focus on nurturing the potential value that’s locked up in your business.

Your exit timeline will determine what your growth targets need to look like. If, for example, you need to reach a £5m sale price to retire comfortably, you might need to achieve 10% year-on year growth instead of 5%.

The old adage ‘turnover is vanity, profit is sanity’ is fitting here. Ultimately it’s profit that will drive the value of your business. So, be sure to stay focused on your quality of earnings.

Increasing your sales

Have a clear strategy on how you intend to increase your sales. Ask yourself the following:

// Do I want to increase market penetration and share?

// What differentiates the product/service from competitors?

// How can competitive advantage be increased?

// What is the current pricing strategy?

// Are there untapped markets the business should be reaching?

Draw upon marketing, business development and sales expertise to implement and support the strategy.

New product development

Growth often requires innovation. This could mean investing in the development of new products and services to help you diversify and open up new markets.

If you are innovating, you may qualify for Research and Development (R&D) tax relief.

Working with the right customers

Ensuring you have the right customer- base and the ideal mix of customers will ensure resources aren’t being drained. It will also allow you to sell at good margins. It is generally more effective and profitable to have one customer pay you £30,000 annually, than 30 paying you £1,000.

Cutting costs

Evaluating the cost base of your business will highlight any unnecessary or discretionary costs. These can then be removed to increase profitability. This will vary between industries, but some costs to review include:

// Supplier base

// Office space

// Systems and software licences

// Production costs

It’s important not to lose sight of your long term strategy when cutting your costs. You don’t want to lose crucial assets that will add value to your business.

Improving efficiency

Restructuring your teams to finetune your resources, reallocating funds to focus on best performing activities, and investing in new systems can all improve productivity and efficiency.

Inorganic Growth

Growth through acquisition involves buying other businesses and incorporating them into your group. It can be effective if you operate in a congested market, allowing you to achieve critical mass quickly.

Acquisitive growth can increase your market share and allow you to break into new markets, whilst obtaining new assets, expertise, and revenue streams.

Planning, timing and objectives

There must be an appetite for growth and a strategic growth plan. You need to set clear objectives at the start which should be aligned to those of the organisation you are acquiring.

Your team, processes, and systems must all be prepared to deliver on these objectives and to manage high growth.

Value proposition

This involves an analysis of competitors, whilst retaining focus on the strengths, core customer base and revenue streams of the business you are acquiring.

Funding the strategy

Acquisitions are often funded from a combination of debt and equity. If your business doesn’t have the funds for an acquisition, you can look to secure external funding.

There are various ways to finance an acquisition including:

// Cash

// Earnout/deferred consideration

// Shares

// External debt finance

// External equity finance

// Vendor equity

// Vendor loan

Risk-aversion has risen amongst high street banks. Lenders are looking for more visibility and information than in the past. You need to articulate the key strengths and opportunities of the business you are acquiring, the KPIs you are setting to drive growth, and deliver robust management information.

Funding the strategy

Acquisitions are often funded from a combination of debt and equity. If your business doesn’t have the funds for an acquisition, you can look to secure external funding.

There are various ways to finance an acquisition including:

// Cash

// Earnout/deferred consideration

// Shares

// External debt finance

// External equity finance

// Vendor equity

// Vendor loan

Executing the strategy

Selecting the right target for acquisition is vital. Each target will differ in culture and in geographical spread. You need to decide on organisations who best align with your existing operations.

Once you have shortlisted your target business, you need to ensure the correct valuation is attached to it.

Due Diligence

As the acquirer, you will need to complete a thorough due diligence process. This should include full disclosure on all financial, taxation and operational aspects of the business you are looking to acquire. This will ensure there are no unexpected problems or unforeseen liabilities.

See chapter 6 for more detail on due diligence.

To get the best sale price, it’s highly likely that you will need to make some key changes to your business. This is where working with an experienced advisor adds real value.

A good advisor brings a sense of objectivity and drive to the planning process, whilst still asking ‘where else can we go?’. By being nimble and agile in this way, you will keep the business on track and keep one eye on your future sale.

Good quality management information is vital to articulate the true value of your business. It shows stability, scalability, and that you’re running your business well.

When looking at your management information, the buyer will want to see as few obstacles as possible. Key to this is tidying up well before your sale.

This will help you to prepare for due diligence, form robust financial information, and ensure your sale is smooth and profitable. Doing this in a timely manner will allow for any discrepancies to be taken care of, which will protect your business value and any future offers in the long run.

This Checklist Will Help You Take The Necessary Steps To Tidy Your Business Up

Are your filings (e.g. tax returns, annual accounts, and confirmation statements) up to date?
Have you reviewed your employee contracts to ensure that there’s no discrepancies in remuneration?
Have you obtained verbal and non-formal agreements with suppliers and customers in writing?
How much of your revenue is in each customer contract?
How much of that is attributable to each customer/client? And is there capacity to cross/up-sell?
Have you reviewed your lease agreement to ensure there are no issues since signing?
Do you know where all of your insurance details including your professional indemnity certificate are?
Can you provide evidence that you are fully compliant with any software licences?

