Below is a guest blog post by Simon Read, who works as a business broker.
He helps sell professional service firms, ranging from sole traders turning over ~£100k up to £2m-3m multi partner firms.
Talking a lot to both sellers and buyers gives him a strong understanding of what makes a business in a good position to be sold.
The logic is still relevant to EOT sales.
Why is it so important to prepare your business for sale?
Demonstrating streamlined operations, and real usable data about your clients and revenue sources will put you in a stronger position and can enhance its value.
If it can demonstrate stability, growth potential, and reduced risk, acquirers can make informed decisions as to whether it will be of interest or not.
Faster sale process
A well-prepared business where records and information are clear, well-presented, and transparent will make it easier for your adviser to assess things and agree the deal with you and the wider team.
Reducing risk
A business that is well-prepared that has addressed potential issues or risks, makes for a much less risky proposition. Remember that if the business fails, even after sale to an EOT, the founder has more to lose than anyone else (at least for the first few years post sale).
Improving business performance
The process of preparing your business for sale can reveal areas for improvement, even if you are not yet ready it will put you in a better position.
Legal and financial compliance
Ensuring that all legal and financial matters are in order reduces the risk of potential liabilities.
Negotiation position
Whilst there is no formal negotiation with an EOT sale, it can help you justify a higher sales price with whoever is valuing the company.
Smooth transition
A well-prepared business makes for a smoother transition for the new EOT owner. Proper documentation, procedures, and employees who have been invested in the process to facilitate the handover process.
Maintaining confidentiality
Having the business prepared beforehand allows for better control over the information shared during the sale process. This helps maintain confidentiality.
How & when to inform my staff?
You will want to look after your loyal staff. Indeed that’s often a key reason you’re considering an EOT sale. It makes sense to involve key staff early in the process. Also, in the unlikely situation redundancies may be required, consider working with HR professionals.
What about my premises?
If you currently occupy an existing building on either a Freehold or Leasehold basis, then it may be possible to negotiate this into the sale. Of course what happens to any premises will depend on who is currently the legal owner. If the Ltd Co owns it, and you want to retain it, you’d likely want to separate it from the trading company first, before the EOT sale.
What will my business be worth?
There are several methods for valuing businesses. It’s as much art as science.
However, generally speaking a multiple of 3-4 times “adjusted EBITDA” (tweaked profit) would be typical. Some allowance for any significant retained profits would be considered too.
Factors that can affect the EBITDA multiple (hence valuation) will include things like whether turnover is primarily from recurring or project work, and the profit margin. While a high margin might sound great it can mean the business is underinvested. The potential to increase margin with improvements is more attractive. The historical and growth forecast of the business is also a factor. Client relationships especially larger ones is key.
Also things like staff turnover and retention may be considered. As well as the qualifications, expertise, lengths of service, and any keyman risks inherent in the business.
Properly preparing your business for sale in advance will help ensure a successful transition that benefits everyone.
Summary
Properly preparing your business for sale in advance will help ensure a successful transition that benefits everyone.
The business will be more stable and profitable.
This means you as founder are more likely to get paid in full, whilst being better able to step away.
It means the team should have a reliable income from the business for years, if not decades to come.
If you are interested in finding out more about what Simon/his team can do for you, approach him on LinkedIn here for a confidential conversation.