Selling your business can be one of the toughest decisions you’ll ever have to make in your life. For whatever reason, you may want to take a step back and do something else in your life, away from the business you have owned. No matter what your thought process may be, there are some key and critical things which need to be weighed up before looking to exit in order to leave you in the best position away from your business.
We spoke to Norden’s Head of Strategic, Joe Sword, on the timing behind selling your business, exactly what you need to be analysing, and how to leave a legacy behind whilst beginning your future endeavours…
When is the perfect time for a business owner to sell their business? What are some of the green light signs which indicate this?
This is the million-dollar question which no one really has a concrete answer for. Everything is of course dependent on the particular business owner’s feelings and wishes, which may take some time to really pin down. Why are you selling your business and what do you want to achieve by doing this? Are you frustrated and have had enough because your business isn’t working correctly or are you fed up and have honestly taken the business as far as you can take it? Once you work out why you want to sell; whether that be to retire, to spend with family, or even travel the world, the process becomes a lot easier to manage and set into action. These are the questions that really need to be drilled down.
By analysing your thought process and figuring out a designated plan, you can really get to the core of why you want to sell and how best to go about this. The more valuable your business becomes to buyers and investors, is when a proper plan has been set in place and the business is running smoothly. A desperation sell is very high risk for both you and the potential buyers, and also indicates that there have been issues which is likely to transpire into the valuation of your business not meeting your criteria.
For me, the ultimate green light sign to sell your business is simply if you’re not enjoying it anymore. You’ve no doubt put thousands of hours of effort and have poured in blood, sweat and tears into your business, yet if the passion levels have dropped then it’s probably the time to look at stepping back.
If an owner is heavily involved in the day to day running of the business, what do you advise for them to do in order to make the business as attractive as possible to sell?
You always want an owner to exhibit passion and love for their business, however if they’re too heavily involved then it could be a real problem when looking to sell. The reason for this is if a purchaser comes in to view the business, and they see the owner integrated fully into the day to day running as well as the business being very reliant on them, then it’s not an attractive prospect at all. The likelihood is that the purchasers will want the existing owner gone as soon as possible, so if the business is built around the owner and still requires them to do a large proportion of the work then warning signs are apparent. If you put yourself in the shoes of the purchaser, they want to be able to take a streamlined business and hit the ground running as soon as they buy it basically.
To rebuild the business successfully without the owner involved, it will take a long time and a lot of resources. Therefore, even if the potential purchasers choose to put an offer in, it’s very likely it won’t be anywhere near the figure that the business owner wants. We always recommend here at Nordens to build your business where it could be in a position to sell, whether you want to or not isn’t what’s important. If a business isn’t wholly dependant on the owner, it’s much more likely that you’ll not only enjoy your work but also if you do choose to step back then all the foundations are set in place so that you’ll be enhancing the value of your creation. I’ve always found the best businesses are where responsibility and dependability are shared across numerous people, allowing for a fluid system where if one, or even two, of those people were removed then it won’t be as difficult.
Do you believe it’s right for entrepreneurs to go into business with a firm view to sell in the long-term?
If your true definition of success is you want to be a millionaire and sell off your business in a few years with targets set around that, then there’s nothing wrong with that. It’s quite a common mindset where people think I want to go into business to make a million, however what does that million even mean to you. When you break it down, money is just a vehicle to help you get what you want. You’re not going to frame a million-pound bank note or even admire a million pounds of cash in a vault, you’re going to want to spend it or invest in different things in life.
It all comes back to the ‘why’ in your vision and this is where the personal and business crossover happens. You need to be constantly asking yourself, what does success really mean for me? It’s not necessarily viable to go into business with a firm view to sell, but you need to build a business which is capable of being sold for the right amount in order to enable any of those goals or pipe dreams to become a reality. Having the mindset that you can take a step back from your business whenever you want, and the business is in safe hands, is a firm indicator that your business is valuable and attractive from a purchaser’s point of view.
