Preparation is so important if your client is looking to sell their business

So your client has decided they want to sell their business and are ready to crack on and find a buyer.  That’s often how our conversations start.  And our usual response is that they need to slow down a little, and make sure they have all their ducks in a row before starting the process.

When your clients are looking to sell their business, or raise money to fund growth or a management buyout, they are opening themselves up to the scrutiny of third parties.  That might be a buyer, or a bank, or a private equity investor, but in all cases, they are looking to properly understand the company and how it works.

So it is important to do the preparation.  This is likely your client’s most valuable asset…. Don’t let them just roll the dice!

Statutory accounts can give buyers a good snapshot as they have usually been prepared by a recognised accounting firm.  If your client is a larger company and have been through an audit process, then that’s even better, as a higher quality threshold should have been reached.  But they leave so many questions unanswered…

• They are usually for the last financial year, so are already out of date;
• They provide only an annual snapshot so give no insight into seasonality;
• They can easily be impacted by end of the year cut-offs;
• They do not give any insight into trends, be they growth or decline;
• They provide limited granularity as to the true drivers of the business.

So inevitably investors, lenders or buyers are going to look for more than this.  And while we would always advocate a careful release of information during a process, it is essential to do the work up front so your client is ready.

It will depend on the sector, but the type of data we would look for from our clients during that preparation phase would be:

• Monthly management accounts or trial balances showing both detailed Profit & Loss, Balance Sheet and Cashflow data to properly understand the seasonality and trends;
• Client level data, be that revenue or invoices to understand what is driving revenue – new client wins or losses, price increases or new products, as well as to understand concentration risk;
• Supplier level data, especially for manufacturing business to understand cost of sales, concentration risk and pricing/ margin changes;
• Payroll and headcount data to assess operational efficiency, as well as recruitment and churn issues;
• Budgets or forecasts so we can understand where they feel the opportunities for growth are.

We know that often SMEs have never looked at their business in this much detail.  And they get a little exasperated when asked for this information … “We are a simple business, do you really need all this?” The answer is always an emphatic yes.

Detailed analysis often highlights important trends, especially ones that may need explanation for a buyer or investor.  For example, it may show that:

• Client churn is significantly higher than they realised. They may have lots of small clients so no single one appeared on their radar, but if they keep leaking clients off the bottom, it makes it that much harder to grow.
• Revenue per employee has been heading in the wrong direction over the last couple of years. Why is that?  Is it a trend, or can it be reversed?
• Stock or work in progress is only adjusted at year end, which makes gross profit variable month to month, and therefore difficult to understand a true gross margin.

So rather than wait for a buyer or lender to find out these things, it is much better to do the work in advance and be ready.  None are terminal for a deal, but isn’t it better to be prepared for discussions on these issues and, if possible, have an answer or solution?

A good corporate finance advisor will always work with their clients to prepare this information in advance of any potential transaction.  I would actually go as far as to say, you can’t properly present any business for sale without going through this thorough process, to properly understand and explain the economics of the business.

And then putting together a well thought out, detailed, realistic budget will be a critical part of any successful transaction, and ensuring the business hits budget through the process is important to build credibility.

No businesses are perfect, especially SMEs, and buyers or investors will find those imperfections… that is what due diligence is for.  By being prepared, armed and knowledgeable about what investors and buyers are looking for keeps your client in control.

So before your client considers any kind of transaction, make sure they do their preparation.  Get an advisor that can work with them and who understands what is going to be required, who can ask the difficult questions and get them ready.  They shouldn’t be defensive…. their advisor is on their side and will help craft the answers or offer solutions, for when the tough questions come from the other side.

As a client once said to us….. you only get to sell your family business once.  So don’t just roll the dice…. Make sure your clients are prepared and they stand a better chance of getting the outcome they and their fellow shareholders deserve.