Why 80% of businesses fail to sell – Part 3

 

It is a sad fact that across the UK SME market 4 out of 5 private companies will fail to sell, meaning only 20% of those taken to market achieve a successful outcome.

In contrast to the industry average, EvolutionCBS successfully sells an average of 3 out of 4 businesses we take to market. We are only too aware of the key reasons businesses fail to sell, and so we work with the business owners to ensure their business is fully prepared and in a position to realise it’s maximum value before we take it to market.

There are 4 main reasons that businesses fail to sell; in the first article of this series we focused on the importance of having professional advice during the sale preparation period, to ensure that exit value is maximised.

In the second article we covered how poor financial information can affect the saleability of your business.

The third reason is an over reliance on the business owner(s), which we’ll explore further here in the third article in the series:

The impact of owner reliance on exit value

The majority of SMEs are owner-managed and generally provide their owners with a reasonable lifestyle. However, when the time comes to sell the business it can reduce the value of the business considerably.

Owner reliance significantly increases transitional risk for a buyer. This is particularly true if the business owner holds the key client relationships. Whilst this may not result in a failure to sell, it could result in either an offer and/or a deal structure that not only requires the owner to stay in the business, but possibly also with the total consideration being based on a performance related earn-out.

A strong Management Team increases saleability (and value)

The much-quoted Steve Jobs said, “A small company depends on great people much more than a big company does.” He recognised that a skilled, motivated and stable team is a massive value driver.

From a buyer’s perspective, the ideal company will have a strong management team able to operate the business on a day-to-day basis, with the owner(s) role being much more strategic – providing top level management and direction.

A good, capable senior team with the skills and experience to run the business is highly attractive to an acquirer and is a key indicator of a company’s growth potential.

A management team doesn’t necessarily have to be a formal Board of Directors; it could be an “operational board” that runs the day-to-day activities of the business without the owners’ involvement.

This presents the lowest risk and promises a smooth transition of ownership.

Clearly with smaller businesses this may not be feasible, however the goal should always be to work on the business rather than in the business to the greatest degree possible, in order to present the business in the most attractive way.

Relationships

It is not uncommon for owners to continue managing high-level relationships that they have developed with customers and suppliers, especially those which are integral to the success of the business. From an acquirer’s viewpoint, this can present a risk factor due to the concern over what will happen to those relationships after a change of ownership.

Where possible, we encourage our clients to increase the “touch points” within critical relationships – motivating other senior members of staff to take an active role in fostering closer ties between the companies. Handing over the day-to-day management of these relationships to senior members of staff is usually part of an overall exit strategy.

Systems and processes reduce dependence

These demonstrate that the business can be maintained profitably post-sale. Don’t limit these to operational processes; include HR policies and processes, employee communication systems, client management systems and so on.

Not only will the company benefit from the efficiencies these deliver, they demonstrate that the business will run without the owner’s intervention in everyday matters.

Define an Exit Strategy

In our experience, owners that have a defined strategy to exit and who follow this plan over a period of months or years have the highest likelihood of realising the greatest value for their businesses.

It is often difficult for business owners to discuss this strategy and hold themselves accountable for following it as they rarely want to focus on or even discuss their desire to sell with their employees. Even trusted Managers and Directors are often not confided in until there is something tangible to discuss.

External consulting and/or mentoring can help you to focus on your exit strategy by creating a customised plan specific to your business and personal goals, whilst ensuring the business continues to create sustainable and transferable growth – ultimately enabling you to achieve your valuation goals and personal objectives from a future exit.

EvolutionCBS have developed the EVOLVE toolkit , a unique and powerful programme of services designed to help business owners create a highly saleable asset  – find out more here http://www.evolutioncbs.co.uk/evolve-brochure/

 

Join us at one of our free events and hear from our panel of experts. Discover how to generate maximum value from a future sale; as well as gaining insight in to the legal, financial and commercial aspects of selling a business.  Details of all events are available on our website – www.evolutioncbs.co.uk/events.

 

If you haven’t had your business valued recently and would like to receive a free valuation report, please visit www.evolutioncbs.co.uk/free-valuation.

 

 

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