Do you have monthly management accounts which align with your statutory accounts?
Is your paperwork and internal recordkeeping up to date?
Do you have any old litigation or claims which need to be reviewed and dealt with?
Do you have any historic creditors or debtors which need to be sorted?
Is your Customer Relationship Management (CRM) software fully cleansed with no outdated data?
Can you evidence who your current and correct shareholders are?
Can you show that historic dividends have been properly recorded and approved?
Where does all of this data reside? On cloud software systems, or physical copies?
If you use different systems to store your data, do these systems integrate with one another to make extraction easier?

Maximise The Use Of Technology

By providing more accurate and insightful data, cloud accounting and artificial intelligence can significantly improve your management information and the way it’s presented.

Software systems such as Xero, Dext and Sage can track all your data with detailed focus. They provide you with real-time data, helping you to create robust management information. Dext, for example, reduces time spent on manual data entry, and ensures that your financial information is always up to date. Whereas Xero uses machine learning to create bank reconciliation predictions. This can signal transactions that don’t align with your invoices.

AI bolt-on tools can then formulate insights and reports from this data into user-friendly formats, which can be presented to potential buyers.

If you’re already using cloud accounting, it is a good idea to conduct a review. This will ensure you’re making the most out of the technology at hand.

Advice Tip

Want to streamline your expense tracking, monitor stock levels, or manage international transactions and currency exchange? There’s an app for that. Cloud accounting systems have thousands of apps and add-ons which can integrate with every part of your business.

Find out more here

Restructuring Your Business

The structure of your business can have a huge impact on its value and tax liabilities. An efficient structure will make your business easier to market and more attractive to buy.

The right structure will also help you to align your exit plan with your long term goals and personal wealth objectives.

// To reorganise ownership, operational, capital and legal aspects of the business.

// To protect, split off, or separate assets.

// To lock in key management teams via share incentives.

// To give new roles to your team whilst separating yourself from the business.

Certain assets can be split off or safeguarded through a reorganisation:

// Human assets. People, key team members, and expertise/advisors.

// Intellectual property. Product ideas, customer data, patented information, and patents.

// Tangible assets. Premises, equipment, and inventory.

// Cash. Savings, liabilities, loans, and investments.

Why Restructure Ahead Of Your Exit?

When restructuring, it’s crucial to consider what will be included in a sale and who will ultimately benefit. Will any employees or shareholders who have equity interest in the company benefit? Are there shareholders who shouldn’t benefit?

You may need to undertake a reallocation of the share capital or issue fresh shares to some employees.

Getting Your Management Team Ready

Preparing your management team and ensuring they’re ready to step up into the role of ownership is crucial.

External buyers won’t want all of the expertise in your business to leave with you. Demonstrating that your team can run the show and make decisions without your input will drive business value up.

Your Future Leaders

Make sure you have the right team in place to secure the legacy of your business. Not everyone will be ready for leadership.

Find the members of your team who have the potential to grow and lead your business:

// Who is going to help drive the business forward?

// Who possesses the leadership qualities needed to run a business today?

// If you don’t have the right people on board, it’s time to recruit the right talent.

// Motivate your team to start taking over the reins of the business.

// Are your team currently involved in the strategy and management of your business? They need to know the ins and outs of your operations, structure, and future plans to run your business efficiently.

// What training do you need to put in place to prepare your existing team?

Advice Tip

You may need to move people around the structure. Having an effective HR team or consultant will help with recruitment, remuneration, and staff contracts.

Find out more here

Motivating Your Team With Employee Share Incentives

When it comes to keeping your team motivated, synergy between your team and your business plan is key. Emphasising your management team’s role in future plans will improve job security.

But motivating your teams with additional financial incentives such as employee share schemes can increase their emotional investment in the future success of your business.

Establishing a share scheme creates additional administrative costs, but they can be an effective tool to align employee interests with those of the shareholders.

Find out more about share schemes by clicking here.

Enterprise Management Incentives (EMIs)

EMIs offer employees a stake in your business with shares of up to £250,000 over a three year period.

Employees that hold qualifying EMI options are subject to a lower CGT rate when selling any shares (provided they’ve held them for over 24 months). Your business will also gain a corporation tax deduction which is equal to the difference of the initial value when the EMI options were granted and their value when exercised.

If your business grows significantly from the date the EMIs are granted, you could access a large tax deduction further down the line.

Company Share Option Plan (CSOP)

CSOPs are a discretionary share option plan and allow you to grant options to any of your team members. Unlike EMIs, there are no limits on the size of the company or the number of employees within your business.

Growth Shares

These share incentives effectively only accumulate value from the date they are created, and only if the company’s value grows from that date.

Growth shares can be very flexible and can be brought in for different employees at different stages. There are fewer requirements before implementing a growth share scheme and HMRC approval is not required.