Thinking of Selling your Business – It’s Never Too Early to Start Planning
A busy January has seen a number of clients come to us to discuss the future of their business and what their own personal objectives are. I think it is very important for business owners to take time out to think about this on a regular basis as in our experience far too many business owners are too busy focusing on the day to day operations of their business.
We have seen in the past how business owners who have developed and followed a plan in relation to the sale of the business can maximise the amount paid to them versus those who make the decision and place their business for sale in a short time frame.
However, it is important to point out that as part of considering maximising a business owner’s return on their business, there are other options which can be considered apart from a sale to a third party, including succession planning, benefits of retirement relief and management buy-outs. These topics will be covered in detail in future blogs.
Today we are going to focus on some key points to bear in mind if you are thinking of selling your business.
1. Types of Sales Transactions
Typically there are two main ways that a business in Ireland is sold. It is either through sale of shares in a company or the sale of the assets of the company.
If the shares in a company are sold typically the ownership of the company together with all assets and liabilities associated with the company will transfer to the new buyer. Employees would also transfer to the new buyer under TUPE Regulations. This method allows the seller to maximise their return for the business whilst ensuring that the business continues to trade post sale as a going concern.
The second method is the sale of assets, usually both tangible and intangible to the buyer. This usually arises where a buyer only wishes to purchase certain assets (items such as brand, intellectual property, customer lists, supplier relationships etc) but not all the liabilities of the company. There are a number of key considerations to bear in mind if you are only selling the assets in this regard, which include, the status of the company post the sale of the assets and the potential tax liabilities.
2. Methods for Valuing your Company
There are several distinctive approaches which can be used when valuing a company. These are:
- Asset based valuation
- Sales based valuation
- Dividend based valuation
- Cashflow based valuation
- Earnings based valuation
Typically for valuing SME’s the earnings based approach is predominantly followed. The earnings based approach is where the valuation of the business is calculated by establishing the future maintainable profits of the business (FMP) and applying a multiple to the FMP. The FMP is the expected level of earnings that the business is reasonably expected to make into the future. Typically to arrive at an FMP the earnings of a business over a 3-5 year period are assessed with a weighting given to each year and an average derived from this calculation.
The overall valuation is driven by the multiple a purchaser is willing to pay for the FMP. The multiple can vary from industry to industry and company to company. There are also macro economic factors which would impact the level of the multiple. In certain industries businesses would trade for multiples of 4-6 times FMP, whereas in other industries with perhaps stronger macro economic factors the multiple may be between 8-10 times.
3. Set Realistic Expectations
If you are considering the sale of your business, it is important that you determine your expectations of its value and then benchmark this value to see if these expectations are realistic.
- Understand the FMP of your business. Calculate the current FMP of your business and if you plan to sell your business in 3 years time, do an estimation of the FMP at that stage. This will also give you an opportunity to consider the factors which impact on the FMP or what may be in your control to ensure you are maximising the FMP of your business.
- Research the multiples in your industry. If the businesses within your industry are being actively sold it may be possible to pick up considerable market information from the press which will allow you to understand the level of multiples being achieved in the industry. By using multiples that are being regularly applied in your industry this will allow you to set realistic expectations on the valuation of your business.
4. Place Yourself into the Shoes of the Buyer.
This is perhaps one of the most difficult elements of the exercise; however, it can be instrumental in maximising your value. This exercise will challenge you to objectively look at your business. Some key items for consideration would be:
- What are the key elements of your business that drive value and would be attractive to a buyer? Is it intellectual property or a brand or unique process? Are there ways of maximising this element of your business and increase the value?
- What type of buyer would your business be most attractive to, is it a trade buyer or financial investor?
- What is the most common type of sale in your industry and how can you make your business more attractive to this buyer?
- What elements of the business may cause concern in the due diligence process? Is there anything that can be done that can mitigate these risks prior to the sale?
- If elements arise during the due diligence process that can cause the buyer concern, this may lead to either the buyer withdrawing their offer or alternatively the offer being reduced. It is therefore important to look critically at all elements of your business like a buyer would assess these factors.
5. Develop a Plan
If you have decided that the best way to maximise the investment in your business is by selling, then it is important that you develop a plan to allow you to maximise the return on your investment. Some of the key elements of the plan would be:
- Set a realistic time frame for the sale of the business. You may decide that the optimum time to sell your business is in 2-3 years time rather than today.
- Understand the key elements of your business that are driving your FMP and proactively manage those.
- Understand the industry multiples and set yourself realistic expectations.
- Know what elements of your business would make it attractive to a buyer.
- Know what type of buyer would be attracted to your business.Place yourself in the shoes of the buyer and actively deal with issues which may impact on your overall return.
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