FAQ

Frequently Asked Questions about Business Acquisitions

Who Might Buy My Business?

So, you are thinking of selling your business, and are curious about who might be interested in buying it?

Congratulations and good luck because you are going to need it! You are about to embark on a roller-coaster ride like you have never experienced. We aim to help make the process as engaging and rewarding as possible. Going through the highlighted point, you will be sufficiently forewarned and forearmed!

There are no definitive, widely available statistics on small business sales, as (overall) only completed sales executed by Public Limited Companies (Plc’s) are required to disclose sale information. These will be few and far between anyway because Plc’s tend to purchase mid to large businesses, rather than dabbling in the small end of the market. Business sale statistics from brokers/advisories services/transfer agents etc are kept extremely secret, under the pretence of confidentiality. This might be true, but the main reason is because only a very small proportion of companies formally listed for sale (and significant non-contingent fees paid up-front for the privilege) go on to be sold. And these tend to be the larger companies anyway. We are talking about small businesses here, which for the purposes of this article, are those with a turnover of less than $10m or its equivalent.

Figures from various sources will suggest a range of 70-90% of businesses with a turnover of less than $10m will not sell. For those under $5m turnover businesses, the higher end of that range is most likely. There is a reason why 11k-13k perfectly solvent businesses are voluntarily wound up each year (quarterly stats on Members Voluntary Liquidations are widely available from Regulatory Sources).

Before we even start thinking about valuations and money, you need to start by thinking about how much you care about your business, the people you employ, and what happens to them after the sale completes. Why? Because different buyer categories will have different plans for those things – and you do not want to get it wrong! Below is a generalised overview of the different buyer categories, and the pros and cons for each:

The Mighty Plc: Super-deep pockets and can afford to buy your business at a premium because they can! But your company means very little to them – other than the parts of the business that first attracted them to it in the first place (proprietary info, skilled engineers, specific customer(s)). Fairly soon after the acquisition, your company will be swallowed up and the rejected bits spat out and disposed of (site closures, redundancies, etc). On the upside they will have plenty of managers already, so probably would not need you to stick around for longer than a thorough handover. But Plc’s are looking to add significant extra profits to their bottom line, so rarely bother with buying smaller business that throw off less than $1m in net profits per year. If your business is not at that level and does not have some amazing proprietary process/product/service, this exit route is likely out of your grasp.

Trade Buyer/Competitors: Pretty like Plc’s except they are unlikely to be able to pay the super-premium prices because they are not trading at double-digit Price-to-Earning ratios like the Plc’s are. The money they pay for your company is their surplus cash, new debt raised, or a mixture of both. Like the Plc, they have already identified the bits of your business they are after, and what bits they see as being duplicate costs post-sale (i.e. the areas they will dispose of post-Acquisition), so redundancies and closures are still inevitable. But they may value your business name/brand and decide the trading history has a tangible benefit, so might not be so fast to cease using the business name. Your legacy will live on for a little while yet! You may be asked to stick around for a longer period to ensure the transition is a smooth as possible, and perhaps given an opportunity to stay on in the business as a salaried employee!

Private Equity: It is all about getting a return. The end game is to re-sell your company again in 3-5 years for more than they bought it from you – and drawing generous dividends each year along the way. But there is usually a couple of major catches. The model in almost all cases will be to offer you a very generous overall/total sum for your business, but most of it will be contingent on the business hitting certain financial targets each year. Oh, and you will be slapped in golden handcuffs, be “required” to stay at the helm for another 3-5 years AND be responsible for hitting all their growth targets in order to get the full amount promised. Yes, you heard that right. But your reward for running your old business for another 5 years, reporting to new bosses, and achieving annual growth way more than anything you managed to achieve before is a potentially very big pay day. The Private Equity companies are usually keen to acquire the whole business and retain all staff they deem as necessary to keep the business running, so unlikely to implement wide-sweeping redundancies and site closures…maybe…

Individual/Private Investor: Assuming the person is credible with a successful track record (there are many pretenders out there, so homework is critical), this is your most sympathetic and least confidentiality-sensitive exit bar none. But you need to think of it as a mutually willing arrangement in terms of fairness in risk and reward. A Private buyer, in almost every case, will look at your business as something very precious that deserves to be respected and preserved. Everything about the business that made it a success needs to stay in place after the sale completes. They will likely look after the business as though they founded it. If you bought a classic car, and then changed almost everything about it, it’s no longer a cherished classic. It is something else entirely, that is arguably not as valuable as it was. Does not make much sense, right? However, these buyers are unlikely to be able to compete with the other types of buyers in terms of how much cash you might receive at closing, but they can often be very flexible and creative with the terms of a deal – meaning you could end up with the total figure you’re happy with…but you might have to wait a little longer to get it all. The key question to ask yourself is how much you care about your legacy. If it is high, a Private buyer will likely be able to offer you that post-sale peace of mind. And if we are brutally honest, if your business is small in terms of turnover and profits, and private buyer is probably your best and only option.

