The Options To Selling Your Business

You’ve spent a significant portion of your life starting, nurturing, developing, and growing your business. Throughout the process, you endured the numerous headaches, the missed family time, and a handful of near-misses along the way, but the good news is, you made it here.

What might surprise you, depending on which data source you look at, is that now, only 4% of businesses make it to their 10 year anniversary.  

But you made it to this point, and now for whatever reason, you’ve decided to sell the business & move on to the next chapter in your life.

Selling your business can be a minefield to the unsuspecting observer.  After all, it’s a different industry to the one, that most business owners are used to.  To understand the process fully, you really need to become a master of a new art.  How much time do you have to learn this new art?  Ancient wisdom tells us, it takes 10,000 of practice to become a master.  My guess is, you don’t have 10,000 hours spare.

So before we look at the process to selling your business, let’s start with a few key points, we need to consider, that will help us move in the right direction.

  1. 98.7% of small businesses listed for sale, never achieve a sale.  There are numerous reasons for this, from being owner reliant, being too small, being overvalued by the broker, or just being too focused on a handful of key customers.
  2. Over 70% of small businesses are owned by people who will reach retirement age in the next 10-15 years.  This is the effect of the baby boomer generation.  We’ve never experienced such a generational shift in the last 100 years.  This means over the next 5 years, we’ll start to see the number of businesses coming onto the market increase dramatically.

For any small business owner, this means if you want to sell your business, it will become, increasingly much harder to achieve that sale as time goes on - And this isn’t something you can dismiss for the next 14 years either.  Around 50% will reach retirement age over the next 5 years.

Just take a second to consider, if 70% of your competitors were all listed for sale, you wouldn’t be competing with them for new customers, you’d be competing with them for a buyer.  Can you be confident that you’d win that fight?

You may not realize it, but this is your most important fight you’ve ever had to face - particularly if you’re hoping for any kind of income or pot of money in your retirement years.  Let’s be honest, the odds are stacked against you.  It’s your penultimate fight.  The result, might just affect the rest of your life, and the ability to retire and live comfortably.  So it’s imperative you choose the best strategies to make this happen.

The worst thing for you.  If you don’t get it right, but your competitors do, and they achieve a sale, you’ve now got fresh blood in the game.  You’ll now be competing with people that want to make their own mark on the world.  Most retiring business owners I speak to, aren’t interested in fighting anymore, they’re tired, some have even lost interest.  After all, there are other things in life to enjoy, it’s not all work work work anymore.

So, what are the options?

Option 1 - Employ a Business Broker

This is what most business do.  Did I mention that 98.7% of businesses don’t sell?

A broker will value your business, & charge you an upfront listing fee.  This can be anything from 5% - 13% of their valuation for the business, with a minimum engagement fee of between £30,000 - £50,000.  Now it’s widely known across the industry, that most business brokers will deliberately over-value a business.

This does two things.  First of all, it gives the business owner a warm fuzzy feeling, and secondly, it generates an income for the broker, whether they achieve a sale or not.

The business broker will normally tell you, they have thousands of people on their mailing list, all looking for a business.  The fact is, these people are generally just tyre kickers and time wasters.  Some may also be your competitors just trying to get an insight into your business.  A serious business buyer, generally won’t approach a broker, because they know the business has already been substantially over valued.

Let me give you a typical example of a broker valuation.  This is something I see almost on a daily basis, as most of the brokers email me their latest business listings.  For just a moment, step into the shoes of someone looking to buy a business, or more importantly, step into the shoes of someone looking to get a return on their investment as fast as possible.  People don’t buy businesses to give themselves a job, buying businesses is about growth, and it’s about making a return in the quickest way possible.

So a typical valuation, and let's be clear this isn’t a one off, this is widespread.  This particular example was for an Air Conditioning Business.  The business turnover was £600,000.  The Net Profit was £50,000, though I later discovered the owner, who worked in the business as an engineer, had only been taking a £6,000 wage.  Now replace that with an equivalent engineer wage, and suddenly the net profit drops to £20,000.  The balance sheet was around £50,000.  Now the broker had placed an asking price on this business at £450,000.

Let’s just recap this for a second.  If an investor bought the business at the asking price, it would take them 20 years of profits just to recoup their investment, and that’s before they start to see any kind of return.

