There are important factors that must be considered before deciding if a business is ready to be sold, Lianne Ross of Hutcheon Mearns tells Anthony Harrington

One of the most difficult decisions for any successful entrepreneur is working out when and how to sell the business that they have founded. 

As Lianne Ross, who heads up Hutcheon Mearns’ Corporate Finance team in Edinburgh, notes, there can be any number of reasons why someone would want to put their company on the market, and a few considerations must be undertaken when deciding if the business is ready for sale. 

It may be that the entrepreneur is reaching retirement age, they may want a fresh challenge, or may have another great idea that they want to turn into reality. 

Some entrepreneurs also realise that they have taken the business as far as they can and that future growth may be more achievable in the hands of a trade acquirer who has an international network of offices and personnel, or a private equity buyer that put additional capital to work. 

“Some people are very entrepreneurial. They will want to cash out their stake in their existing business to progress another idea. If you are a serial entrepreneur by nature, you may want to put your money into your next idea,” she notes.  

Lianne points out that whilst maximising value for shareholders is the ultimate goal some entrepreneurs are also focussed on making sure that their business finds the “right home” for the sake of existing staff, customers and suppliers. 

“One of the first things that any owner of a business needs to note is that it is critical to prepare a business properly before going to market,” Lianne says. 

Unfortunately, this question is sometimes taken out of the owners’ hands, and they may have to sell, but when that isn’t the case, there are a few factors to consider when deciding if you are “transaction ready”. 

Lianne says being prepared to go to market is critical. “One of the things I have learned over the last 15 years is that extended timelines can be detrimental to a successful outcome”. 

Lianne points out that an owner should be looking to engage legal and financial advice probably at least six months before putting the company on the market. This is something that a firm like Hutcheon Mearns can help with.

The firm has a specialist deals team that can help a business fully prepare for a sale, and then execute the transaction through to completion. 

Every potential buyer will want to do their due diligence. So, the seller needs to go through a comprehensive exercise to make sure their general “housekeeping” is in order and to create an online data room of all requisite information. 

“You want to find and fix all the skeletons in your operation way before you get into the sales negotiation. It’s better if you identify and try to mitigate them than if a buyer uncovers them during diligence,” she cautions. 

“As the seller, you want to be sure, for example, that all your contracts with customers and suppliers are up to date and can stand scrutiny. 

A potential buyer is also likely to want to reassure themselves that your key customers are going to be comfortable with the change of ownership.” she notes. 

The Herald:

There are also external factors that need to be considered. 

Obviously, we live in an uncertain world, and no one can predict exactly how the local and global economies are going to be through the sales process. 

Clearly, a sudden, severe, and unexpected downturn in the local economy, or a sudden major geopolitical event, can cause potential buyers to slow walk or postpone an acquisition. 

Political uncertainty can drive buyers to put a pause on acquisition strategies, however, changes in tax legislation could spur on transactions depending on party policies. 

Lianne points out that it is a truism in corporate finance that when negotiations start to drag and stretch out, deals unfortunately tend to stall or even die. 

This is yet another reason, she points out, for the seller to ensure that they have done everything possible to expedite the sales process, so that when you hit the button on going to market, you are fully diligence ready, and a buyer can hit the ground running. This can ensure a smoother overall process. 

Lianne points out that if the business is going to be sold, thought needs to be given to how the business will appeal to different categories of buyers. “You will want to identify and highlight the value proposition for each category of buyer. 

“This will vary depending on the type of potential buyer. The messages will differ and therefore honing the story is important. 

“The motivations of a trade acquirer versus a private equity investor will be different,” she emphasises. 

There are certain things that will make a business more attractive to a potential acquirer; market proposition, sector, robustness of earnings, quality of information, management team and depth of customer base to name a few. 

Above all, selling a business requires ‘good housekeeping’ and a strong set of financial projections that the seller can stand behind. 

“Acquirers are generally familiar with, and pretty much expect, a set of hockey stick projections, but be realistic. Produce a set of forecasts that you can stand behind under scrutiny. 

“Consider the next 12 – 18 months as the most important and make sure they are deliverable. Releasing good news on customer contract wins or key commercial milestones throughout a process provides a buyer with confidence over deliverability,” she counsels. 

www.hutcheonmearns.co.uk