The following scenario is all too familiar within the small business sales market;
Decent Business + Genuine Seller + Willing Buyer(s) + Excessive Valuation = Lost (No) Deal
Selling a small business is not always easy, so to burden the process with an excessive and barely credible valuation = one likely conclusion, vendor unhappiness.
These are the primary factors that lead to problems;
Sellers Price Expectations
Most sellers have limited knowledge of the business sale process and how to arrive at a valuation. If the seller believes (or has been advised) that their business will achieve X, then they will naturally expect to achieve something close to that number, even if it bears little reality to the market.
Worse still, they may decide to price their business based on what they need to achieve, great if you’re dipping your toe in the water but as an ingredient for achieving a sale ... likely to be a recipe for disappointment.
Everyone is an Expert
Business valuation “experts” lurk around every corner. From the golf club to the networking group to the online forum and yet, most of it is detached from the realities of selling a small business.
A proliferation of online guru’s help to create a fog of different theories with some providing advice that could have a negative impact on value.
Below are two extracts of online advice about business valuations – both taken from otherwise excellent websites;
“get a figure in mind and stick to your guns”
“be clear in your own mind about the amount you wish (or need) to realize”
Well meaning but misguided advice because trying to achieve a sale price for small businesses, based on sticking to your guns or being clear about the amount you need, is almost often a route to frustration as the seller digs in for a price that is simply not matched by market appetite or reality.
The Pre-Sale Valuation
We have a mantra about pre-sale valuations – which we repeat until we’re blue in the face (literally) – and that is, for smaller businesses they’re almost pointless. The market will set the price so the key issue for an owner is to concentrate on how increase the value of their business with a combination of good preparation and extensive marketing.
Unfortunately, some advisors will use the excessive valuation as a marketing tool for securing clients – it’s no different from the estate agent beauty parade however, a business valuation contains so many variables that it’s more open to manipulation than property pricing. All the excessive valuation does is raise expectations for sellers and create barriers to buyers.
The Adjusted Net Profit
The adjusted net profit calculation is often a necessary mechanism to help extract the true earnings of a small business. There is often a legitimate debate between parties as to what should be included, so it’s important that the calculation is credible and justified.
This is not always the case as some sellers and advisors include a range of unjustified items that helps to inflate the bottom line and, by using the multiple principle of valuation, over inflate the asking price.
We encountered an example this week. Nice business and keen sellers but both of them burdened with a valuation anchored by an over the top adjusted net profit. They’ve already burned potential buyers and as the price gets reduced, the seller becomes demoralized and real value decreases.
What To Do?
People take their businesses to market for different reasons and with different expectations.
If you’re not particularly committed to selling and want to dip your toe in the water, then you might fix on a price you want/need and then gauge market reaction. Luck and timing often play a part in selling a small business but remember, the sale process is often demanding and will distract you from running the business.
However, if you’re genuinely committed to selling your business – however big or small – then forget about pre-sale valuations and asking prices. Drive up the value of your business by concentrating on what really matters;
- Making the business as profitable and sustainable as possible
- Trying to create a management structure that removes the owner operator
- Preparing thoroughly, including up to date accounts
- Creating as much buyer interest as possible, particularly from strategic buyers
- Generating multiple offers
Thursday, 27 October 2011
Monday, 4 April 2011
The Trouble with Testimonials
What value do testimonials actually provide anyone? Do they benefit a clients selection process and/or create any point of difference for professional services firms?
Every marketing department of every professional services firm will want to point prospective clients in the direction of their testimonials. It's traditionally been a key pillar of promoting firms who are selling a future service. Often headed with confident boasts like ... "Our testimonials speak for themselves" ... the testimonials page inevitably leads you into an endless list of happy clients, awash with lashings of praise that extol the virtues and life enhancing benefits of using that particular firm. But if everyone is promoting similar testimonials then where is the value and what is the point, apart from 'keeping up with the Jones's'?
The following scientific perspective could easily crossover into my world of business sales;
"Testimonials are not useful because they cannot be used as confirming or dis-confirming evidence as they're isolated events that lack the comparative information necessary to rule out alternative explanations.
