How to maximise your firm’s sale price – plan years ahead


Looking to sell your SME within the next five years? Here’s what you should start thinking about now

If you want to sell your business within five years, you face critical decisions now that could significantly impact the sale price. So start planning by looking at your firm through the eyes of a potential acquirer.

Prepare detailed three-year rolling forecasts for sales, profit, cash flow and earnings before interest, tax, depreciation and amortisation (EBITDA). Show how you will retain and grow clients during this period.

Write your plan for succession, including how a motivated senior management team will be ready to replace you. Show they will have the right skills and experience, plus any incentives that will help secure the deal and their retention beyond it.

Max Perry, Associate Director at Hurst Corporate Finance, says: “A common pitfall when owner-managers approach a full exit is that they haven’t reduced the extent to which the company relies on them. Sometimes, there is no substantial second-tier management, which nearly always drags on value. A robust succession plan is vital to defending value – it can’t be ‘we’ll recruit someone when the time comes’.”

Also show how your operations – including all your systems and processes – will scale and work without you. Your plan should show that your business is free of legal claims or complaints and has fully compliant data and processes. How will any new legislation or regulations affect your business and is it ready to comply? If so, evidence this preparation.

Explain how your market may change over the next five years and affect your business, especially during a lasting recession. How might it look when the recession ends? “You know the business best and where it’s heading,” says Max. “Give confidence that it has been structured with one eye on the future environment.”

What are the steps to prepare accounts?

You may need significant changes to your financial statements to maximise your sale price.

Martin Brown, CEO of business-growth advisors Elephants Child, says: “It’s critical to understand how any acquirer is likely to perceive your firm and how their due diligence processes work. Many firms will legitimately reduce their profits to minimise tax and support their lifestyle. But to optimise value, you now want to maximise profit and earnings.

“Many family-run SMEs build family costs into their business finances. Buyers may understand if you have a shareholder spouse because it’s tax efficient. But we see firms expense things like football season tickets, golf-club memberships and the last holiday to Barbados as a strategy session.”

This is a complex area that will require professional advice. Max says blatantly unjustified expenses – which do occur in some firms – should be taken out immediately. However, there is often an acceptable grey area that is better to strip out in a separate, adjusted set of accounts for the acquirer rather than changing in your statutory accounts. This makes it easier for the acquirer to “compare apples with apples” in previous years’ figures. The adjusted figures should show what EBITDA the firm would achieve if it were owned by an arm’s-length entity, he says.

To increase profit, you might also stop or delay certain expenditures. But don’t overinflate profits and do maintain the investment necessary to hit targets and maintain long-term competitiveness. Show buyers what investments will be necessary post-sale to support growth.

Improving month-end discipline

You need a disciplined month-end reporting regime. Update your balance sheet regularly and have monthly budgets and forecasts from the past three years ready to show the acquirer – they will expect this. Many smaller companies don’t prepare statements this frequently – or only do so informally.

Ensure you can meet growing monthly targets. Max says: “Demonstrable growth in immediately preceding years is one of the most important value-driving factors. Your plan should yield higher EBITDA.”

Your plan should also include detailed, regularly updated management accounts and management information on matters such as revenue diversification, customer segmentation, credit control and supplier details – things you may not have focused on until now, but that are relevant to the sale.

Account for any stock or work in progress as accurately as possible, as large year-end balance adjustments can prove problematic.

Martin says: “SME business leaders are often experts in their specialism, but they may not know much about pre-sale due diligence because they don’t need that detail in the regular course of business. But without it, the other side will see more risks and chip you down on price.” All these things could be worth hundreds of thousands, or even millions, to you in the final sale price.

What is the importance of personal financial planning?

During the preparation period, think about your personal financial plans. Safeguard your business asset with the five key protections. Plan well in advance to convert it to a personal asset and extract profits, property or any excess cash tax-efficiently. For example, you may need to maximise your pension allowances several years in advance.

You also need to plan any use of Business Asset Disposal Relief, which can make the sale much more tax efficient.

How we can help

We’re well placed to help you with this planning because we can work with business consultants such as Elephants Child to understand your full situation and give you a holistic plan.

Speaking to us can also get you thinking about how the sale may affect your business partners and your family members, including children and grandchildren. Five years may feel like a long time. But you don’t have a moment to lose.

We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for exit and sale.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

SJP Approved 30/11/22


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