How to sell a business?
Having considered all the pros and cons, you have finally decided to sell your business. However, the process of selling a company that you built with blood, sweat and tears feels complex and daunting. How should you prepare your company (and yourself) for the sale? How will you find a buyer? Heck, how much is your company even worth? In this article, we answer these and many more questions which will help you understand and navigate the sale process with confidence.
We will cover the following, so feel free to navigate to your preferred topic:
1. Preparing your business for sale
2. Getting your business valuation
3. Selling with a broker vs independently
4. Finding a buyer for your business
1. Preparing your business for sale
Set the business model right from the outset
Deciding whether to exit or not and when is the best time to sell are long processes by themselves which we discuss in other articles. In all honesty, the preparation to sell should start even before you decide to sell, ideally. Crucially, preparing your business for sale is the first step that you need to consider before any marketing efforts start, as thorough preparation can significantly increase your company’s appeal, valuation and the all important buyer interest.
According to John Warrillow’s “Built to Sell”, to achieve a highly sellable and attractive business it needs to be able to operate without you and have three key attributes: teachable, valuable and repeatable. That means that you should strive to build a company that sells a product or a service that you can easily teach employees to deliver with excellence without your presence, avoid price undercutting and instead be the best in your niche, and finally, focus on creating recurring revenue by selling products that customers often repurchase. Obviously, this is not realistic or beneficial for everyone across the board, but it is useful guidance to what is desirable by potential buyers in general. For example, contact lenses companies have highly repeatable business model, however, it is not advisable for a roofing company to have their customers buy a new roof every other year. Instead, the goal should be to build high quality roofs, so that their current customers recommend their services to others and choose them again in case they move. We will delve into different business models later in this article series.
Moving past the business model setup, what are the practical matters that you should prepare for?
Get the easy improvements right, but do not revamp the whole company
It is a good idea to try streamlining your operations by improving the efficiency of your company when easy. For example, standardise processes in client onboarding or project management to improve scalability, invest into an easily implemented automation software such as inventory management for real-time stock tracking minimising excess stock, or outsource non-core activities. However, stay away from more involved changes leading to extensive operational changes immediately before a sale. They may not yield an instant return on investment and could disrupt existing workflows deterring potential investors. For example, in 2019 Kraft Heinz considered selling its Maxwell House coffee brand. Prior to initiating this process, Kraft Heinz invested heavily in operational changes including cost-cutting measures across the brand. While aimed at improving profitability, these changes led to reported declines in product quality and market share, making Maxwell House less attractive to buyers and ultimately halting the sale process due to insufficient buyer interest.
Get organised and make sure your financial accounts are in a top notch state
Before you go to the market and tell everyone that your business is for sale (openly or anonymously), you need to make sure that your financial accounts are up to date, correct and preferably audited for two reasons. Firstly, all the marketing materials prepared for potential buyers to spark their interest will be based predominantly on your financial statements. Secondly, if some of the buyers are intrigued enough to start the painful due diligence process and discover that there are inconsistencies between your marketing materials and the reality, it will likely lead to uncomfortable conversations at best and to a buyer loss at worst.
Unavoidably, your financial statements will then have to be updated, corrected and likely audited anyway, and the marketing materials will need to be redone and (re)distributed again, which is an additional cost to you. There is simply no way around it as interested buyers will scrutinise your financial history to understand the company’s profitability and potential for future growth.
For a UK-based business, it is essential to ensure that all records comply with HMRC standards, tax returns are filed and financial statements are up to date. Therefore, it often pays off to pay for an audit of your financial statements (three years back for SMEs, five years for larger companies). Audit is a process during which a qualified accountant reviews all financial data, paying particular attention to profit margins, revenue consistency and debt obligations. This level of transparency can reassure buyers about the accuracy of your financial position.
