Your company will have qualities that some potential buyers will find attractive. But if you ignore its shortcomings you may find it difficult to achieve a successful sale, despite its merits.
Failing to address shortcomings before launching the sale process is a grave error and the later you leave it the greater the possible negative impact. To identify and reduce these problems as early as possible and increase your chances of achieving the best possible price.
Below we list the ten most common shortcomings we have found from our experience over many years.
1. Financial difficulty
The most common financial difficulties relate to cash flow but they can range over many other aspects of a business. They may arise from unfavourable terms from suppliers, uncompetitive customer pricing and/or slim margins.
Action: If your company is in financial trouble then it will almost certainly need to accelerate the sale process or seek restructuring before seeking a sale.
2. Decreasing turnover or profitability
A company facing falling turnover or profitability can, depending on its severity and the company’s financial reserves, be faced with a distress sale scenario, even if only perceived.
Such situations place buyers in a very strong position. They know that time is on their side. The longer the sale process drags on the more desperate the business owner will be to sell and this may lead to a deflated sale price.
Action: the business owner must take steps to cut costs and/or increase profits. Even if you have only just done so this will be regarded as a positive step. Buyers will see a business with potential and that is the most significant element of any sale.
3. Shrinking market
There are certain business sectors which are, through market forces or changes in customer behaviour, going to experience shrinkage and, in some cases, eventual extinction. For example, companies selling fax machines or DVD players. Yet even in this kind of marketplace, there is still scope and value in a structurally sound and profitable business.
Action: there are two common responses. Firstly they can adopt a ‘the last man standing’ strategy and achieve growth by taking over customers from other businesses which are exiting the sector, eventually becoming the dominant player. Or secondly, they can adopt a product/service diversification strategy to grow revenues in a more stable market.
4. ‘Essential’ owners
In a number of instances, the owner personifies the business. Many years of networking and engagement in their sector have made them ‘celebrities’ within their particular field. Their businesses have benefitted greatly from their status but what happens when they leave? Years of valuable contacts and relationships can disappear in an instant.
Action: a handover period is needed before the sale process begins or for a short time after the business has been purchased is the ideal solution. Gradually introducing other people to take on the various aspects of the owner’s role will help the business move forward and reduce its dependency on this one key figure.
5. Incoming uncertainty
The greater the security of its long-term income, the greater the value of a business. In some sectors, long-term contracts can provide a degree of certainty but in other sectors, typically where products or services are sold to consumers, there can be no such contractual reassurance. However, if your business has been operating for some time you should, at least, be able to show evidence of repeat purchasing and a steady influx of new business.
Action: Adopt a marketing strategy to create a new customer pipeline and encourage repeat purchasing. You might consider moving clients onto a subscription basis or other longer-term commitment model. All this will make your company considerably more attractive to buyers.
6. Many hands make difficult decisions!
If there are many shareholders the ownership structure of the company may be fairly complicated. In this scenario, a buyer must provide a financial offer and sale terms that are acceptable to each and every shareholder. Many deals break down because of the difficulty of getting everyone to agree and, in the worst cases; relationships among shareholders can break down.
Action: Try to reduce the number of shareholders as far as possible through a share buyback process before entering into the sale process. If this is not possible, an alternative option can be to obtain agreement across all the shareholders on a negotiating position, i.e. agree on terms and a price that all shareholders will accept.
7. When relationships break down
The existence of unresolved disputes can damage prospects for a sale. Disputes can include employee tribunals, supplier problems and customer disagreements. If these are not resolved before the sale process starts they not only generate uncertainty about future costs but also create doubt and uncertainty in the mind of the buyer about the integrity of the business.
Action: potential buyers are rarely keen to take over such disputes, therefore try and resolve them before you start the sales process, even if you have to accept some short term financial and emotional pain.
8. Show me the numbers!
It goes without saying that any potential buyer will want to study the detailed figures that lie behind a company’s published financial accounts and reassure themselves that the business is actually performing as stated.
Action: Before the sale begins, owners should prepare detailed financial reports on all aspects of the business and, ideally, draw up an information memorandum or business plan that provides the overall context to the detailed figures.
9. Outside approval
Some businesses may have contracts that contain a change of ownership clause. For example, long-term, high-value customers may be entitled to cancel their contracts if the business is sold.
Action: The existence of these contracts is a significant issue but one which is surmountable. It requires you to ensure that your client finds the potential new buyer acceptable.
10. Governing change
Some business may be vulnerable to changes in legislation. For example, although the market for electronic cigarettes is currently growing strongly, governments are already considering legislation that may hit sales. When solar panel installers lost their extensive subsidies in April 2012 they had to face immediate changes in market conditions, demand and margins.
Action: You must show potential buyers that you are aware of possible future legislation changes and that your business has a strategy for responding to these changes without losing sales or margins.
If any of these issues apply to you, do not despair, they don’t mean that your business is unsalable. But the sooner you face up to the issues, get advice on them and take action, the better your chances of securing the best sale price and terms.