Now I work with a lot of private & professional investors, and I know that they typically want to see their money returned to them in under 5 years.  Even if your only interested in the annual income, that only represents a 5% return, for something you’re probably going to, as the buyer, be spending a lot of time managing it.  This particular business wasn’t large enough to employ a full time manager.  How many experienced managers do you know that will happily work for £20,000 a year?  That’s roughly half of what the engineers were getting paid.  Of course, this all means, if you’re buying it, you’re in there on day 1, running it, you’re in there dealing with customer complaints, you’re in there dealing with bad payers, you’re in there dealing with staff issues.  All for a 5% return?  Surely that’s heart attack or nervous breakdown territory?

Now if you’re unlucky enough to sign up with a broker before reading this, and you’ve paid their extortionate listing fees already, the broker will normally email out a teaser document, and subsequently an Information Memorandum about your business to anyone placing an enquiry.  

Most of this preparation work will need to be done by you.  They’ll probably ‘package’ it up nicely in a couple of A4 pages, but ultimately you’ll spend a few months digging out all the information and getting it to them.

After they’ve sent out the information memorandum, they’ll either just relay messages, or they’ll instruct you to contact the enquirer directly.  A good one will attend meetings with you, but I’ve not seen or heard of any broker doing this personally, though it might happen.  In such circumstances, you’d normally pay additional costs to cover time and expenses.

Should the business actually achieve a sale, you’ll then pay a further percentage of the sale price on completion, to the broker.  All very well if you’re getting a nice lump sum payment on completion, but about 99.9% of small business sales are done with some form of staged payment structure.  If this is the case, you might find yourself paying most of your closing day payment, to the broker.

I’ve seen business owners pay listing fees, and 3 years later, still not even received an enquiry for their business.

From a buyers perspective, I’ve approached brokers myself, enquiring about a business that caught my eye.  Most of the time, it takes them weeks just to return a phone call.

In my opinion, especially with the incoming high number of businesses to the market, and everyone doing the same, using a business broker is not the best option for any business owner.

Option 2 - Approach your competitors

Although your competitors would probably love to take over your business, this is a very dangerous strategy to follow.  Throughout the negotiation process, you’ll provide them with vital information about your business.  All of which they can use, to approach your customers, your staff, and generally destroy your business, without ever having to pay a penny for it.  

Selling to your competitors is always an option, but there has to be an intermediary involved.  Of course, you might be keen to keep your businesses brand alive after a sale too.  By selling your business to a competitor, there’s a strong chance they’ll re-brand your business as theirs.

Option 3 - A Private Equity Sale

A Private equity firm is someone that uses other investors money to buy & grow a number of businesses.  In simple terms, they invest in deals with huge growth potential.  They typically buy a business, grow it over a 3 - 5 year period, then sell it on, or list it on the public stock market, normally at a huge profit for their investors.  They provide ongoing support for the business, in terms of making client introductions, inputting key personnel, & provide ongoing consultancy and mentoring to drive the business forward.  They normally want to see fast growth - Typically doubling the business in size, year on year.  Most Private equity firms have minimum criteria as to what a deal looks like for them.  They will be sector and service specific, and they will always have a minimum turnover requirement.  

For most private equity firms, the smallest deals they consider, range from £10m t/o up to £50m t/o, but can quite typically be north of £200m turnover.  The main reason behind this, is because larger businesses have established teams in place, they aren’t owner reliant, they have regular cash flow, and they have solid relationships with ‘safe’ corporate clients.  It also takes just the same amount of effort and cost to purchase and manage a business at £100m turnover, as it does, for a business at £5m turnover.  

It is almost impossible for a small business owner to even speak with a private equity firm.

In my opinion, if you have the scale you’re probably being approached by these people already.  If you’re not on their radar already, it’s very unlikely you’ll achieve a sale through this route.

Option 4 - A Public Listing

Just like Option 3, listing your business through an Initial Public Offering (IPO), unless you’ve got sales turnover in excess of £20m, it’s probably a waste of time and money considering it.  Although an IPO will give you some money in exchange for a portion of your shares, you’ll still need some level of input in the business.  The listing costs generally exceed £100k, and the extra reporting and compliance related work that you’ll need to do, will mean your dreams of peaceful retirement will disappear off long into the future.

Regardless of the above routes you might choose, a significant portion of your time will need to be dedicated to achieving the sale.  In real terms, for the successful ones, it’s not uncommon for the business owner to spend 50% of their week just dealing with buyer requests, and negotiations.  This should be something that’s considered when you make your choice on which route to take.

An alternative strategy to selling your business.

For the majority of small businesses wishing to sell, there will be lots of work that needs to be done, just to prepare the business, and have it ‘sale ready’.