Lastly, avoid small cheeky adjustments such as cutting operational costs to enhance short-term profits just before a sale. These changes may not always reflect the true operational costs of the business post-sale. Consequently, buyers might see this as misleading and attempt to negotiate a lower price based on perceived risks.
Ensure legal compliance and adhere to current regulatory standards
It is advisable to verify your company’s compliance with (UK) business regulations. Every business in the UK must adhere to regulatory standards from employment law and GDPR for data protection to health and safety regulations in the workplace. For example, an e-commerce business should ensure that GDPR-compliant practices are in place including consent for marketing emails and secure data storage methods. For tech companies, ensuring that trademarks, patents and copyrights are properly registered if applicable. Intellectual Property can represent a substantial portion of your company’s value, so ownership documentation is critical.
Hiring a legal advisor ensures all compliance issues are addressed, which is particularly important for businesses with complex legal obligations. While some argue that minimal compliance issues are not deal-breakers, others believe that even minor infractions can affect buyer confidence, so it is best to be prepared.
Stay organised and professional
Everything we have discussed above means that you should be very organised when it comes to your company’s documents. Organising and presenting all this paperwork in a professional and accessible way demonstrates transparency and readiness which in turn builds buyer trust. It is also a relatively easy win which goes a long way. If all of your documents are as they should be, your company will make a great first impression setting the right mood for the sale process suggesting that if your paperwork is in order, so should be the business itself.
Using a virtual data room (VDR) platform, typically set up by your adviser or broker, can make accessing sensitive documents easier for serious buyers while maintaining confidentiality. It is important to include all documents that are vital to your company’s operations, financial performance and show your compliance with the current regulations. For example, a construction firm may include safety records and certifications, while a tech startup would focus on growth metrics, intellectual property details and team expertise.
Business plan including financial forecasting and growth potential
We discuss financial forecasting in detail in our company valuation articles, however, it is important to mention that here too. Financial forecasts covering at least 3-5 years based on realistic (or even optimistic) business plan are a valuable tool to demonstrate the business’s growth potential. It helps to paint the picture of all the potential money that your company can bring to the next owner and gets them excited about all the opportunities still residing within your company.
Your business plan should include expected revenue, profit margins and key operational costs. A well-documented growth trajectory demonstrating strong market drivers, customer growth and potential scalability can justify a higher valuation and will generate interest amongst buyers. For example, an SME in renewable energy could highlight market demand forecasts for sustainable energy solutions, projecting revenue increases aligned with the UK’s sustainability goals.
2. Getting your business valuation
Astounding 98% of small business owners in the US do not know their company’s value according to M&T Bank survey carried out between 2020 to 2022, despite the business comprising more than 75% of their entire wealth (CPG, 2022). In the UK, the situation is also bleak. Between 32% (Marktlink) to 54% (Bizdaq) of SME owners have no idea about their company value. In the rest of Europe, it was around 40% (Marktlink). Depending on the sample size and research methodology, we get slightly different results to a similar question. Nonetheless, it remains true that across all these studies large portion of SME owners do not even know whether their business is worth pennies or millions.
It’s very surprising because when it comes to property, most people are interested in knowing how much the asset is worth. Equally, people do care how much money they have in their personal current bank account, savings account or in their pension pot. It really should not be any different with your business which could be the largest asset of the lot.
So why is it vital that you know your business’ value? In short, you must know what you’re selling for two contrasting reasons. Firstly, you might be selling yourself short. Secondly, you live in a Delulu world and expect the impossible.
Let’s first delve into the first issue. It is estimated that over 60% of SME owners underestimated the value of their businesses, often leading to missed opportunities during exit negotiations. Additionally, 45% of SME owners who sold their businesses in 2023 reported that proper valuation helped them secure higher sale prices than initially expected. These statistics clearly show that a solid valuation of your business is very much in your interest, especially when it comes to the negotiations with a potential buyer. You must understand where your company’s value comes from and back it up.
