Selling your business? Follow these 10 key steps

By Richard Hayward, Principal, HHMC Australia

We have written about this before but it a very important topic and is worth re-visiting as we start a new financial year.

In so many of the discussions that we have with recruitment company owners we hear about their future plans and exit intentions. It is often the case that people are underprepared for what is required to complete a successful sale. With all the years of hard work and risk that has gone into building up a business it is a great shame to see owners getting into unnecessary difficulty.

There are no guarantees that you will sell your business. So getting the process right is in your interests as much as the buyer’s. What should be remembered is that the recruitment industry has relatively few barriers to entry and so it is always an option for any company considering an acquisition to, instead, add some more consultants and build up a sector organically. This option to compete rather than buy is harder to do in some other industries where the entry costs and barriers are higher and buying your way into a market is the only viable route.

A few years ago in recruitment extra we listed 10 key steps that help make deals conclude more effectively for all parties. Do they still hold up in 2010?

1. Place a realistic price on your business. Nothing has changed here. It is still the case that many sellers overvalue their business based on emotional factors such as the amount of time and effort they have put into the business over the years. Unfortunately, the “sweat equity” involved is not rewarded of itself by a higher price. Rely on external advice from experts with industry knowledge to help you determine a price that allows a “win-win” position. It’s important to take your ego and emotion out of this assessment.

2. Keep a “business as usual” mentality. Don’t become distracted from day-to-day demands. This can affect revenue, costs and profits. Since the selling process could take as long as a year, the buyer needs to keep seeing a healthy business.

3. Engage expert intermediaries to ensure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Expert intermediaries can keep the sales process discrete and on track.

4. Prepare for the sale well in advance. If possible, be sure your records are complete for at least three years and do all pertinent legal or accounting “housekeeping” beforehand.

5. Anticipate information the buyer may request. The buyer will need to understand the financial ins and outs of your business. All acquisitions involve risks and serious buyers need as much information as possible to mitigate those risks.

6. Don’t oversell. You are a salesperson or you wouldn’t have built up your business to where it is. But overselling could create a credibility gap which the buyer will notice.

7. Be flexible. Don’t be the kind of seller who wants too large a portion of the price upfront, or who won’t accept any contingent payments based on performance. Depend on the advice of your intermediaries. It is important to keep the “deal at the table” if there is genuinely a deal to be done.

8. Negotiate, don’t “dominate.” You are your own boss and have been for a while, but be prepared to learn that the buyer may be used to having his or her way too. With external advice, decide ahead of time when “to hold” and when “to fold”.

9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary to be sure that potential buyers stay on a schedule and that offers move in a timely fashion. It is easy for transaction timeframes to blow out with so many of the key discussions relying on as few as two people – a seller and a buyer – with the authority to progress things.

10. Be willing to stay involved. Even if you are feeling burnt-out, or planning to retire, realise that the buyer may want you to stay within arm’s reach for a while. Consult with intermediaries to determine how you can best effect a smooth transition.

We believe all these points are still very relevant and we have added a few extra that you may wish to consider. An attractive business should have the following:

* clear legal structure and shareholder agreements;
* depending on size have in place effective advisory board processes;
* clear and consistent management structure and reporting lines;
* a demonstrable business plan and operational plan;
* proper financial structure (financial reporting, debt management);
* clear and consistent management reporting against operational plans;
* efficient back office processes;
* enthusiasm for growth;
* separation of shareholder/personal activity from the company; and
* willingness for open and consistent information exchange.

Ultimately, any organisation needs to be efficient in its creation of bottom line profit to enable a fair price to be achieved. How you generate business, deliver your services and ensure future profitability is what reduces risk for the buyer and adds value to the seller. The buyer is interested in the ability to produce next year’s profits after they own it and will judge a business accordingly.

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