Mark Ridout describes how businesses can undertake effective steps that can significantly increase their value and help achieve a successful sale.
There are many things to do, most of them simple, when preparing to place a small business for sale on the open market. Furthermore, it is imperative to allow a sensible timeframe to work towards maximising the selling price.
The good news is that, on the whole, the UK continues to maintain a respectable market for small business transactions with a healthy level of prospective purchasers of small and micro businesses, especially in certain sectors. Although it may well be something as mundane as the availability of adequate car parking that determines whether clients choose one business over another, there are steps that can be taken by the owner or owners to increase the potential value of their business.
If applicable, the physical appearance of any retail outlets, showrooms or offices should be up to scratch. As with selling a house, so called ‘kerb appeal’ is vitally important. When homeowners want to sell their house, they may paint it, fix a few things that have been waiting for repair during the previous few years, and polish the taps. Simple and obvious, but unarguably effective. Small business owners can improve the value of their business by making a few changes along the same lines. First impressions count and can be the difference between a successful sale and lost
Exactly the same applies for the business’ fiscal presentation. It is financial performance – and growing trading profit in particular – that validates whether a business is performing well to prospective buyers. A business must be effectively run with budgeting and cash flow managed consistently.
To illustrate how basic trading improvements can significantly increase a business’ value over three years, the following example shows how three simple improvements can show an inspired upward trend. Trading Profit can be more than doubled in three years by improvements of 7% in three other areas; all under the control of the owners – namely sales, gross profit margin and reduction in cost ratio (overhead costs as a percentage of sales) – without the need to reduce operational costs.
In the day-to-day running of a typical business, this equates in simple terms to a combination of:
1. Increasing sales: The business should regularly review its pricing. It can promote services that both attract new customers and bond existing clients with the business. An increase in spend per client should also be pursued – for example, with a retail business, the captive in-store audience can be targeted with offers advertised in key locations within the premises (i.e. point of sale, entry and exit points).
2. Reducing purchasing costs: Negotiate beneficial terms when buying products. Owners should review and frequently compare supplier prices and reliability of service and avoid a build up of worthless or obsolete stock.
3. Managing overheads: By keeping a close eye on all overheads, using and reviewing management information on a frequent and regular basis, and highlighting any expenses that are becoming disproportionately high in relation to the level of business income – i.e. watching the cost ratio (overheads/sales) – owners can tightly manage and maintain overhead costs even during sales growth.
Concentrate on the points listed above. Be prepared with clear, up-to-date accounts showing an attractive and well-documented track record of profitable growth. Like the homeowner, polish and a fresh coat of paint will help with the kerb appeal. However, ultimately, it all comes down to profit. Get all of the above right and the financial figures will speak for themselves.
The words ‘exit strategy’ can be seen as emotive though all business owners should have an exit strategy in mind. This may simply be a wish list reflecting the owners’ desires, or it could comprise part of a detailed formal business plan. Either way, an exit strategy should, ideally, be planned at least three years ahead if a satisfactory valuation, and successful sale or transfer of ownership, is to be achieved. Management teams that feel they haven’t got the experience or the time to develop a plan should hire a consultant or someone who can help – it will almost certainly be a sound investment.
• Mark Ridout is a Director of R A Valuation Services Limited. Email firstname.lastname@example.org
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