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Why SME owners must always be ready to sell up

Author: ICAEW Insights

Published: 01 Nov 2023

Half of business exits stem from unsolicited approaches, new research finds, so if owners aren’t ready, that can have a potentially damaging effect on their firms.

Amid the daily pressures of delivering for clients, firefighting unexpected glitches and rolling with the latest punches from macroeconomic trends, SME owners could be forgiven for feeling somewhat restricted to short-term time horizons.

However, new research from accounting and business advisory firm Azets suggests that there is at least one long-term possibility to which owners should be alert on a constant basis: your exit strategy.

According to the firm, 50% of business exits this year have stemmed from “unexpected taps on the shoulder” – unsolicited, cold approaches from private equity (PE) investors and other similar parties who are eager to make strategic “buy and build” acquisitions to consolidate their sectoral presence.

All of which sounds tremendously exciting and flattering to the owners on the receiving end – unless, that is, they haven’t put in the required groundwork to prepare for disposal.

In Azets’ assessment, nine times out of 10, companies are simply not prepared for sale, and are therefore immediately on the back foot and potentially facing an uphill climb in negotiations.

As such, owners must understand what being prepared should look like.

A consistent story

“In many ways, it comes down to housekeeping,” says Azets Head of UK Corporate Finance Lee Humble. “And it’s not just about being ready for disposal, because a lot of the steps you would take to prepare for that process are also what you would do ahead of more regular instances of fundraising.”

For Humble, having all the business’s financial – and, importantly, non-financial – data at your fingertips in a consistent and accurate format is the foundation of preparedness.

“Consistency of format is where a lot of owners trip up,” he says. “They will typically embark on some form of process whereby the prospective purchaser has asked for a list of data, and the owner will then hurriedly collate the information specifically for that exercise. But if you have it already reconciled, it becomes a lot easier to transfer to the party in question.”

Treating financial and non-financial information in a holistic way is also a priority. “In any business,” Humble says, “you’ll have a financial system, but you’ll also have operational and functional systems. And what you’d ideally want is data that shows how all of those systems talk to each other, so the buyer has a consistent picture of the company’s story.”

 “When you get into processes such as due diligence, inconsistencies can be sources of real difficulty,” Humble adds. “If you’ve sold a particular story about what type of business you have and how it works, and the numbers are saying something different, that’s when what looked like a good transaction suddenly turns bad. The acquisition process takes longer, costs increase, and deals can even terminate completely.”

Built for sale

For Kirsty McGregor, Founder of The Corporate Finance Network and Accountant in Residence at advisory platform Capitalise, a limbo period before a deal falls through can be as psychologically damaging to a business’s future as the failure itself.

“In terms of day-to-day management, by the time the deal is cancelled, the owner has taken their eye off the ball for several months – perhaps even a year. That means the business will not be performing as well as it should, which will further impact valuation,” McGregor says.

“Not only has the owner been distracted – in their head, to all intents and purposes, they’ve sold. Emotionally, they’re already on the golf course or the beach, thinking about what they want to do with the rest of their life. From that position, recovering their energy levels to try and kick the business back into growth again can be extremely difficult. That’s just human nature.”

With those factors in mind, McGregor says every owner should always be ready to sell – even if they don’t yet want to. “Readiness puts them in control of the process,” she notes. “In my view, ‘Built for sale’ is a philosophy that every business should follow to plan for its exit. If an offer does come out of the blue, and the owner is unprepared, that could set the company on a very destructive path.”

Demonstrating resilience

Humble urges owners to look at how their financial data is linked to the business’s product lines: “Do you track, monitor and appraise on a divisional basis? Can you dive into that sort of detail? It can have a major bearing on how the party on the other side of the table will structure and value the deal.”

“If you have a significant revenue stream that’s contractual and consistent, the valuation basis is likely to differ from that of smaller products with non-contractual, higher-frequency sales, where you don’t have that sort of tail,” Humble explains.

Monitoring and reporting by client type is also important, Humble says. “We’re in a volatile world right now, where some sectors are struggling and others are doing well. Being able to demonstrate resilience in the business, via your quality of earnings from different customers, will work to your advantage during deal structuring and valuation. The outcome will depend upon how the buyer perceives risk.”

Most buyers look at the previous three years of profitability, as well as looking ahead, McGregor says: “So, when planning your accounts, always ask yourself: ‘Is this what I want my potential purchaser to see in four years’ time?’ 

“That means thinking very carefully about the timing of disruptive shifts, such as moving to new premises: costly processes that can impact on business continuity and may take a while to balance out in profit and loss.”

On the forward-looking side, McGregor says, financial data should demonstrate that an upward trend in profitability is baked into the firm through its various revenue streams – providing the buyer with confidence that they are taking on a business that’s going places.

McGregor also encourages owners not to restrict their strategic considerations to one type of buyer: as management buyouts (MBOs) and employee ownership trusts (EOTs) have shown, purchasers can be close at hand.

“You may have more than one route open to you,” she says, “be it a trade purchase, an equity option or a more direct, MBO- or EOT-style acquisition. That gives you a lot of choice. So, think about how you will need to structure your management team and develop your succession planning – because your buyer may come from within.”

ICAEW Head of Corporate Finance David Petrie warns that while an unsolicited approach may seem like an easy option, it very rarely turns out that way. 

“Selling any business, large or small, is far from straightforward, and a good adviser is essential. Chances are that, even if they start by acting as a sounding board in a relatively simple deal, they will earn their fee many times over. Even the most active entrepreneur rarely goes through the disposal cycle more than a handful of times in a business career – but an experienced adviser will have seen it all many times before.”

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