If you have built your own business, selling your business is an exit strategy which can provide you with the lifestyle you want when you retire.
However, what are the things you should be thinking about now, which will enhance the overall selling price when the time comes to sell.
We all know that you have to have something worth selling, i.e. that it is profitable, has a good customer base, has a unique selling point etc. but how do you make your business more attractive to potential buyers who will be comparing your offering against others in the market place.
Management information is often an area smaller businesses do without. You, as the owner, may feel that this is an unnecessary requirement, after all, no one knows your business better than you, right? So why do you need a load of reports telling you what you already know?
Well that is perhaps the thing, it is information that you hold and one of the key things that makes a business attractive for sale is that the business is not dependant on you as the owner for its continued profitability and long term future.
So here are 3 areas where management information will benefit you, if you eventually want to sell your business and get the maximum price you can.
1. To demonstrate potential.
A key method for valuing your business for sale will be based on a multiple of future earnings. The multiple used may be industry specific but can range between 3 to 20 times the future earnings expected from your business. If you have no past record of earnings and how this has trended, this earnings figure can be an area for negotiation and where a buyer potentially can reduce the selling price.
As a seller, it is important for you to be able to demonstrate an increasing trend where there has been one, or even stable month on month earnings. If earnings have been variable, this can also highlight cyclical trends or periods of investment followed by growth.
The key thing here though, is that you were aware of these trends and you have used this understanding in managing and growing your business.
You haven’t just arrived here “by chance” and the sustainability of your company moving forward is robust and solid.
If you can show through the financial figures a monthly or quarterly story of how your turnover and profits have moved over the last few years, this gives a buyer better insight into what he is taking on and what would be the potential returns to him in the future.This will be the key metric he will use to value your business and a buyer is more likely to want to buy a business where there are hard figures to show the returns on the investment, compared to you telling him what you “think” the potential earnings could be.
Furthermore if you are trying to suggest that your business is growing or has potential for growth, it is always good to see the growth of your business in the context of past performance. If your business has grown 10% year on year and you tell your buyer you think it can achieve a further 10% growth, he is more likely to believe in this figure when you can demonstrate this with actual turnover and profit figures that have been achieved up to now.
2. To demonstrate internal control and processes which run themselves
When choosing a company to purchase, any potential buyer will want to know that the business he is buying is in control and has sufficiently robust processes in place that enable the business to continue to run, after you have handed the running of the business over.
Processes such as pricing are key; Can you show that you have a visible pricing model in place? Does this show that you price jobs based on the key parameters which drive your costs, rather than pricing based on a ‘finger in the air” quote or on what you think or feel the price for the job should be. Furthermore is there clear visibility in your pricing model which shows that build-up of costs, how does it allow for the covering of all costs and does it clearly highlight the profit you will make on each service or product that you deliver?
Of course we know that you, the owner, know what you have based your pricing on but can this process be handed over to the new owner? Where you have solid models to base your critical decisions on, like pricing, this will provide the new owner with a proven system they can use.
Likewise having a monthly management accounting process shows that the financial figures are being reviewed and used for managing the business. Having figures that are reconciled and checked on a regular basis shows the company has a good system of internal financial control. Control measures include areas such as ensuring your supplier accounts and customer accounts are agreed back to the actual transactions that took place in the month. After all, who wants to take over a business which cannot reliably prove that all the work they have done has reaped income and collected that income in a timely manner.
Management accounts will provide the vital insight and figures a buyer will require to build his own financial scenarios. It will more readily enable him to estimate the cost of restructuring, growing or consolidating your business and this will enable him to bring more certainty into his financial projections. Fear of the unknown can be a complete show blocker when compared to a similar business where visibility of sales, cost structure and profit are readily available.
A buyer needs to be convinced that he is taking on a business which will generate profit and cash, not one that will lead to a drain on his resources and time.
Regular reviews again shows you are in control and proactively checking for issues rather than leaving it to the yearend, when the external accountant does his work and identifies weaknesses that have occurred often more than a year before. Your use of management information for planning will give a potential buyer more confidence in your company and will again, reinforce the feeling that your business is in control.
Other powerful controls would include cash flow forecasting and demonstrating how cash has been managed when you have gone through periods of growth. You demonstrate it is possible to grow the business further and that existing income from customers is sustainable.
3. To demonstrate there are no “skeletons in the cupboard.”
A business built through good planning means it will have strong foundations and will be better able to weather any downturn or adverse events in the future. Management information will show that you know and can pass onto the buyer what the key performance indicators (KPI’s) are which should be monitored to ensure the business continues to perform. It’s a bit like a crib sheet for the new owner.
Handing over key performance indicators to your new buyer again gives insight into what drives and hinders the business. Your key performance indicators may be around flagging orders and sales by product lines at the front end of the business cycle, to quality defects, repeat work and delivery times at the backend of your process. The KPI’s are specific to your business and where it is in its lifecycle. They may not be figures that the new owner continues to produce as he may have different plans for the business but again, the span of your KPI’s should cover all the critical areas of your business. This should instill confidence that there are built in control mechanisms in your business which will not disappear when you walk away.
Your knowledge and experience has shown that these are the areas which are critical to the success of the business and therefore this is what he should be looking at if he is to continue the success of the company. This reduces the risk on the buyer and a buyer happy in the knowledge that there is reduced or manageable risk is more likely to give the asking price.
Management information doesn’t have to be complex, in fact the simpler the better. It should only take 2 or 3 days a month to produce and will ensure that when you reach the time to sell your business on, you reap the best price for your business and you get the retirement pot you deserve.
If you need help with producing management information for your business please get in contact via this website or ring me direct for an initial chat.