   ***   To see our other article on ‘10 things you’ll need to sell your business’, click here   ***

For most small businesses, the option of selling the business isn’t actually that realistic.  If you’ve read our article on the 10 things you’ll need to sell your business’, you’ll understand what I mean.

Let’s take one of the most common, and simplest reasons that a business won’t be able to achieve a sale. - Being too concentrated on a handful of customers.  In other words, one or two key customers that make up more than 10% of your total sales turnover.  This might seem fine to you, especially if you’ve worked with these companies for years and you’ve developed personal friendships with them.  But to any purchaser, it presents a huge risk to the business.

Aside from that, another issue is scale.  With around 96% of businesses earning less than £1m in turnover, and employing less than 10 staff.  In the UK, in 2017, that equated to 5.5million businesses.  To any buyer, size equates to risk.  The larger the business, the less risky it is perceived to be.  If you want to achieve that sale, you need to dramatically increase scale.

It’s often said in the financial sector, that if you’re looking at raising money, it’s often easier to raise £100m, than raise £100,000.  There is literally billions sitting waiting to be invested in deals.  Remember, the purpose of the financial sector, is to earn a return on money invested.  You invest in a pension plan, a mutual fund, or any type of investment vehicle, and you want to see that investment grow.  It’s what makes the world go around.  The problem is, there just aren’t enough deals available - They just aren’t big enough.

I know what you’re thinking.  Where are we going with this?  So let me explain.

We can agree that the larger a business, the more attractive it is.  We know that ‘BIG is BEAUTIFUL’ in the world of mergers and acquisitions.  We know that, for the right deal, there’s access to unlimited amounts of money.

Are you following me?

We also know that there are an abundant number of business owners all approaching their retirement years, and ideally would like to have a pot of gold, as reward for their many years of effort.

We know that each of these businesses, individually have one or two major issues, that affect the ability to attract a buyer.  

But if we could bring these individual businesses together, the issues would be fixed.  We’d increase the overall size of the business, & we’d then have access to those unlimited pots of money.  

Effectively, we’re creating the perfect deal for any buyer.

Let’s look at an example.

Two businesses, all relatively the same size, lets say they both have 7 staff including the owner.  The owner manages the business day to day.  This makes it nonviable for any buyer, as an investment.  If we put both businesses together, we have 12 staff, plus 2 owners.  This creates enough capacity to employ a full time manager, which is a role that could be filled by either one of the owners, or both can take semi / full retirement.

But we aren’t just talking about bringing two businesses together.  We’re talking far bigger than that.  Imagine what your business would look like, if it were four times the size, in just 12 months from now.  Imagine if that same scale of growth was achieved every year for the next 5 years?  In simple terms that would take our £1m turnover business, and transform it into a £10m turnover group within 3 years.  

If we know that 70% of the 5.5m businesses trading will retire in the next 15 years, that averages over 250,000 every year.  It doesn’t take too much effort of searching, before you find a suitable deal.  To take our £1m turnover business, and take it to £10m turnover, that’s less than 10 deals.  It’s less than 10 conversations.  

Of course our predictions are extremely conservative.  We could take a £1m business, and make it into a £10m business by growing it organically in the same period.  Our own record proves that.  Doing it the easy way through acquisitions, is much faster.  There’s no reason it couldn’t be 3 or 4 times that.

But let's be serious.  This is a full time job, finding, negotiating, setting up, supporting each business.  It requires skills, knowledge and experience that are foreign to most business owners.  There are certain key pieces, needed to make the whole project a success, having access to an experienced team of advisors, coaches and mentors, having access to the support systems, and most importantly having access, and a good working relationship to those motivated corporate buyers and investors, as without those, the project would be pointless.

We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.

If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen.  It’s a full time job. - The time investment alone is enough to put anyone off.  So imagine for just a minute, that you didn’t need to do all of this work.  What if this could be done over the next 3 - 5 years (by someone else).  Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.

Unlike other private equity firms, our focus is on growing businesses at the smaller end of the market.  We’ve worked in, and grown our own businesses in the exact same fields you work today.  We’ve spent years coaching and supporting small businesses just like yours, developing their teams, and helping them to grow, but now, we’d like to help you.  

We have a solution for business owners that need to sell their business immediately, or for those who want to stick around for a few years.

If you’re considering the options to grow or sell over the next five years, read more about how we're helping others just like you. Click here to read about our unique approach to helping you get what you want with the YokeFormula™ for your business.

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