It’s not unusual to hear business experts talking about ‘being ready for sale’ when discussing Succession and Exit Planning for small or medium-size businesses.
But it is quite rare for anyone to offer a view on what this actually means.
Sadly, only too often, the result is that business owners don’t earn as much as they should in the last few years of their working life and they do not get as much money for their business as they should have.
So, what does ‘being ready for sale’ actually mean?
As a starting point, it is helpful to understand how potential buyers may assess and express the value of a business: it is also important to understand some factors that may reduce the value.
Many buyers express their view of the value of a business as a multiple of the commission and fee income. The multiple applied will vary from buyer to buyer, influenced by the attractiveness of each individual business: these multiples may be as low as 1 times or as high as 2 times. The higher the commission and fee income, the greater the payment the seller will receive – self-evident, right?
In my experience, many broking businesses could increase their commission and fee income by at least 10% by simply making small changes to the way they run their business. And this would translate into a similar increase in the value of the business that could add £50,000, £100,000 or more to the money the owners could receive when they sell.
But the impact of a small increase in commission and fee income is potentially much more than this.
A 10% increase in income can translate into a 40% increase in profit, even up to a 60% increase if done correctly.
What impact might this increase in profit have on the value of the business?
Firstly, the owners will be making more money from the business, allowing them to either invest in growth or to simply increase their earnings.
The other very significant impact is that some buyers assess their view of the value of a business using profit/profitability (usually EBITDA, for those of you who are technical!). Buyers who use this approach will express this as a multiple of EBITDA (Earnings before interest etc), often in a range of 4 to 6 times.
The impact of increasing your profits for this valuation method is striking – potentially increasing the sale value by 40%-50%: why would any rational business owner ignore this potential increase in wealth?
And it really does not take too much effort to make the changes that can produce these increases in earnings and value.
So far I have talked about income and profit as the key drivers of the value an owner is creating. Buyers apply different multiples: the multiple used will reflect the attractiveness of the individual business to the buyer. There are many factors that can influence attractiveness but some key features would be:
- Business mix (personal/commercial, property/motor/liability)
- Schemes and specialities
But ‘Readiness’ is not just about doing things that will increase value. It is also about making sure you are not doing things that will reduce value.
What then are some of the aspects of a broking business that could have a negative impact, that could reduce the value?
- Financial Services: Most buyers of general insurance brokers don’t like financial services. If you do this type of business in the same business as your general insurance it may limit the interest of potential acquirers
- Compliance and Regulation: You will be expected to evidence a robust and healthy compliance regime (documents, audits, etc).
- Employment Contracts: Do you up to date contracts of employment for your key staff in place, with enforceable covenants?
- Premises: Don’t sign a long lease with no break points shortly before you plan to sell!
On a scale of 1 to 10, how ready do you think many businesses are? Most businesses simply don’t know and go to market on a wing and a prayer.
The truth is that many small and medium-sized businesses are not prepared when they sell. As a result, the owners of those businesses inevitably lose value that they could have had with a little pre-planning and support and they will also have lost potential earnings in the period leading up to any sale.
RWA can help business owners get the best deal they can when they are ready to sell and can make the sale process as easy as possible.
A short ‘readiness’ check is likely to enable a business owner to increase their earnings and get a better price for their business.
And of course, this check can be run at any time regardless of imminence or otherwise of a sale. Start realising your business’ full potential and embedding the policies and procedures needed to help facilitate the best deal when the time does come to sell.