Every design consultancy owner, like every person of a certain age, reaches the point of asking: Where do we go from here? One of the options is selling the business. But should you do that? And if you do, what should you do to prepare for a sale? Step one is a full appraisal.
The first question to ask yourself is: What is motivating you to sell your business? Is it money, is it because you have a real strategic need which can only be met by an international tie up, is it that you are tired and want out, is the sale to provide funds to get rid of a partner at odds with everyone, do you want to ensure the continuation of what you have built up over so many years? Whatever the motivations, the appraisal should be thorough and honest.
In deciding whether or not to sell your business, one fact above all needs to be accepted – you will end up having a boss. However it is dressed
up, whatever protection you may build into the sale agreement, you will have a boss to whom you will report and be accountable. It may be a generation or more since you had one, is that something you can accept? If not, save yourself a great deal of heartache and expense, and rule out a sale.
Calculating the worth of your business is an art rather than a science. Just like when you are selling your house, the answer in the end is dictated by the market.
Purchasers will be looking for a strategic fit – or at least that is what they say. While your profits are very important, they are still historical. A buyer will pay for maintainable earnings and will be looking for these to grow.
There is a lifecycle in businesses and a key ingredient of successful deals is selling at the right time. When is the right time? It is common for a consultancy to be sold too early, before its reputation or business has been built.
It is rarely appreciated that it is also sometimes too late to sell a consultancy well. We all know of businesses that are living on their past reputation and are no longer attracting the quality work they did previously, or are failing to retain their quality people. They may not be beyond their sell-by-date altogether, but the range of buyers will be significantly diminished, as will the price.
There are many potential buyers and each has its own way of looking at the world. However, they have many common characteristics. They aren’t mugs, they want to buy quality, robust businesses which are well run, preferably with a spread of ownership, where the sellers are committed to grow the business and are prepared to accept much if not most of the price. These “earn-outs” are characteristically between three and five years in length.
Given this kind of structure to your sale, it means that the people you have employed, on whom the business depends, need to feel committed. To achieve this requires an identity of interests between the selling shareholders and key management, which doesn’t own shares.
This can be achieved in a number of ways, but whichever is chosen there should be a direct link between what is received on the earn-out between selling shareholders and key management.
The effect on a business of a sale can be a positive one, or a damaging one. You can do the right things to improve the quality of your service to clients and incentivise your people by sensible rewards, while earning increased profits.
If you just concentrate on the earn-out and look at the short term, experience shows you will be the loser. Selling will mean the imposition by the buyer of reporting requirements and financial disciplines. The former is a necessary burden and the latter often shows what you might have achieved, had you had these been in place earlier.
Deciding on your future course and, if the sale route is chosen, preparing your company for sale may take years rather than months. The right purchaser can also make available wisdom and experience at the right time. It can also provide invaluable referrals and help you deliver your service internationally.
Choosing the advisers that will help you through the whole process should be done at an early stage. Go for people with experience. The people you will be talking to are doing deals all the time, so even out the odds a little. Your advisers should be people who understand the business, that you like and respect and with whom you can work. They should be people to whom you can bare your soul and on whom you can count.
You will spend a great deal of time with them and they will help you shape your future.
Roger Alexander is the senior partner and head of the marketing services law group at Lewis Silkin Solicitors
You should be selling a business before it has fully matured, while it is still growing
Buyers mistrust businesses owned by a single owner; they will look at risk, what happens if that person leaves, falls ill or dies
If there is a single owner, any steps to spread the equity more widely should be taken as far ahead of a sale as possible. The Enterprise Management Incentive (launched by the Department of Trade & Industry) now affords excellent ways of doing this
Don’t spend the sale price before it has been banked