Selling your business amidst covid is certainly not all doom and gloom. In fact many businesses can look forward to reaching new realms of respect both in their industry sector and from prospective buyers and lenders post-covid if they play their cards right.
Richard Alvin, Managing Editor of Business Matters talks to Gareth Smith, CEO of Hilton Smythe on this week’s podcast to find out what business owners can action now to future proof a sale. Enjoy this snippet to form an invaluable check list then subscribe and listen to the whole podcast here.
Are you seeing a number of people with distressed businesses? Running out of cash, looking to exit fast?
It’s an interesting time, unprecedented seems to be the buzz word with this pandemic. Yet actually most businesses are in the same boat. We haven’t seen a lot of distressed businesses at the moment. It could happen, with recession what you tend to find is that the businesses that don’t survive will start to struggle in the recovery phase with the majority of them folding at that point.
Do you think corona virus will have a hangover to the value of businesses, this year, next year, in five years time?
Actually I think the opposite may prove itself to be true. The way I’d like to look at it and I’m sure I’m not alone in this, is that if your business has survived something like this, then isn’t it reasonable to say well actually it’s worth more? If you can get through something like this and be on the other side, well then you’re ripe for picking aren’t you? I think it could show that you’ve got a much better business this side of corona virus than going in. Businesses have adapted the way they work to become more efficient, stronger and leaner and if they do that, they will add value invariably over the long term.
So it’s more that there’s a post-corona badge of honour to add to the value and not detract from it?
Yes I think so. It’s tough to say with value because what is a business worth? Well ultimately it’s worth what someone is prepared to pay for it and that’s down to if it’s an individual it might be down to psychology and the desire and want to buy the business, whereas if it’s an acquisition to an existing company that’s also survived corona virus who see it as a higher investment because it’s adding more profit. Until we get through to the other side it’s really tough to direct where the values are going to go.
For our SME audience that might be potentially thinking about selling their business next year, or the year after, what are the real takeaways that they can get from this for preparing their business for sale?
If you want to sell your business in the next year or two, first of all get your accounts in order because we know that lots of businesses like to ask for accounts to pay as little tax as possible, of course the accounts can be manipulated in various ways. Whereas for selling, the important thing is to show as much profit as possible. It’s the first step and you need a good two or three years of doing that, and make sure your processes are well in place. Take the opportunity to take stock of the business and make it better, more efficient and really drive hard the areas you can push – whether that’s outsource marketing, third party suppliers or even your own sales figures and team. Really push it. Use the time to take stock and drive the key performance.The other thing to have as a board or series of managers, is to have both leading and historic KPI’s so you know you’re on track and you know where you’ve been. Make sure you’re as profitable as you can be, watch your cost lines, make sure you’ve got a good manager structure in place and that they know what they’re doing, in other words, take yourself of the business and work out of the business and not in it, and make sure you’ve got key performance indicators showing where the business has been and some leading KPI’s to show where it’s going to measure whether you’re on track.
We’re hearing horror stories about high street lenders not lending for growth or business purchase, how have you found dealing with traditional high street lenders, both at the moment or the six months beforehand. Are the stories we’re hearing correct?
I’ve heard the stories, personally in my experience as a business owner and finance broker I just can’t see that there’s that issue. The banks generally are very good, if the business stacks up you can get really good rates from the banks. We don’t get many rejections but that’s down to the business. It’s all about risk to the banks – the longer the business has traded and the higher the turnover, the more likely is that the risk factor is lower dependent on the business sector of course. If people are struggling to get finance it might be that they don’t have a relationship manager and they’re going through the call centre route, if you’ve not prepared your case correctly you might struggle. Always speak to someone who knows how to apply for finance who can write the application in a specific way so someone looking at it from a credit point of view can see that it makes sense. Take advice.
Deferred payments are now very common place. Would you recommend them?
From a buyer’s point of view it’s very easy to say ‘look your business is doing well, we’ll link the sales price to that performance’. A straight out deferred payment where we say we’ll give you half a million for the business, 250 upfront and 250 deferred over two years again happens quite often, however there’s a lot of risk for the seller in that respect – what if they don’t pay you? Buyers often can’t give a guarantee. We don’t advise people to accept deferred payments for their businesses, if you decide to go ahead and accept this kind of deal I’d say that ultimately you need to be happy with the amount you see on that first payment then fine, because you might never see the rest.
Are there any specifics from a due diligence point of view that our readers should make a point of researching?
Due diligence is so involved and it’s easy to overlook something. I think this is down to having good representation from a lawyer that knows what they’re doing because they’ll make sure the warranties and covenants in the share or sale purchase agreement cover you as a buyer. Surround yourself with the right advisors. Forensic accounting is a key one to show accuracy in the accounts. You wouldn’t believe how many buyers miss out this area. HP lost a shed load of money by not properly investigating the accounts. Environmental due diligence is also something that needs to be considered very carefully. But often the biggest area a buyer fails to look at is the culture of the business and this is because your lawyer or your accountant won’t do it. You’re left to do it yourself. You tend to find then that you’re taking over this business, you’ve no idea what the culture is, and it hits you like a rock when you take it over as the staff will revolt against you, they don’t agree with too many changes too soon.