Only you will know the type of buyer you feel is the right fit for your company when it is time to sell, but hopefully this piece has helped to throw some light on the matter.

How Do I Value My Business?

Most small business owners believe their company is worth a big heap of cash and buyers will be queuing around the block the instant it is put up for sale. For a lucky few, this sometimes can happen. For the most, the reality is very different – especially for smaller companies. If your company is regularly doing $1m+ of profit per year, then you are in a very strong position to attract institutional or corporate acquirers. Between $500K and $1M profit is still an attractive proposition (depending on what that represents as a margin of turnover). But if your profit levels are significantly below $500K a year, then attracting credible buyers is going to be more challenging – and so is coming to a sensible valuation.

There are potentially dozens of ways to value a business. The bigger the business, the more complicated it can be. But we are talking about the Small/Medium Enterprise (SME’s) spectrum here. In simple terms there are two ways to value a business, and both are arrived at from the figures in your company’s own accounts:

Net Asset Value (NAV): is the theoretical amount of money left if you were to liquidate all the company’s assets into a pile of cash, then pay off all the debts and liabilities the company owes. If there is anything left, that is the net asset value. For simplicity, we are ignoring the fact that sometimes assets can be worth significantly more or less than their “book” value (the value shown in the accounts after it has been depreciated). This figure is available from the balance sheet page of the company accounts, so can be easily identified and monitored. For many companies this can be a disappointingly small, or even negative figure. Occasionally, for the more restrained and patient owners, this figure can be satisfyingly high too! But this is likely to be the figure (at best) you would receive if you did not find a buyer and decided to close the company down.

Enterprise Value (EV): is based on the company’s ability to produce a dependable and recurring profit each year. The operating profit, depreciation and amortisation figures from the company accounts are added together (EBITDA) and averaged over 3 or more years to show the recurring EBITDA figure (to smooth out any years with one-off or exceptional ups or downs). That figure is then multiplied by a very subjective “multiplier” number to finally arrive at the EV. For all intents and purposes this multiplier number represents how many years of future profits the Seller believes the company is worth, or indeed a Buyer is willing to pay to buy the company. Even then, the EV is subject to adjustment depending on unencumbered assets (upwards) or net debt (downwards), but we will keep it simple and just stick to EV for now. The multiplier can typically be as low as 2 or as high as 5 or more (a whole blog could and might well be dedicated to just covering the multiplier, it is that subjective). The key message is it is based on the company’s profits NOT turnover. Turnover is not all yours. You must pay cost of sales and admin costs from that turnover. It is what is left that drives the value.

The Valuation Gap: Without stating the obvious, the key to a successful company share sale is agreeing a price that both the Seller and Buyer are happy with. It is not a one-sided process! From a Seller’s perspective, they want as much as possible. It is their baby, their Pride and Joy. But if the company is examined without the attachment and emotion (like a Buyer does), the value of the company is initially derived from a much more objective place using the black-and-white evidence of the company accounts. A Buyer also must consider what happens with the business after the sale has completed, including how well the company can service any new debt raised to buy the shares. Safety must be the primary objective for the Buyer, or it could all have been for nothing. Nobody wants to buy a stressful problem! Frustratingly, this almost always creates a valuation gap between Seller and Buyer expectations. The wider the gap, the less likely a deal can be struck, leaving the Seller to wait for someone else to come along and hopefully make an offer. Maybe…

Bridging The Gap: A great way to help bridge the gap is for both parties to put themselves in the other party’s shoes for a minute and try and see things from their point of view. A seller does not have to sell – but time is not on their side. At any one time, there are way more companies for sale (especially the smaller end of the spectrum) than there are willing/credible buyers. If the offer is too low, there is no strong motivation for the seller to do a deal to hand over the reins (and they will simply fold the company instead and have done with it). From a buyer’s perspective, would the seller buy their own company for the price and restrictions/conditions they are insisting on? The buyer does not have to buy either; there is no shortage of businesses for sale. There is also no right or wrong answer here. But a sale needs two willing parties, which only happens when the valuation gap is consciously closed by the Seller and Buyer working together to reach that deal.

The dirty secret in the company selling world is that only around 1 in 12 small businesses formally listed for sale are successfully sold – and many had to wait 1-2 years or more for it to happen. The ones that do not sell usually join the other c.13,000 (yes, you read that right) companies voluntarily closed each year (Members Voluntary Liquidation). What a shame. Everything gone. All because a mutually agreeable deal structure could not be found.