The problem of relying on testimonial evidence is that if testimonials accumulate to support any specific remedy, all the competing remedies also have supporting testimonials. What we all want to know is which remedy is best, and we cannot determine this by using testimonial evidence" How to think straight about psychology (2001) (Keith Stanovich)
We have our own testimonials pages, festooned with love and appreciation for what we do but in reality, what does it mean to the rest of the world? How can prospective clients measure it when every other firm in our sector does the same and has the same?
It's particularly important to get underneath this spin when selecting an advisor and/or process to help sell a business. For most business owners, this will be a one off event that needs to generate a suitable reward for the time, risk and effort committed over the years.
But how does a business owner make this selection? What are the criteria to consider? How do they search through the quagmire of marketing spin to isolate the good, the bad and ugly? A few thoughts;
1. Market Reputation: What is the market reputation of said firm? What does your trusted advisor (accountant, solicitor) think about the different types of service and firm? Gain a professional perspective;
2. The Process: Understand the different types of service available and what is the deliverable reality behind the marketing of each suitor?
3. The Spin: Does the marketing spend and reach being employed to grab your attention necessarily mean that firm will provide you with a great service? Is it a good indicator that if they found you, they will find your buyer? Are they more focused on gaining your signature than selling your business?
4. Online Chatter; The web can be full of nonsense but a simple google search might help you pick up on any consistent themes about the firms and people you're considering;
5. The Agent: Do you like the person you're dealing with? Selling businesses is often about people, trust and integrity so if you feel confident about this individual then so might the buyer of your business.
6. Experience & Support: What experience do they have? What deals have they done in the past and what support mechanisms can they provide ie memberships, partnerships etc.? What is the CV of your advisor or will your file be handed to a junior with no commercial experience or knowledge of your business?
7. Peer Reviews/Online Forums: Anyone you know who recently sold a business and/or used a professional services firm of a similar nature? Visit some Business Forums and discover the experiences of others? How does the actual delivery of their service compare with their marketing?
8. Testimonials: These utopian landscapes might still play a part in the overall assessment of a firm and help provide a sense of what makes them different (or at least what their partners think makes them different);
9. The Beauty Parade: If remaining undecided then consider an old fashioned beauty parade. Select 3 different types of agent or process and ask them to illustrate how/why/where they add value over and above the competition;
10. Instinct: The great challenge is to wade through the marketing, the testimonials, the glossy presentations and understand what works for your business. On many occasions the evidence is supported by an instinct - no matter what those happy clients keep telling you.
Every marketing department of every professional services firm will want to point prospective clients in the direction of their testimonials. It's traditionally been a key pillar of promoting firms who are selling a future service. Often headed with confident boasts like ... "Our testimonials speak for themselves" ... the testimonials page inevitably leads you into an endless list of happy clients, awash with lashings of praise that extol the virtues and life enhancing benefits of using that particular firm. But if everyone is promoting similar testimonials then where is the value and what is the point, apart from 'keeping up with the Jones's'?
The following scientific perspective could easily crossover into my world of business sales;
"Testimonials are not useful because they cannot be used as confirming or dis-confirming evidence as they're isolated events that lack the comparative information necessary to rule out alternative explanations.
The problem of relying on testimonial evidence is that if testimonials accumulate to support any specific remedy, all the competing remedies also have supporting testimonials. What we all want to know is which remedy is best, and we cannot determine this by using testimonial evidence" How to think straight about psychology (2001) (Keith Stanovich)
We have our own testimonials pages, festooned with love and appreciation for what we do but in reality, what does it mean to the rest of the world? How can prospective clients measure it when every other firm in our sector does the same and has the same?
It's particularly important to get underneath this spin when selecting an advisor and/or process to help sell a business. For most business owners, this will be a one off event that needs to generate a suitable reward for the time, risk and effort committed over the years.
But how does a business owner make this selection? What are the criteria to consider? How do they search through the quagmire of marketing spin to isolate the good, the bad and ugly? A few thoughts;
1. Market Reputation: What is the market reputation of said firm? What does your trusted advisor (accountant, solicitor) think about the different types of service and firm? Gain a professional perspective;
2. The Process: Understand the different types of service available and what is the deliverable reality behind the marketing of each suitor?
