We are often asked; when is a business ready for an external sale and what problems might we experience?

The answer as you might expect is; well that depends!

Most, if not all businesses are sellable when there is a visible upward curve in the profit stream or top-line revenue. Most owners will sell ‘their baby’ when these conditions exist and where there is a cash flow or other resource constraint or the personal risk is too high for them to jump on the curve.

This will often happen when shareholders want an exit due to age or other circumstances that mean the risk is too high. After all, if you believe that the upwards curve is genuine and are willing to take the risk on the future rewards then why else would you sell?

However, holding our for a ‘big payout’ is often dangerous as the risks increase for you and the larger the sum required then the more difficult it is for the deal to be structured and the number of potential suitors decreases.

here is always the exception to every rule though and we know of entrepreneurs who are investors and acquirers that have deep pockets and a higher aptitude towards risk.

Before you consider selling though you need to consider the needs of other shareholders.

The use of a comprehensive partnership agreement always helps, as does a strong and working relationship between the partners.

When did you last ask your fellow partners about their retirement plans?

They won’t always align with what is in your partnership agreement.

If everyone is at loggerheads it makes putting together a workable deal all the more difficult.

 

The type of firm is also important, if you have a firm which has developed as a group of GP’s and operates as a block of sole practitioners then it is less likely to be appealing due to problems of integration and cross selling.

Firms that establish successful niches are always interesting.

One recent example to sight is the successful sale of a multi-million turnover firm which had established a great niche in dealing with contractors, they were able to sell their firm on a high (5x) multiplier due, I assume, to the fact they gave the buyer access to a client base that they found appealing.

Similar deals have occurred in the past due to specialist tax skills or strong financial services division as further examples.

 

When selling a firm with a larger turnover you need as I have said above to plan ahead and think carefully about what deal you might as partners be able to accept. With the larger firm sale you are likely to have partners with different needs and requirements for their exit. Some may not wish to exit immediately but wish to get some certainty, others may wish to go immediately. Thus enabling the purchaser to put together a staged purchase which would work for both parties.