Is now the right time to sell my business?
As a business owner deciding when the right time is to sell your business can be a huge question to answer.
Many of our business owner clients ask whether now is the right time to sell? The truth is it’s almost impossible to tell when the “right time to sell” is until after the event. There are however many things to consider around the timing of your business sale, this includes current economic climate, the stage of your business lifecycle, the health of your business, tax planning and management team strength to name but a few.
In this blog, I’ll look at some of the key areas you should consider when deciding if now is the right time to sell your business.
Considering the current environment
After the last few years of challenges navigating Brexit, COVID 19, the war in Ukraine and the energy crisis, we have seen many business owners consider their options when it comes to realising the value of their business by selling or planning their exit in the coming years.
Post pandemic, the Mergers & Acquisitions market has been buoyant. Appetite for acquisitions has remained strong within a number of sectors, with some well-funded buyers in the market.
A key driver of the acquisition market continues to be significant ‘dry powder’ in the Private Equity market. With buyers in the market now looking for acquisitions, there may well be significant opportunities for business owners that are ready to sell.
For businesses that have delivered strong performances throughout the pandemic, valuations have sometimes remained at pre-pandemic levels and in some cases, we see improved multiples of earnings and therefore increased value. But this isn’t necessarily the case for all businesses. Others that were more heavily impacted by the pandemic are still looking to rebuild back up to pre-pandemic levels.
Overall, the current market conditions, regardless of whether your business has outperformed or underperformed the wider market, could mean that now is time to consider selling your business for you personally.
Preparation for sale
Have you adequately prepared your business for sale? A minimum of 12 months is often seen as the required time to prepare sufficiently for an exit. Without preparation, you will find that you won’t be in a position to sell, so early preparation is key to even beginning the process. We work with business owners and management teams on pre-sale preparation and planning to ensure they are in the best possible position to sell their business.
Business owners who develop a well thought out succession plan in advance of selling their business almost always find themselves at an advantage.
Defining the exit strategy and timing your business sale at a time that’s right for you and the business can be complex. With clear succession planning and an exit strategy in place, you’ll be better prepared when unexpected circumstances or your own desire to move on dictate the timing of the sale.
Business considerations when deciding the time to sell
You need to evaluate whether your business is ready to sell based on your own individual exit requirements. Some areas to consider and focus on prior to sale are:
Regardless of what time you sell, good preparation is always key to a successful sale and exit. Get professional advice now, whether it’s to work on increasing the value of your business before sale or just preparing the business for sale.
Key areas involved in the planning process include:
- A review of the business’ financials and operations
- Identifying shareholder goals
- Tax planning
- Due diligence preparation
Achieving maximum shareholder value for your business is often the objective, whether that be purely valuation orientated or you want to look after the staff or the legacy of the business. Professional advisors will help you achieve this.
Most investors seek a profitable business with strong internal control systems and well managed operations. Poor financial information sends the wrong message to potential buyers, employees and management. Good quality, regular and timely financials make good sense and will help provide buyers with credibility. You’ll need 3-5 years of historical financials and a forecast. If there are any significant changes in your financials, you’ll need to provide sufficient evidence as to why.
If you are selling your business, financial due diligence will be part of the process. A proper planning process would front load this exercise so that any potential query points could be dealt with in advance of a potential buyer’s due diligence, helping to maintain value and avoid a buyer trying to ‘chip away’ at the price.
Financial areas to focus on for your exit are:
- Good quality, regular and timely management accounts
- Cashflow statements & forecasts
- Profit & Loss and Balance Sheet analysis
- Margin and trend analysis
- Capital expenditure requirements
- Cash, debt and working capital
- Audited accounts (when necessary)
Your management team
Another critical element to prepare for sale is to build a strong senior leadership team, so that your departure doesn’t have a detrimental effect on the business. A new owner will be looking for a strong second tier management team to allow for continuity with customers and suppliers. Having a business that is less reliant on you will make your business more attractive to potential buyers. One of the key questions a buyer will ask is “can the business operate without you?”
Operations and documentation
Getting your day-to-day operations working effectively and efficiently, with all your documentation in order, is critical to a successful and smooth business sale and exit. Keeping your regulatory information up to date at Companies House like Share Transfers, Confirmation Statements etc. is key. Ensure all your legal contracts are up to date and effective. A lack of these types of documentation can delay a sale and create doubt in a buyer’s mind over the quality of systems and controls in place.