3. The Spin: Does the marketing spend and reach being employed to grab your attention necessarily mean that firm will provide you with a great service? Is it a good indicator that if they found you, they will find your buyer? Are they more focused on gaining your signature than selling your business?
4. Online Chatter; The web can be full of nonsense but a simple google search might help you pick up on any consistent themes about the firms and people you're considering;
5. The Agent: Do you like the person you're dealing with? Selling businesses is often about people, trust and integrity so if you feel confident about this individual then so might the buyer of your business.
6. Experience & Support: What experience do they have? What deals have they done in the past and what support mechanisms can they provide ie memberships, partnerships etc.? What is the CV of your advisor or will your file be handed to a junior with no commercial experience or knowledge of your business?
7. Peer Reviews/Online Forums: Anyone you know who recently sold a business and/or used a professional services firm of a similar nature? Visit some Business Forums and discover the experiences of others? How does the actual delivery of their service compare with their marketing?
8. Testimonials: These utopian landscapes might still play a part in the overall assessment of a firm and help provide a sense of what makes them different (or at least what their partners think makes them different);
9. The Beauty Parade: If remaining undecided then consider an old fashioned beauty parade. Select 3 different types of agent or process and ask them to illustrate how/why/where they add value over and above the competition;
10. Instinct: The great challenge is to wade through the marketing, the testimonials, the glossy presentations and understand what works for your business. On many occasions the evidence is supported by an instinct - no matter what those happy clients keep telling you.
Thursday, 31 March 2011
Article on Pre-Pack Administrations
An interesting article on Pre-Pack Administrations:
Kindly supplied by Parkin S Booth, Insolvency Practitioners
www.parkinsbooth.co.uk (Tel: 0151 236 4331)
On 15 September 2003 the Enterprise Act became law with the loss of preferential status for H M Revenue & Customs and the replacement of Administrative Receiverships with Administrations for floating charge holders.
One of the key changes introduced by this legislation was the ability of directors to be able to appoint an Administrator out of Court with the consent of the charge holder(s). Administrators were able therefore to be appointed and execute sales of businesses quickly and without any ratification by creditors, other than charge holders. So evolved the Pre-Pack sale which in short is a sale of a business at the commencement of an Administration, it having been arranged beforehand. This transaction can ensure the smooth handover of a business’ ownership with minimal disruption to its ability to maintain on-going operations.
Any negativity surrounding the public perception of Pre-Packs tends to focus on the sale of the business to a connected party – generally the existing directors. This aspect of a phoenix is viewed with suspicion; is this just the directors “dumping debt” and carrying on regardless? It is a fact that in many situations the directors are special, or even the only, purchasers. The aim of an Administrator is to maximise the return to creditors and that generally means maximising the value of the business and assets. If the highest offer comes from existing management, all other things being equal the Administrator will have no qualms in selling the business to them - and quite rightly so as creditors may be equally unhappy if a significantly lower offer from an unconnected third party was accepted which resulted in a lower dividend.
There is a perception that some directors/charge holders and Insolvency Practitioners may have abused the Pre-Pack process which gave rise to the release of Statement of Insolvency Practice (SIP) 16 on 1 January 2009. SIP 16 sets out what is considered as good practice and must be implemented by all practitioners when considering a Pre-Pack sale.
SIP16 details the information which must be disclosed to creditors and to the Insolvency Service in all Pre-Pack cases which includes:
· The importance of the justifiable premium (the price paid by the purchaser over and above the market value in return for exclusivity).
· Any valuations obtained and the agent’s input.
· Efforts made to consult with secured creditors, key suppliers and other stakeholders prior to the sale.
· Marketing activities undertaken by the company and/or the Administrator (albeit often on a no names basis).
· Prompt notification to creditors setting out actions undertaken to justify a Pre-Pack sale.
· Evidence of why trading, whilst a full marketing campaign was undertaken, is not appropriate.
