UK: Building Value For The Sale Of Your Company

Last Updated: 22 October 2012

If you are thinking of selling your company during the next few years, there are several things you should be doing now if you want to get the best possible price.

1. Build the niche

All buyers of companies look for the seller who has carved out a powerful niche in which to do business. The focused niche player has strong margins, is more profitable, and has greater barriers to competitive entry.

A+ companies have overall profitability in the range of 18%-plus, as a percentage of sales, and sometimes go as high as 25% or 30%. They are often dominant players selling their products in their particular focused market, and they usually offer some products no one else does.

They typically have a defined business category that they understand well, and this gives them the ability to be first with the changing technologies and trends deemed desirable in their business segment.

The better you understand your customers, and the products that attract them, the easier it becomes to service that solid niche presence in your marketplace.

2. Build a financial track record

Buyers look closely at financial history in assessing value. They look for strong profitability, steadiness of progress over recent time periods, and solidity of fundamental balance sheet.

The more you can keep costs well controlled and profits growing, the better. It is easy in the mature company to become increasingly complacent about cost control. To stay in that A+ category requires ever-vigilant focus upon improving profitability.

Also, as you build, your plans should include steady and fairly aggressive pay-down of debt. Most buyers, when they pay a multiple of cash flow, generally begin with a cash flow definition known as EBITDA (earnings before interest, taxes, and depreciation allowance), less normal recurring Cap X (capital expenditure requirements).

The amount they pay is what they expect to pay for a normal mix of assets and liabilities, excluding interest-bearing debt. Excess cash on the balance sheet can typically be added to the price.

Thus, the truly healthy company, with minimal debt and/or strong cash, is highly reassuring to buyers, and generates strong confidence quickly.

3. Understand growth potential

When analysing a client seller, we commonly begin with a SWOT analysis (strengths, weaknesses, opportunities, threats). To optimise strengths, one element of the "attractiveness" analysis is measurement of the size of your primary customer segment – both size today and possible size of future growth. Even the best niche market in the world, if its total potential size is tiny, is not very attractive.

As you begin to see weaknesses in the market road ahead, look for possible replacement segments in emerging new markets. Analyse the forward prognosis in demographics and retail trends, and in every other bit of information you can glean, to give you glimpses of the possible future.

4. Secure the intangibles

Intangible assets enhance value. The most obvious intangibles relate to patented products, or products subject to exclusive supply agreements. As your market presence and distribution networks become increasingly powerful, it gets easier to command exclusivity in sourcing the product.

Trade names and trademarks create value. Be diligent about the legal maintenance of such intangibles.

An equally important – but often neglected – intangible asset is key people. Non-compete agreements may not prevent you from losing good talent, but they can prevent key people from walking out with a head start in the form of business taken from you, as a former employer.

A firm, long-lasting non-compete agreement for top management is something that needs to be in place, as a matter of course, well in advance of consideration of sale. If non-compete agreements are put in place immediately prior to sale, employees are likely to resent the change and feel unfairly treated by both the exiting seller and the new corporate buyer.

5. Do your housekeeping

"Housekeeping" means:

  • maintaining clean financial records, with annual audits or reviews by an outside accountancy firm
  • having defensible tax positions – nothing outrageously risky or "on the edge"
  • having clean environmental and safety records
  • complying with governmental rules and regulations
  • fully and properly adhering to rules for taxes.

All of these areas and more will be reviewed in depth by an incoming buyer, and major uncertainties or exposures will show.

Additionally, any buyer paying an aggressive price will expect the seller to make certain representations and warranties about the condition of the company being sold. The seller need not make representations and warranties about the future in any way, except that he will need to say that he has fairly disclosed known threats and claims. He will also have to attest that he has told the truth and has not misled the buyer intentionally.

Positioning for the future

You can build into your plans the mechanisms to enhance the value of your company. By doing so, you ensure that your company will be worth more in the future, and you increase its stability and security right now. You make your employees safer, in that they will be more desirable to a future buyer of the premium company. The outcome can be the best possible for everyone.

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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