Manage the risk in your business by diversifying customers, products and services and geography if possible. Aim to reduce any reliance on individual customers or suppliers, and You can look at removing risk from the business by reviewing and changing your business structure. Minimising risk in your business prior to sale will help you maximise value and the attractiveness of your business to potential buyers.
Growth & investment
The stage of your business cycle will be important to a sale. Is your business in a growth, maturity or decline phase? A business with falling profits and falling market share is unlikely to be as desirable. Don’t put off large investment projects that will aid future growth. Although you want to exit, investors are always interested in a viable future for the business, which includes the future strategy, and potential growth opportunities.
Personal considerations when selling your business
For most business owners, there are also personal reasons and considerations to take when deciding the best time to sell.
Your decision on the time to sell should be tied to whether you have achieved financial security personally and if selling your business will support your current and future lifestyle.
The tax you pay on exit can have a huge impact on how much money you exit with.
Depending on your exit strategy, it is best to plan well ahead and seek advice to ensure you leave your business, or your family benefit, in the most tax efficient way possible.
The earlier you plan, the better because some of the conditions that will need to be met to utilise tax reliefs on exit need to be in place in the years ahead of a sale.
Here’s just some of the tax areas and reliefs you need to consider:
- Capital Gains Tax
- Business Asset Disposal Relief
- Corporation Tax
- Inheritance Tax
- Business & Deferral Relief
You may have changes in family circumstances such as divorce, illness or the death of a family member that may mean you need to sell. Your own health may force you to consider your own position within the company.
It is better to avoid selling because of short term circumstances that force you to sell, when possible, as you may not have the time to properly prepare and realise maximum value.
You may be at a stage in your life where you want to achieve more personal time or work life balance. You may find that owning and running a business and being a business owner is no longer your key priority in your life.
Other personal reasons such as stress and the day to day running of the company becoming too much for you to deal with anymore are also compelling reasons to consider selling and can often drive the time agenda of a sale.
Often a decision to sell is out of your hands as there may be issues or personal reasons for other shareholders to want to leave the business. Your reason to sell may be due to retirement, ill health or the death of your business partner.
Other business interests
We see business owners shift their own business priorities by wanting to start another business or focus on other ventures or business interests they may have.
Market factors when deciding to sell
Certain market factors will always affect business sales. Sometimes these factors will be beneficial to you as a seller, and sometimes they may affect your decision on the timing of your business sale. On a macroeconomic level, these will include interest rates, economic outlook, political uncertainty and current market & sector conditions.
But also, you need to understand whether there are several businesses or investors that would be looking to acquire a business like yours in your industry/sector. Have there been other businesses in your sector that have be sold or acquired and who were they acquired by? This is where a corporate finance specialist advisor can add value by using their market knowledge and research to advise you.
Increasing Business Value
Having time to work on increasing your business value can help you to clarify the right time to sell. However, the key is to properly prepare a well thought out exit plan, ideally with a corporate finance adviser.
Many business valuation methods use a multiple of earnings approach to calculate the value of a business. A higher multiple therefore leads to an increased price. This will typically be achieved when a buyer attaches less risk to the business to maintain its earnings into the future, but will also depend on other factors, such as quality of revenues and whether your business has a niche, for example.
External factors will influence the multiple – such as the type of industry you operate in. However, many internal factors, within your control, will also be instrumental in determining the value and timing.
Below is an example list of factors that should be considered and having enough time prior to sale to tackle and improve these value drivers may determine when you sell. The value drivers below will affect the multiple that your business sale achieves.
- Over dependency on people, suppliers, customers, products/services.
- Customer Quality.
- Contracted/repeat income.
- Key people / management team.
- Quality of profits vs quantity of profits.
- Scalability of your business.
- Company/Shareholding structure.
- Strategic planning.
- Business operations.
- Formalised contracts & legals.
- Brand awareness.
- Capital Expenditure requirements.
- Intellectual property.
Selling your business and deciding the right time to do this can be a complex decision. Whether you’re thinking about selling your business this year or several years from now, preparation will be critical to getting the best price for your business and to achieve the right deal for you as an individual.
Using professional advisors such as Barnes Roffe will ensure you get the result you want and enable you to achieve maximum value from both a monetary and non-monetary perspective.
We can help you right from early-stage planning, maximising value, preparing for sale, finding the right buyer, right through to sale and exit, including post exit tax planning.
Contact us today if you are considering selling your business.
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PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.