The Pre-Pack is clearly here to stay, but the above clearly imposes significant requirements upon the Insolvency Practitioner who must ensure that a Pre-Pack transaction is seen to be transparent and above board. In the right circumstances, however, it is the appropriate process. It allows a quick seamless transition of an insolvent company’s business and assets where the business may otherwise implode. It permits, provided good practice is followed, for the optimum return to creditors which is the prime focus for any Insolvency Practitioner.
Kindly supplied by Parkin S Booth, Insolvency Practitioners
www.parkinsbooth.co.uk (Tel: 0151 236 4331)
On 15 September 2003 the Enterprise Act became law with the loss of preferential status for H M Revenue & Customs and the replacement of Administrative Receiverships with Administrations for floating charge holders.
One of the key changes introduced by this legislation was the ability of directors to be able to appoint an Administrator out of Court with the consent of the charge holder(s). Administrators were able therefore to be appointed and execute sales of businesses quickly and without any ratification by creditors, other than charge holders. So evolved the Pre-Pack sale which in short is a sale of a business at the commencement of an Administration, it having been arranged beforehand. This transaction can ensure the smooth handover of a business’ ownership with minimal disruption to its ability to maintain on-going operations.
Any negativity surrounding the public perception of Pre-Packs tends to focus on the sale of the business to a connected party – generally the existing directors. This aspect of a phoenix is viewed with suspicion; is this just the directors “dumping debt” and carrying on regardless? It is a fact that in many situations the directors are special, or even the only, purchasers. The aim of an Administrator is to maximise the return to creditors and that generally means maximising the value of the business and assets. If the highest offer comes from existing management, all other things being equal the Administrator will have no qualms in selling the business to them - and quite rightly so as creditors may be equally unhappy if a significantly lower offer from an unconnected third party was accepted which resulted in a lower dividend.
There is a perception that some directors/charge holders and Insolvency Practitioners may have abused the Pre-Pack process which gave rise to the release of Statement of Insolvency Practice (SIP) 16 on 1 January 2009. SIP 16 sets out what is considered as good practice and must be implemented by all practitioners when considering a Pre-Pack sale.
SIP16 details the information which must be disclosed to creditors and to the Insolvency Service in all Pre-Pack cases which includes:
· The importance of the justifiable premium (the price paid by the purchaser over and above the market value in return for exclusivity).
· Any valuations obtained and the agent’s input.
· Efforts made to consult with secured creditors, key suppliers and other stakeholders prior to the sale.
· Marketing activities undertaken by the company and/or the Administrator (albeit often on a no names basis).
· Prompt notification to creditors setting out actions undertaken to justify a Pre-Pack sale.
· Evidence of why trading, whilst a full marketing campaign was undertaken, is not appropriate.
The Pre-Pack is clearly here to stay, but the above clearly imposes significant requirements upon the Insolvency Practitioner who must ensure that a Pre-Pack transaction is seen to be transparent and above board. In the right circumstances, however, it is the appropriate process. It allows a quick seamless transition of an insolvent company’s business and assets where the business may otherwise implode. It permits, provided good practice is followed, for the optimum return to creditors which is the prime focus for any Insolvency Practitioner.
Wednesday, 2 February 2011
Protecting Value Through Due Diligence
Nothing for 4 months and then 2 articles in 10 minutes - such is the sporadic nature of my blog writing;
How do you best protect the value of your business when travelling through the choppy waters of due diligence?
Achieving Heads of Terms is a big step forward but will be followed by a due diligence process where the pressure intensifies and the balance of power often shifts from seller to buyer. Badly handled, this can have a negative impact on value and potentially rupture the deal itself.
How can you best protect the value of your business during this critical phase?
1. Balance of Power
As a sale process enters due diligence there can be a dramatic shift in the balance of power between the seller and buyer. By accepting one offer you might have to refuse alternatives and run the risk of putting all your eggs into one buyer basket. Furthermore, having agreed terms with a buyer you then have to decide what and how to disclose commercially sensitive information as a buyer (or team of advisors) gets under the bonnet of your business;
2. Preparation
Good preparation will not only help to increase the appeal and value of your business, but it can also play a pivotal role in accelerating the due diligence process. Try to look at good preparation as a process of 'Advance Due Diligence' that helps avoid your deal getting bogged down with issues that could have been clarified and cleared up long ago.
