Selling a business may be a once in a lifetime transaction where the vendor has one chance to get it right. Well prepared businesses are more likely to command a higher sale price. Maximising the sale price is an important objective that requires considerable attention well before the sale process starts.
Goodwill ‘attached’ to the vendor (personal goodwill) is often difficult (or impossible) to transfer to the purchaser, whereas goodwill ‘attached’ to the business transfers with the business. Purchasers do not usually pay for non-transferable personal goodwill. Vendors should therefore attempt to transition knowledge, relationships and other personal intangible assets to staff over time, where possible.
Employees are typically one of the most valuable ‘assets’ of a business. A business sale may be an unsettling time for staff. Key staff should be ‘locked in’ through appropriate incentive plans (e.g. employee share scheme). Employment contracts should be fully documented and staff should be prevented from eroding the business goodwill (e.g. soliciting former clients or other employees after termination of employment).
Certainty of revenues is an important value driver. Where possible, revenue streams should be contracted for a desirable commercial term. At a minimum, client relationships should be documented (subject to industry norms).
In setting a purchase price and / or the required net assets at completion, purchasers often consider the working capital ‘locked up’ in the business. The working capital cycle should be shortened, where possible. Lower working capital may release cash to the vendor prior to the sale or potentially support a higher purchase price.
In addition to setting the vendor’s price expectations, a dynamic valuation (i.e. including sensitivities and ‘what if’ scenarios) typically allows the vendor to understand the value drivers and the financial impact of various scenarios and sale options.
Intellectual Property Protection
Business value is often underpinned by intellectual property. Intellectual property should be legally protected by patents, trade marks, copyrights and confidentiality agreements, where applicable.
There are other strategies to potentially enhance the sale price – those methods available to the vendor (including many of the above examples) and those available to the business sale advisers (e.g. structuring, tax efficiency).
Vendors should begin the sale planning process well in advance of the desired sale date. Identifying and acting on key value drivers sufficiently early should maximise opportunities to enhance the exit price.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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