On the other hand, referring back to the Marktlink survey mentioned above, 32% of respondents who did get their business valued believed it to be undervalued, indicating a potential mismatch between owners’ expectations and market assessments, which could influence the appeal to potential investors.
To summarise, obtaining your company valuation ensures that you receive a fair price and facilitates smoother negotiations with potential buyers. If you’d like to get an estimate of your company value, you can use our free Quick Valuation Tool (no registration or card details needed) or simply contact us.
3. Selling with a broker vs independently
You can do either. There are benefits and downsides to both.
Choosing the right broker can be hard, confusing and tiring. However, if you choose wisely, it may be one of the best decisions you make (apart from starting your business in the first place!). So how to choose?
Talk to a few brokers and gauge their preparedness for the initial call, their understanding of your company, sector and motives. Ensure they tell you about their initial views on your company’s ballpark valuation. Ask them about how they think about your sale story and how they are planning to paint the picture to potential buyers. Find out, how they are planning to approach potential buyers and what kind of a buyer they find most suitable. Carefully observe whether they are talking to you following a standardised script, or if they are genuinely asking tailored questions specific to you and your business. If you manage to choose a smart, knowledgeable and adaptable broker, you will experience a smooth and organised sale process with a high success probability.
A good broker will help you create marketing materials from a teaser to an information memorandum, provide you with a company valuation, put together a long list of potential buyers and devise a plan on how to best approach them, ensure confidentiality agreements are in place, help you with other legal process letters, support you during the non-binding offer phase, help you evaluate and compare the offers you receive and assist you during the negotiations. They will also manage the due diligence process and ensure the legal, accounting and other professional teams are sticking to the timeline. Eventually, they will help you with analysing the binding offers and transaction completion. If the above sounds like a load of gibberish to you, then you should probably find a good broker. If you, however, feel confident in managing all these phases of the sale process yourself, you may consider going the independent way. Nonetheless, do not underestimate how tiring the process can become if you are doing this on top of your regular responsibilities. You do not want your business value to drop because you are mentally and physically absent whilst searching for a buyer.
A broker is likely going to charge you either nothing or a small initial fee (typically a few thousand pounds which is a symbolic amount considering the amount of work being done for 6-9 months) and a success fee payable upon transaction completion. Fees differ and, sadly, you do not always get what you pay for. Therefore, it is important you talk to a few brokers and get a feeling for how they work and think.
In contrast, if you know that your business can only be attractive to a few potential buyers (maybe your clients or suppliers), and you know all of them, it may be best that you simply get in touch with them directly and complete the transaction with the help of your solicitor and accountant. It can also be the case that you get approached by a potential buyer directly, which may accelerate the sale process. Sometimes, however, even in those instances you may want to have a third party in the middle to help you with navigating the negotiations and support you during the due diligence process.
In general, selling your business independently is a good choice if you have a smaller, easy to understand company with a straightforward business model. You should also have a clear idea of your company’s valuation, how the sale process works and have all your supporting documents organised, ready for the due diligence phase. Choosing the wrong broker, may end up being worse that going the independent way as it wastes a lot of time and might deter otherwise interested buyers. On the other hand, if you choose well, it pays off to be hand-held during what is likely the biggest cash out of your life.
4. Finding a buyer for your business
Finding a buyer for your business is one of the most difficult stages of the sale process. There are different types of buyers, and they typically have different agendas. The two key types are strategic buyers and private equity funds. Newly, there are also individuals who are looking to jump start their entrepreneurial journey or simply quickly change their career path which is called Entrepreneurship Through Acquisition or “ETA”. We discuss other buyer types such and family offices, high net worth individuals or even management buyouts (MBOs) in our other articles.
Strategic buyers are companies operating in your niche or sector. They can be your competitors, clients or suppliers. You will likely know a lot about the players in your field. That is useful because not only you can guide your advisor on who could be interested in your company, but also eliminate the ones that would not be.