- Make sure that all key customer and supplier contracts are in order and standardise if possible;
- Try to sell close too or just after year end accounts so your financial information is recent, relevant and accurate. Meet up with your accountant to gain an understanding about any anomalies within your accounts that might need explaining to a potential buyer;
- Tidy up any outstanding leases and/or make sure that your landlord will not create a problem or delay at transfer;
- Settle all disputes (commercial and personnel) well in advance;
- If selling a division of your business, create separate management accounts and provide clear information about exactly what will be going and staying.
3. Confidential Information
It's a delicate process to understand and appreciate what is and is not required by a buyer at any particular stage of the process. Whilst you have every right to protect your information pre-heads, being over protective through due diligence may be viewed unfavourably by the buyer and their team. They will ask for as much as possible and you will, understandably, want to protect commercially sensitive information.
The truth is, that to achieve a deal you will have to release some sensitive information so understand why they need what they've requested and protect yourself by insisting on a confidentiality agreement that will provide some level of protection and remedy against future leakage or misuse of information.
4. Exclusivity
Some buyers will request a period of deal 'exclusivity' to protect their position during due diligence. It becomes part of the negotiation as to how long and at what risk to you of potentially losing alternative buyers. Understand what they need to see, how long they require and create a schedule that provides you with some visibility and control of the process. You can release certain pieces of information in stages and depending on the balance of power within your process, you might also insist on a deposit.
5. Buyer Sincerity
Becoming comfortable with the buyer and their motivations is a key part of the entire sale process. Genuine and reasonable buyers will understand your anxieties and therefore all dialogue should be handled in a spirit of mutual respect. Remember also, that whilst the balance of power might shift towards a buyer they will be incurring cost in trying to achieve this deal so will also want to move swiftly towards completion. Be wary and questioning of those who drag out the process without obvious reason or explanation.
6. Momentum & Price Chipping
Time kills deals and delay can lead to fractures within the sale process and therefore opportunities to price chip and/or withdraw altogether. Achieving a price and structure at heads of terms does not necessarily mean those terms will be sustained through to completion - there is always something to play for and any problems that emerge during the process can lead to attempts by some buyers to re-negotiate terms.
7. Communicating with Staff
When and how do you communicate with the staff? If your business contains key employees then at some stage a buyer will want to conduct face-to-face interviews and discussions with the people involved. Ideally you've already communicated with senior management and achieved their buy-in but if not, you need to feel comfortable with the requests for access being made by the buyers and try to ensure that it's one of the final steps in the due diligence.
8. Retained Advisors
Moving from Heads of Terms to deal completion is not a straight forward process and as illustrated above, often requires delicate and experienced handling. It's at this stage of a sale process where we recommend that you retain an experienced advisor. Their knowledge of how to handle buyers and negotiate the due diligence phase will prove crucial in helping you protect both the value of your deal and at times, the deal itself.
[The views expressed in this article are generic and not based on any one particular business. We always recommend the use of professional and experienced advisors to assist with the due diligence process]
How do you best protect the value of your business when travelling through the choppy waters of due diligence?
Achieving Heads of Terms is a big step forward but will be followed by a due diligence process where the pressure intensifies and the balance of power often shifts from seller to buyer. Badly handled, this can have a negative impact on value and potentially rupture the deal itself.
How can you best protect the value of your business during this critical phase?
1. Balance of Power
As a sale process enters due diligence there can be a dramatic shift in the balance of power between the seller and buyer. By accepting one offer you might have to refuse alternatives and run the risk of putting all your eggs into one buyer basket. Furthermore, having agreed terms with a buyer you then have to decide what and how to disclose commercially sensitive information as a buyer (or team of advisors) gets under the bonnet of your business;
2. Preparation
Good preparation will not only help to increase the appeal and value of your business, but it can also play a pivotal role in accelerating the due diligence process. Try to look at good preparation as a process of 'Advance Due Diligence' that helps avoid your deal getting bogged down with issues that could have been clarified and cleared up long ago.
