Wednesday, 8 June 2011

How to Sell an SME Business

Lately, I have seen some poor examples of how and when to sell a small to medium (SME) sized business. No names, no pack drill.

Let's face it, if the owners want to take off and run you get to see some pretty shoddy tactics to satisfy their own demands. Meanwhile, you see some people who have nurtured their baby with loving care reluctantly part with it only to see their protege get raked over by the new owner. In the middle lie the staff, customers and suppliers who often are the last to be considered.
I could go on and on about examples I, or we, have all seen, but suffice to say the common theme in bad examples is lack of honesty and communication while in the good it is attention to detail and good management practice.

So if you are thinking of selling your business, firstly get some sound advice and then question yourself as to whether it is the best for the shareholders, the staff and the future. In terms of valuation, timing is one of the most important factors. So many businesses have missed their opportunity for holding on through the good times and selling in the downturn while others got lucky and quit at the top. Oh, the names we could dredge up but just think of Skype and Barings and you will know what I mean.

A few tips then:

  • Keep your staff motivated. The moment you decide to sell, staff will see an attitude change so it's as well that they are a) consistently managed and b) involved in the decision-making. That's a complete anathema to most business owners but imagine the value to a would-be buyer of inheriting good, well motivated staff.

  • Keep cash in your business. Run your business on debt and have low cash, you will get nobbled on valuations. Keep investing as every pound in could mean several more on valuations if the business is set for the future rather than just a quick buck sale. It isn't rocket science. Avoid paying yourself over the odds early even if the temptation is there as it shows at valuation and will get discounted for sure.

  • Be honest and open. When you sell you are going to have to give some pretty hairy warranties and undertakings about how your business has been run. You had better make sure those skeletons in the closet don't come back to haunt you as it is getting harder to simply walk away from problems and keep a high valuation.

  • Time your exit well. The natural feeling for all investors let alone business owners is to keep a good thing going. Knowing when to exit is critical and selling at a high point is hard to accept. Groupon may just be the next big example of a company offered mega bucks by Google to go for an IPO only to find that Google, Amazon and 481 others are hungry for a piece of a business model that you or I could knock out next week. Greed clouds vision when selling. In their case, $20bn was a pretty hefty sum to turn down. Similarly selling too early in a company's cycle may suit the serial entrepreneur but it may leave cash on the table if the business hasn't exceeded critical mass and scaled accordingly. Sometimes a mid-term management change can help (cf. the James Caan story).

  • Be market driven not lifestyle driven. I know lots of people who have built lifestyle businesses and to be honest their valuations will be lower as typically they have built something to be an independent employee of rather than to have a business with a long term future due to a compelling market position.

  • Keep your reputation well manicured. Your brand and customer standing is as important as good financials. Heaven knows Ryan Giggs Ltd has a somewhat tarnished image even if it is rich. Valuations are as much about the management, the staff and the reputation of a business as it is about the balance sheet.

  • Govern your business as others would. Quirky little accounting tricks, dodgy expense policies, sly revenue recognition rules or silly stock management will always get recognised and penalise. Invest early in decent IT, ERP systems and CRM and it will make life easier for a buyer to manage, keep their deal costs down and mean more in your pocket.

  • Time your exit sensibly. If you want to sell your business to retire you are already too late. Think ahead as buyers will want owners to stick around and manage the transition - at minimum they will think they smell a rat. They will most likely keep money back as performance related earn outs. Make sure that staff are involved in these schemes as daft as that sounds so that everyone, not just the owners, has an incentive to make a sale work.

  • Share the love. As the staff sit like pawns in a game there is nothing more demotivating watching sellers and buyers haggle, often publicly. Even with fancy, cleverly worded 'retention bonuses' most staff will weigh up where their prospects lie in the future before seeing if some paltry addition to their wages makes a serious difference. Join staff into ownership early in some way or another either by direct shares or stock options. Make them desire the day a business is sold rather than dread it. Make the process of the sale exciting rather than a death sentence.
    More intelligent people than I know more about this but these are just a few tips from things I have seen just recently. The stories I could tell of people you probably think butter would melt in their mouths!

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