Business Acquisitions (Full or Partial)

The simple answer is that you should start thinking about an exit well before you want to exit the business or realise any value from it – unless you have no interest in value of course. This is because the business’s reliance on any specific individual (generally you, the owner), whether it be reliance on motivating or managing the team through to a dependency on an individual to use their relationships with key customers, will add risk to any equity transaction and will likely lead to a long tie in to keep the individual engaged with the business. Which may not be what you were hoping for. Early thought around how to ensure the business is structured correctly, has the right people in place and is a strong entity without over reliance on a key individual, is essential to realising the greatest value from a sale. And this all takes time to put robustly in place.

It is worth what someone will pay for it. And that depends on a vast range of factors from geographies, technologies, similar business sales, size, how future proof it is, dependency on key individuals, assets, IP, customer base, turnover, profit etc. There are many ways to value a business (Google will happily list them all) but there are a few common ways to value a business that I see more than any other method:

EBITDA based valuation. This is where you multiply the average EBITDA over the last few years by a multiplier that takes into account all the various factors that affect the business valuation. This is typically between 3 and 6 unless you have letters such as AI, SaaS and ML in your description. This means that a buyer can get a return on their investment in 3 to 6 years in theory, assuming they do nothing positive or negative to the business. 

The other method, specifically used when the EBITDA is low / negative, is an asset-based valuation. This is simply how much you can sell your assets, IP etc. for. It is the same process that an administrator would go through but without the pain of being in administration. 

One challenge for the buyer (and the seller if they don’t have lots of options) is that the money lenders won’t just lend against ridiculous valuations. They will need to be comfortable that the valuation is correct, the risk is acceptable and they can recover their money over a suitable timescale. 

You may do, but if it isn’t a trade sale, it is also common to get less than 50% of the total value up front with the remaining 50% being paid over the coming years. It really depends on your situation as a seller, how reliant the business is on you and how much, if any, of the valuation is driven by future potentials. 

If you have planned ahead well, potentially not long. If not, you might need to stay for some years. If you are needed in the business but want to leave now, the value will decrease. You may also want to ramp your time down and have some ongoing involvement in the business, perhaps as you move towards retirement. Anything is possible but don’t assume that working in the business you have created with someone else making the decisions, is an easy change. If you plan ahead and extract yourself from the workings of the business upfront, you are in a better position to negotiate here.

There are a variety of options you can look at: make more sustainable profit; reduce your reliance on a specific product, market, customer, employee or director; create a long pipeline in terms of orders and ensure you have exposure to multiple geographies and sectors to weather any market glitches.

You often see adjusted EBITDA because the directors’ dividends have been added back in to increase the EBITDA figure. If these people don’t need to be replaced and are just taking a salary without contributing to the business, this makes sense. If they will need to be replaced or kept in their roles, then this isn’t logical at all.  It is more common to see business owners taking lower salaries to keep the business going. When looking at the EBITDA, these lower salaries should actually be increased to give a more realistic profit figure taking in to account a real-world salary. Anyone who advises you through “standard calculations” that your EBITDA should be much higher, therefore realising a much higher business value, should be viewed with caution as the first thing a potential buyer will do is get your last year’s accounts and work it out themselves. If there is a massive discrepancy in EBITDAs, they will likely ask for the missing data that shows why the EBITDA figure used was so much higher. If you can’t provide it, you won’t necessarily be seen as being credible. 

A leveraged buyout is where someone borrows money against the business they are buying, to buy it. This may sound unfair / ridiculous as a business seller until you realise that that is how you buy a house. If someone is going to buy your business, reflect on whether you are concerned (within legal and moral boundaries of course!) about how they have got the money. Leveraged buyouts, debt finance, asset finance etc, are all very commonly used to buy businesses.

Plan ahead. You need to make yourself redundant or, in other words, get yourself in to a chairing position for the business where you can oversee the activities but don’t need to be actively involved in the business for it to function. You also need to be driving the profit up (sustainably!), demonstrating sustainable growth and covering off the other points mentioned above. No customer should be more than ~25% of your business ideally and beneath you, there should be a classic organisation that has standard job roles in, should anyone senior leave.  You can use small consultancies like Asirius Ltd to help or you can engage larger businesses that will drive the whole process. There are external solutions to suit absolutely any budget but getting external advice is well recommended.

You need to find a buyer, or, even better, several buyers, to fight for the opportunity to buy your business. From a cost / fee perspective, the ideal is to find a buyer yourself, through your own research or through your industry connections. If that doesn’t work, there are individual buyers out there, like Asirius Ltd, who are interested in buying businesses. There are also a lot of brokers out there who will help you get in the shape to sell and who have good access to a vast number of buyers. If you decide to use a broker, do your research. Don’t be dazzled by an amazing valuation of your business, using a high multiplier on an adjusted EBITDA, as the value needs to be aligned with what buyers will pay. Also note that some of the less scrupulous brokers will blow your mind with a high valuation and then get you to pay them to advertise the business. It then becomes your problem to try and justify their valuation to intelligent buyers whilst the broker takes the upfront payment and, potentially a percentage of the transaction fee, even if it is 10 times lower than their valuation. There are lots of people looking to buy businesses – your challenge is to try and get in front of the right ones.

Every situation is different but, in each case, the buyer needs to understand what they are buying and the risks associated with the purchase. This could mean a protracted due diligence to understand the technical detail of an offering or the finances of the business. As the seller you will need to answer lots of awkward questions about a business that is potentially very personal to you and you could be held liable should something go wrong in the future due to your providing incorrect answers in the pre-sale phase. In most cases the selling process, even after having found the ideal buyer, is a process of many months.