Building a business to sell: How to get it right from the start
Posted: Mon 28th Jan 2013
It's a good idea to have an exit strategy when starting a new venture - even more so if you plan eventually to sell your business. Contrary to popular belief, it's not necessarily high growth that is attractive to potential buyers, as Â Robert Kemp, managing director of UK business broker Select Business Sales, explains.
Most entrepreneurs starting a new company hope eventually to sell it for a life changing amount of money. But how many start out with a clear understanding of the types of company that are attractive to buyers? Not many, we suspect. Most just seem to assume that if they build a successful company, it will automatically be attractive to buyers. Nothing could be further from the truth. As a longstanding UK business broker, Select sees a lot of successful, profitable companies that are going to be difficult to sell for a good price. They simply don't fit the profile of the type of company buyers are looking for.
Six qualities a buyer looks for in a business for sale
So what are the characteristics that make a company attractive to a buyer? For a presentation to our local Chamber of Commerce, we reviewed our recent sales that had generated the strongest buyer interest. These are the common themes we found: 1. A good spread of longstanding customers (certainly no customer more than 10 per cent of sales) 2. Customers that order on a predictable and frequent cycle whether daily, weekly or monthly (subscription style monthly billing by direct debit was particularly attractive) 3. Good quality financial information showing which customers and products are profitable 4. A simple ownership structure (buyers hate deals complicated by different shareholder needs) 5. A flexible property position (a short lease position, or no requirement to sell a freehold property along with the business) 6. A clean history of tax and regulatory compliance if the seller wants to maximise Entrepreneurs Relief by selling shares. These characteristic turned out to be a much stronger indication of buyer interest and a higher selling price than rapid growth or a strong management team - issues that are prioritised by most business coaches.
Where do you start?
So what are the implications of these insights for an entrepreneur building for a high-value exit? As a starting point, avoid businesses models where the company has to constantly find new customers or projects to maintain turnover - construction, project engineering and website development come to mind. As the company grows resist getting tied into a long term property lease; unless you are building a location dependent retail business.Â Renting property on a short licence costs a little more, but the flexibility for the buyer pays off at exit. Don't be tempted to dilute your control of the equity structure by offering shares to key staff or third party investors. These steps might solve a short term problem, but they can prove expensive at exit. We have seen a lot of potential sales fall apart because shareholders have different motivations and price expectations. It is never too early in the life of a business to think about what will be valuable to the eventual buyer. The last thing an entrepreneur needs to hear when they are ready for exit is that the company needs significant changes to make it really valuable. Robert Kemp is managing director of UK business broker Select Business Sales, which specialises in exit sales of private companies.
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