Netwatch Group founder David Walsh reflects on the best ways to
prepare a business for sale.
It is a fact of life that most businesses get sold at some point. Every business sale is unique
and while the reasons for the sale may vary, a common factor across the great majority of
cases is the desire on the part of the owners to maximise the value of their business. This is particularly important in the midst of a global pandemic and the key to success, as in
so much else in business and life, lies in the preparation.
The first step in that process begins with clarity on the reasons for selling. In some cases it
maybe that the founding entrepreneur believes they have taken the business as far as it can
go under their stewardship and an infusion of fresh thinking and capital is required to see it
through the next phase of its development. This was the strategic intent behind the sale of
Netwatch two years ago.
At the other end of the spectrum, the owner or owners may be approaching the retirement
age and simply want to cash in their chips in order to live out their ‘third age’ in comfort.
Another scenario is where the business has entered a period of decline as a result of
intensified competition or other market forces such as the current Covid-19 induced
recession and a trade sale is the best option for all concerned.
Perhaps another scenario could be that the business is at the top of a “fashionable” cycle
and that there is a demand for a particular type of business, which happened during the
dotcom boom. And then there are myriad variants in between.
Each of these situations has an influence on the nature of the sales process and the way it
should be approached in order to optimise the price. For example, where decline is the
issue, time is of the essence while a lengthier more considered approach can be taken
where retirement is the key catalyst.
Once the decision to sell has been made and the reasons identified, the next step is to
appoint an advisor to value the business for you. Entrepreneurs can sometimes get a little
prickly at the suggestion they require an outsider to tell them the value of their business. But
an independent viewpoint is absolutely essential.
After all, owners tend to view the business and its value through sellers’ eyes while potential
buyers naturally do the opposite. Their differences of opinion tend to boil down to enterprise
value versus equity value.
Enterprise value is an accurate way of calculating the current value of a business taking into
account items like historic turnover, profitability, free cash and short and long-term debt. It’s
based on hard numbers and tends to be favoured by buyers.
Equity value, by contrast, also takes potential future value into account and is naturally
favoured by most sellers. Your independent advisor, whether an accountant, a lawyer or any other qualified professional, will be able to guide you as to a reasonable price range to target. More
importantly, they will also be able to advise on how to achieve the upper end of that target
That’s where the vendor due diligence comes in. While buyers will almost always carry out
due diligence on a company prior to the acquisition, sellers can avoid nasty shocks during
that process by carrying it out themselves. The process can not only avert those unpleasant surprises but can also uncover issues which, if addressed in a timely fashion, can enhance the overall value of the business. It’s a bit like getting a surveyor in before you put a house on the market so that you can fix the problems that may depress the asking price.
It’s also usually best to retain an advisor to handle the sales process from there on out. A
business sale can take anything from 18 to 24 months to get right and owners can’t afford to
take their eye off the ball of running the company during that period. Having an outsider to
look after all the details means the business will stay healthy and retain its value throughout.
That professional is also much more likely to be in a position to identify potential buyers,
both domestically and internationally, and assess their likely interest. They will be able to
ensure that the business ticks the boxes which various types of buyer are looking for.
For strategic buyers, this could be evidence of strong continuing cash flows and a strong
management team in place. For buyers, simply looking to take out a competitor such details
may not be of great importance.
The ultimate goal in any sale should be to get to some kind of an auction situation where
competitive tensions drive up the price. Potential buyers will attempt to resist that, of course,
and demand exclusivity periods and so on. That’s where good advisors really come into their
own. They can negotiate price premiums and other guarantees in exchange for exclusivity
thereby securing many of the benefits of an auction.
Selecting a business advisor should be approached with care. This is a small world. You
must make sure that your business adviser is genuinely on your side and incentivised by the
the right set of reasons. The highest price may not always be the best incentive. It may look
good on paper and on the business adviser’s website after the deal but what good is that if
the conditions and small print such as restrictive non-compete clauses are so onerous that
you are tied up for five years not being able to work?
It could also turn out that while the advisor gets the highest price, he might not understand
your industry and perhaps overlook some potential buyers who really do need your business
from a strategic point of view.
The other key piece of preparation to do here goes right back to the basics. A potential buyer
should be treated in the same way as a potential customer. If you are trying to make a sale
to a customer who is visiting your premises, you are going to ensure that you and all the staff
are dressed smartly, that the offices and production areas are clean and well kept, that the
exterior looks at its best, that vans and other vehicles are clean and so on.
This won’t necessarily add to the sale price, but failure to look at this aspect can certainly
depress it. You never get a second chance to make a first impression and a buyer will naturally presume that they are seeing the business at its best during their visit, so poor
presentation will speak volumes about what the business looks like when they are not there.
If it doesn’t feel right, there will be other opportunities to sell.
Finally, culture counts. The atmosphere in the workplace is also important. People can
sense poor morale and discontent among a group of workers. A positive workplace culture
where people have a sense of shared ownership in the success of the business will go a
long way towards securing a successful outcome to the sale process.
But in all of this, you should remember the words of Aswath Damodaran, otherwise known
as the ‘Dean of Valuation’: “A firm can have value only if it ultimately delivers earnings.”
Also, as that famous investor Warren Buffet noted that “The ability to say no is a tremendous
advantage”. If it doesn’t feel right, there will be other opportunities to sell. It took time to build
up your business. Don’t give it away.