- Make sure that all key customer and supplier contracts are in order and standardise if possible;
- Try to sell close too or just after year end accounts so your financial information is recent, relevant and accurate. Meet up with your accountant to gain an understanding about any anomalies within your accounts that might need explaining to a potential buyer;
- Tidy up any outstanding leases and/or make sure that your landlord will not create a problem or delay at transfer;
- Settle all disputes (commercial and personnel) well in advance;
- If selling a division of your business, create separate management accounts and provide clear information about exactly what will be going and staying.
3. Confidential Information
It's a delicate process to understand and appreciate what is and is not required by a buyer at any particular stage of the process. Whilst you have every right to protect your information pre-heads, being over protective through due diligence may be viewed unfavourably by the buyer and their team. They will ask for as much as possible and you will, understandably, want to protect commercially sensitive information.
The truth is, that to achieve a deal you will have to release some sensitive information so understand why they need what they've requested and protect yourself by insisting on a confidentiality agreement that will provide some level of protection and remedy against future leakage or misuse of information.
4. Exclusivity
Some buyers will request a period of deal 'exclusivity' to protect their position during due diligence. It becomes part of the negotiation as to how long and at what risk to you of potentially losing alternative buyers. Understand what they need to see, how long they require and create a schedule that provides you with some visibility and control of the process. You can release certain pieces of information in stages and depending on the balance of power within your process, you might also insist on a deposit.
5. Buyer Sincerity
Becoming comfortable with the buyer and their motivations is a key part of the entire sale process. Genuine and reasonable buyers will understand your anxieties and therefore all dialogue should be handled in a spirit of mutual respect. Remember also, that whilst the balance of power might shift towards a buyer they will be incurring cost in trying to achieve this deal so will also want to move swiftly towards completion. Be wary and questioning of those who drag out the process without obvious reason or explanation.
6. Momentum & Price Chipping
Time kills deals and delay can lead to fractures within the sale process and therefore opportunities to price chip and/or withdraw altogether. Achieving a price and structure at heads of terms does not necessarily mean those terms will be sustained through to completion - there is always something to play for and any problems that emerge during the process can lead to attempts by some buyers to re-negotiate terms.
7. Communicating with Staff
When and how do you communicate with the staff? If your business contains key employees then at some stage a buyer will want to conduct face-to-face interviews and discussions with the people involved. Ideally you've already communicated with senior management and achieved their buy-in but if not, you need to feel comfortable with the requests for access being made by the buyers and try to ensure that it's one of the final steps in the due diligence.
8. Retained Advisors
Moving from Heads of Terms to deal completion is not a straight forward process and as illustrated above, often requires delicate and experienced handling. It's at this stage of a sale process where we recommend that you retain an experienced advisor. Their knowledge of how to handle buyers and negotiate the due diligence phase will prove crucial in helping you protect both the value of your deal and at times, the deal itself.
[The views expressed in this article are generic and not based on any one particular business. We always recommend the use of professional and experienced advisors to assist with the due diligence process]
Sell My Business Online
www.sellmybusinessonline.co.uk will be a unique and (even if we say ourselves) high value service that helps people sell small businesses. We've streamlined and automated the disciplines and buyer networks developed during the many years we've been involved in the business broking and corporate finance fields (Daresbury Company Sales & Dow Schofield Watts) to create a low cost route to exit for smaller businesses.
As part of this process, we stripped out the high cost and frustrating restrictions inherent when business owners have previously used more traditional sales agents. With Sell My Business Online there are no agency contracts, no hidden fees and no large % at sale for what is often, little more than an introduction service.
The service provides exceptional value and support and is ideal for the owner of a small business looking for the best chance of achieving a sale AND maximising their net proceeds.
It's a no brainer, but then we would say that wouldn't we.
As part of this process, we stripped out the high cost and frustrating restrictions inherent when business owners have previously used more traditional sales agents. With Sell My Business Online there are no agency contracts, no hidden fees and no large % at sale for what is often, little more than an introduction service.
The service provides exceptional value and support and is ideal for the owner of a small business looking for the best chance of achieving a sale AND maximising their net proceeds.
It's a no brainer, but then we would say that wouldn't we.
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