Preparation is crucial when selling a business
Many business entrepreneurs know that starting a business is not for the faint hearted, however many don’t realise it’s often just as hard to leave a business as start one.
As an industry average, 80% of small to medium enterprises don't sell and 25% of company owners remain trapped in their business beyond retirement age.
Going by industry averages, the odds for a successful sale of your SME business aren't great, and if you knew the reasons why companies fail to sell, what would you do differently?
We surveyed several hundred failed business exits identifying common regrets and discovered that with better preparation many failed company exits could be have been avoided.
In our survey, the 5th most common regret was a failure to implement leadership transition, which accounted for 18% of failed company sales. Like Gollum and the one ring, entrepreneurs find it difficult to relinquish control of their businesses or justify additional management costs.
Owner reliance is perceived as a risk by acquirers who offset the risk with protracted *earn outs and handover periods, tying the owner to the business for longer post acquisition. Most shareholders prefer quick exits, accepting offers with most of the consideration upfront and minimal *earn out. As a result, owner reliance can become a deal breaker (read more).
The fourth most common cause of regret was the failure by shareholders to reduce the element of risk for the acquirer. Company owners are accustomed to an element of risk; however, acquirers are risk averse when faced with funding an acquisition. Reducing perceived risk is paramount to a successful sale of your business (read more).
Failure by entrepreneurs to optimise profits 3 to 4 years prior to exit was the third most common regret. In our survey, 36% of failed exits were blamed on lumpy or plateauing year on year sales, or low and declining margins. Conversely, an analysis of successful company disposals revealed that profitable businesses accounted for over 80% of successful exits.
Acquirers use future profits to pay back funding and relative valuations are often based on multiples of profit. Businesses with higher profit margins command higher offers and are easier to sell (read more).
The second most common cause for regret was selling before the business had reached a significant size. Many shareholders decided to exit prematurely when their businesses were too small to be of significant interest to acquirers accounting for 37% of failed company exits. Legal billings for commercial due diligence can be costly regardless of the size of transaction making it more cost effective for acquirers to concentrate on larger targets with bigger benefits. There are some exceptions to this rule (read more).
The number one cause for regret was selling at the wrong time with poor market appetite accounting for 51% of failed company exits.
No matter how skilfully a business is marketed you will always be able to count the genuine acquirers on your fingers. Regardless of how many companies you canvas, boardroom acquisition criteria, access to funding, geography, product and service synergies will always dictate a finite number of genuine acquirers at any one time. If those acquirers are already consolidating an earlier acquisition, struggling with funding or there are simply too many companies for sale in your sector at the same time, your attempts to sell your business will take longer than anticipated.
A more pragmatic and organic approach is required when it takes longer to attract the right buyer. A good advisor will be able to pause your market approach and try again at an agreed point in the future. Talk to us about our flexible approach when selling your business.
exitbydesign offers a range of services helping business owners prepare for exit:
Our 'acquirereview™' analyses deal flow and acquirer appetite in your sector, enabling you to sell at the right time for maximum value.
Our exithealthcheck™ is ideal for those able to plan several years ahead and helps shareholders avoid value reduction and identify any weaknesses in their business prior to exit.
Our legalhealthcheck™ will help identify any unnecessary liabilities or structural issues which could derail your transaction.
Our unique financialhealthcheck™ highlights information required for financial due diligence and flags issues that could delay a transaction.
Making your future exit tax efficient can take time and we recommend that you seek tax advice at least 2 years prior to selling your company.
Call us on 01384 274 778 or 075 888 925 88 to discuss further or go ahead and schedule a Zoom meeting at your convenience.
*earn-out - Where the vendor is required to remain with the business for a period of time to facilitate transfer to the new owners post completion. Often, payment of part of the sale proceeds are conditional requiring the vendor to achieve pre-defined performance targets during the handover period.