Strategic buyers are often willing to pay more for a company compared to a private equity fund because by acquiring another company they can realise so called synergies. Synergies are efficiency gains that come from many different areas such as larger product and/or geographical reach increasing acquirer’s revenue, cost cutting reducing the acquirer’s operational costs and achieving economies of scale, or simply tax synergies such as using one company’s net operating losses to offset the other’s taxable income or restructuring to benefit from more favourable tax jurisdictions. Being able to achieve those benefits via M&A translates into a higher purchase price (a premium) that strategic buyers are willing to pay for the right acquisition target. For example, BrewDog, a Scottish craft brewery, acquired Draft House, a UK pub chain, in 2018 to expand its market reach and increase brand presence by adding more locations across the UK. This acquisition enabled BrewDog to boost revenue through direct customer engagement in bars and streamline operations by supplying its own products to Draft House locations.
On the other hand, private equity buyers are looking to acquire a company for its own potential. They are also looking to use a large proportion of debt vs equity (between 50-70% of the enterprise value coming from debt financing). Therefore, their ideal acquisition target is a growing, established but scalable company with steady cash flows allowing for the high debt servicing, in other words a “cash-cow”. Compared to strategic buyers, who are long-term or forever investors, private equity funds are looking to revamp the company and exit within 3-5 years, ideally realising 20-25% IRR, in layman’s terms an annualised investment return. Due to the tight time frame in which they need to realise the double-digit return, their restructuring strategies are rather aggressive and often lead to harsh cost cutting and redundancies. They also often engage in so called bolt-on M&A strategy, which is in simple terms an acquisition hunt for smaller companies that can help them quickly increase revenue, growth and expand into new product offerings or geographies.
Entrepreneurship Through Acquisition (ETA) or self-funded search is a newly emerging trend where individuals, often mid-career professionals or recent MBA graduates, seek to buy SMEs to kickstart or pivot their careers. This approach appeals to individuals who are interested in owning a business but prefer buying an existing one over starting a new company from scratch. They benefit from an established customer base, operational processes and potentially stable cash flows. This path allows professionals to enter business ownership with fewer risks than launching a startup. The ETA strategy is especially popular in sectors such as healthcare, home services and manufacturing where SMEs provide solid growth potential for new owners. For instance, a former London-based consultant recently acquired a modest digital marketing agency. Leveraging her corporate marketing experience, she identified this business as a scalable operation where she could modernise processes and apply her expertise. Post-acquisition, she improved client acquisition methods and diversified the agency’s services to include digital branding, resulting in a revenue increase of 100% over two years.
For you as a seller, it is typically easier to sell to a strategic buyer because there is little need for “buyer education” on your business model, sector and relevant market drivers and risks. Strategic buyers are also more willing to look at a more diverse spectrum of companies in terms of size, development stage and niche because they consider how a potential target can benefit their existing operations rather than consider it on its own. However, they are more likely to retain the seller in the transition period to leverage their industry expertise and relationships. Private equity funds have more narrow and stringent investment criteria as outlined above, but they often insist on shorter post completion transition period for the seller. Selling to an individual may be the most lenient process and present an attractive alternative to selling to larger buyers, as it often promises a dedicated and motivated new owner who is invested in the business’s long-term success. However, sellers are often more likely to offer seller financing when selling to an ETA buyer. This is because individual buyers who pursue ETA strategies may not have access to the same capital resources as larger companies or private equity funds. Seller financing can make a deal more attainable for these buyers by reducing their upfront cash needs. In return, sellers can sometimes negotiate a higher sale price as they help to offset the initial capital strain for buyers.
Acquire Business has the negotiation handbook ready to guide you and help to successfully sell your business.
To conclude, there are a lot of considerations when it comes to selling your company. Being informed, prepared and patient are the key factors that will help you get through the process efficiently and smoothly. Hopefully this was an encouraging starting point for you and your business when it comes to comprehensively understanding what it takes to successfully exit your company.