As we embark on the first quarter of 2015 opportunities are emerging for business owners. There are however challenges associated with these opportunities. Many business owners have never sold a business before and while opportunities are emerging in the market, it takes time and careful planning to optimize the sale price from any such transaction.
Current Selling Environment
The last five to six years have been very difficult for many business owners, having suffered declines in revenues and profits, or where growth was achieved it has been at a low level. Having had to navigate through a number of difficult trading years, which may have involved difficult decisions and corrective actions being taken, many business owners are now tired and may be ready to sell their business. Such a decision possibly may have been deferred due to the recession and until such time as the market and general economic environment took a positive turn. Recent commentary and activity and in the market would appear to indicate that we are turning the corner, albeit slowly. Similarly, those businesses without a clear succession plan involving the family or management team may now be considering a sale in the medium term in light of the recent positive activity in the market.
The process of selling a business can be complex and is generally taking longer than it did historically. However, the pool of potential acquirers has grown significantly with the influx of international companies into Ireland seeking investment in, or acquisition of Irish business with the potential for scalability and growth. In addition, a significant amount of new investment capital has become available over the last three years the holders of which are now looking to deploy beyond the acquisition of distressed assets and loans into more strategic acquisitions, by directly or indirectly supporting the acquisition of trading Irish businesses and assets.
Due to a lack of familiarity with the sale process and available opportunities, owners are often unprepared and can sometimes simply agree to sell to the first acquirer to make an approach, often for a lower value than could be achieved with proper preparation and research. However, to successfully optimise business value and choose the right buyer, a business owner must be patient and plan the process to complete a sale and transition the business to the new owner.
The goal for business owners considering a sale is to position the business for an optimal transaction, by developing and implementing a plan that results in a rewarding sale.
Building Value in Your Business
A key to increasing the value of your business is to understand how a potential buyer views your business. Many owners have an inflated view of the value of their business versus what the market might attach to it. This is why it is important for business owners to engage an objective advisor, who can help you understand the market perception of your business, pinpoint the value drivers and ultimately increase the value of your business, and therefore sales price.
Once you understand the value of the business, you can work on strategies and actions to increase the value. Key business value drivers include:
- Trends in revenue growth
- Product/service advantages and differentiation
- Balanced and growing customer mix
- Strength of sales pipeline
- Market position or niche
- Product and service margins favourable to industry
- Strong management team that can transition to a new owner
- Strength of management information systems (financial and operational)
- Competitive barriers to entry
- Improving profits and earnings before interest, tax, depreciation and amortisation (EBITDA)
Improvements to the value drivers of a business cannot be made overnight. Ideally a business owner should allow two to three years but at least a year to build incremental value in the business to a level that will maximise the proceeds from a sale transaction. This time can also be used to identify and correct various cosmetic issues to protect against lower offers during negotiation.
The major areas of focus during this time include:
- Estimating the current business value – knowing the true market value of your business well in advance of putting it up for sale
- An awareness of other sale transactions in your specific industry/market in which the business operates
- Identifying key business value drivers and other items to increase the sale price
- Implementing profit improvement programmes – cost reductions and efficiencies
- Optimising procurement and strategic sourcing – achievement of cost savings by evaluating procurement and supply contracts
- Managing revenue expansion and gross profit margins
- Ensure that all shareholders and the management team are supportive of, and invested in the sale preparation efforts and are all working in the same direction to maximise the outcome
- Performance of sell-side due diligence to address possible acquirer issues in advance and increase the chance of completing the sale
Company culture and existing customer relationships are also two critical areas which are often overlooked but which can add value to a business. Employees and customers negatively perceive change but if the business is performing at a high level, it is unlikely that a new owner will make significant changes that cause disruption for either.
Maximising the Sales Proceeds
By investing sufficient time focusing on value optimization, the value of your business should increase in the eyes of potential acquirers. Understanding the value of your business and building on it should leads to a higher sales price, and if the sales process has been carefully followed the incremental value will stand up under due diligence by the acquirer.
Many business owners view their company as part of their family and sometimes the company even carries their name. They want their business to be in the right hands moving forward, while obtaining maximum value from the sale.
If you are considering selling your business, the time to act is now. As you should allow sufficient time to prepare for a transaction to correct any issues and build incremental value in your business. Hiring an objective advisor is the key to assisting you to position your company for sale, initiate the process, set expectations and manage the major and minor areas that lead to a successful sale.
Senior Manager, Corporate Finance
RSM Farrell Grant Sparks,
T:- 01 418 2042
RSM Farrell Grant Sparks (www.rsmfarrellgrantsparks.ie) is a leading audit tax and advisory firm with offices in Dublin, Longford and Belfast. RSM Farrell Grant Sparks is an independent member firm of the RSM International network, the 6th largest network of independent accounting and consulting firms worldwide with over 700 member firms in 90 Countries.