Many owners live and breathe their business, and if they’re looking to sell could this have a detrimental effect on not just the business but also the owner’s livelihood?
I’ve seen so many stories where there’s been a honeymoon period with business owners selling up, only for them to return to working a few months later because they’re bored. There’s always been that Hollywood dream of a person retiring and going to slum it out on the beach with nothing to do, however the vast majority of business owners are incredibly productive and actionable people, and that mindset won’t just change overnight.
Finding your happy place, and what that actually is, will determine your next step. This can be tested out before your business is sold, which is something we heavily advise for here at Nordens. Go and take a sabbatical holiday break or go and spend a lengthy amount of time with the kids or grandkids and see where your mind is at afterwards. If you’re itching to get back into the swing of things at your business then the answer is clear, you’re not done just yet.
From the business’s angle, a detrimental effect could occur by not putting those plans in place. If you’re heavily involved in the customer side of business, which is common for many SMEs, then taking a step away will leave clients feeling left out in the cold and could potentially result in them leaving.
How important is it to build a solid team around you in order to ensure that once the business is sold on, it will continue to grow and be profitable?
It’s of paramount importance. It all relates to the progression and succession of a business and the initial purchaser will need to see that in some form. You’re seeing a lot more management buyouts in business which is something we’re extremely familiar with at Nordens. This can provide such a great way for a business to continue thriving and growing without disrupting operations or diluting directions which a business may take. The knowledge and experience that management have is so invaluable and can’t be replicated from an external buyer, therefore it’s no surprise we’re seeing that more commonly over the years.
There needs to be a solid team and work ethic there though for this to work well. Otherwise, it can not only create a downward slope for a business but as a result, the previous owner is often called back in to rescue proceedings. Another thing which has grown heavily in popularity is earn-out structured business sales, this is represented by a lump sum paid initially to the owner, as well as future payments based on the performance and success achieved.
Many business owners get into business because they want to leave a legacy, and this can be fundamental in keeping to the established brand and consistent uptake in sales. The best companies out there when altering senior management and director roles, don’t diverge away too much from the thing that has brought in so much success beforehand. Building those core values and a smooth functioning team as a base will no doubt transpire to future success and ultimately leave a legacy behind.
Is it worth spending a lot of your budget investing in your business and its systems and processes, if you have concrete plans to sell in the not-too-distant future?
When looking at this question, many people relate it the housing analogy, in that is it worth spending x amount of money on an extension or home improvements when you’re long-term looking to sell. I do see the similarity in this sense, however with a business it’s more ongoing and therefore isn’t as tangible as doing up your house.
Yes, houses increase in value usually in line with inflation, yet when looking at a business if those key systems and processes aren’t in place then the business is pretty much seen as worthless from an external purchasing view. You may have an ingenious idea which you’ve made into a business, however if those systems and processes don’t exist then any interested buyers will pay a rock bottom price due to the work and resources needed to make that business as efficient as can be. Purchasers want an easy life at the end of the day and looking at your systems and processes is one of the first things they’ll examine when pondering whether to buy the business. They want to be able to integrate seamlessly with their other business ventures or knowing they’ll be comfortable in hitting the ground running once the takeover goes through.
Digitalising and automating things where you can is needed in all businesses, whether you’re looking to sell or not. This should be done incrementally or consistently, rather than a huge one-off purchase which usually signals that the issue at hand should’ve been looked at a lot sooner than dealt with.
By having a completely streamlined and slick running business, in terms of efficiencies and operations, you’re basically going to be able to get more money for your business, sell quicker, as well as exit sooner to do exactly what you want to do with your life.
We hope this has outlined to you how to go about successfully selling your business, and when is the right time to do so. Our expert and FREE Business Valuation Tool will help you gage exactly how much you should be looking at when considering selling your business. If you require any further information on exit strategies, our strategic advisory services, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.