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A purchaser’s view of your business

When someone wants to buy your company, what will their advisers be looking for during their due diligence?

A purchaser’s view of your business

If it has taken years to build your business then you’ll want to get the best price for it when you finally decide to exit. But buyers will go through your company with a fine-toothed comb and any weaknesses they find could force you to reduce the sale price.

Sue Green, director of Watersheds Corporate Finance, often acts for acquirers when they buy companies and says that a target firm’s financials are the first place she looks for such red flags.

“Right from the start of the acquisition process we try and get our heads around the numbers of the target business,” she explains. “We look at what is going to have an impact on its valuation, such as its profits and recurring revenues, as well as what the financial impact will be on our acquiring client.”

Fluctuating profits

She explains that one weakness, which could impact on the valuation and price of a seller firm, is fluctuating profits.

“We don’t like to see those figures have up and down years. We want them to be stable and ideally moving in an upward direction,” she says. “We also look at the growth potential of the business, such as future revenue streams and expansion opportunities and long-term strategy.”

Customer concentration is another key focus.

“We look at whether the selling firm has a broad spread of customers. We look at how loyal these customers are and whether they are tied up in formal or informal contracts,” she explains. “A firm which has only one or two customers and largely operates on a policy of ‘next order through the door’ will end up with a lower acquisition price.”

Other factors that can affect valuation and price are the strength and quality of the management team. Sue says she would look at how experienced they are; how strong their relationships are with customers and suppliers and whether their contracts are long-term and secure.

She also looks at whether they have non-compete contracts in place if they decide to leave or are asked to leave after exit.

“It is also important to overlay the target firm’s numbers and structure over our client’s to look for potential synergies, cost savings and cross-selling opportunities,” she adds. “In addition, we look at whether the target has any specific niches which our client would not find elsewhere, barriers to entry for competitors and scalability of their operations. These factors would drive up the acquisition price.”

Be prepared

Sue warns that too few entrepreneurs looking to exit think about how an acquirer will view and value their business.

“I would say most are woefully unprepared for the process. They say to me ‘I want to be out this time next year’,” she says. “But you need between 18 months and two years to tidy up your business, strengthen your financials, customer and supplier relationships and concentrate on long-term strategy and succession. That will lead to higher valuations and a higher exit price. But three-quarters of entrepreneurs don’t want to spend their time on it. It means we have to do more work to find out this information, further affecting the final valuation.”

She says entrepreneurs must stop showing such naivety and give more respect to the buying and selling process.

“Many entrepreneurs think a sale will automatically end up with them walking off into the sunset with a suitcase of cash,” she says. “But it is never as simple as that. They have to prepare.”

Martin Brown, director of business advisors Elephants Child, adds that in getting ready for exit a business should consider scalability and the barriers to achieving it. Some are obvious, such as people, funding, process and technology. But in the SME space you should never underestimate aspiration. A clearly stated and understood purpose or intent and a business whose behaviours are aligned to it, is critical. This cultural enhancer is vital in maximizing both business value and chances of a successful exit.

“I also take Sues point in being prepared,” he says. “Most business owners will only sell one business in their lifetime, so get a strong and experienced team around you who understand and can support you through a challenging and emotional process. Deal fatigue can take its toll on the individual and be incredibly disruptive to the business.

“Focus now on creating exit options as opposed to a fixed exit plan and be ready for due diligence.”

​Exit strategies may include referral to a service that is separate and distinct to those offered by St. James’s Place.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.