The value of a business and its saleability are closely interlinked – the factors that make a business more valuable also make it more saleable.
Besides size, the most important factor in whether or not a business will actually sell is automation.
An automated business is not reliant on its owner – it is systematised and operates independently of him / her. The owner may still have some involvement, but will work much less than full-time. An automated business has at least some recurring revenue. It is stable, reliable, and a buyer will have a lot of confidence that it will continue to be successful after the acquisition.
Benefits of Automating a Business
There are a number of benefits to automating a business, besides saleability.
- Stage 1: Now have time to work on the business rather than in the business
- Stage 2: Work on other businesses, or don’t work at all (already exited)
- Earnings will continue without the owner > much easier to sell
- Much easier to sell > more potential buyers > worth more
- Management Buy-Out (MBO) Option
- Ready-made MBO candidate
Sometimes automation itself can be the exit you are looking for. Once you have reached stage 1, your life will change. You will feel so much less pressure, knowing that you don’t have to work in the business all the time. Your business will improve significantly now that you have the time to work on it rather than in it. But once you reach Stage 2, you have effectively exited your business already. You are still earning the profits from the business, but you are free from having to work in it.
Once you’ve reached Stage 2 with your business, you really are an entrepreneur and an investor, rather than just a small business owner. You can work on expanding your empire, starting the next business, and the next one. You can spend more time with your family, and live a more balanced life.
From experience we know that this can transform the way you live and the way your business operates. Once you reach Stage 2 you will be able to:
- Start other businesses
- Manage property & investments
- Live a more balanced life, with more time for:
- Family & friends
- Charity work
This is all while your business performs better than ever. Your team will be happier & more engaged, with a sense of ownership & responsibility for the success of the company (even though they do not have financial ownership).
The business will be more saleable, should you still wish to do sell it. Simply put, most small businesses do not sell if acquirers cannot trust that the business will continue to perform after the sale. These businesses receive less acquisition interest, and a higher rate of abandonment during due diligence. Businesses that are automated do not experience these problems to the same degree and are more likely to actually sell.
Being more attractive, automated businesses have more potential buyers. These businesses meet the acquisition criteria of more acquirers, and therefore command a higher valuation multiple than non-automated businesses. One class of acquirer – the strategic buyer – is often able to pay more for the business, and is more likely to proceed with the purchase, because of the unique strategic advantages they can gain from the acquisition. Strategic acquirers are more easily courted for automated businesses than for ones that are not systematised, with little recurring revenue, and are heavily dependent on their owner.
In addition, some owners appreciate the potentially attractive option of exiting the business via a management buy-out (MBO). Since the business will be managed by a capable 2nd-in-Command, this manager (with varying levels of support from other management / operational team members depending on the size of the business) will be the ideal candidate for an MBO. Structures can differ, with different managers able to provide different proportions of the sale value in cash at closing. But even in the least attractive version of the MBO (where the manager is not able to raise any funds for the acquisition, either from personal savings or from lenders), there are significant advantages to the seller.
Advantages of Using an MBO to Exit:
- Completely confidential
- Buyer already found, no delay
- No due diligence period since he/she already knows the business well
- Sell shares not assets
- Greater deal value for seller (in total)
- Great opportunity for buyer
There are many possible deal structures and the deal can be designed to suit both the seller and the manager’s specific situation: the owner can retain a percentage of ownership or sell the entire company; the deal can utilise outside finance, structured with debt, equity, both, or no outside finance at all; the owner can receive cash up front or finance the entire deal value himself; the manager’s shareholding can rise according to performance targets; and more.
While it is usually preferable to the seller to receive most or all of the sale value up front, this can’t always be achieved with an MBO. But the advantages of the MBO option make it worthy of consideration – especially when the owner fears that an external buyer may not be found. Also note that even if the business is sold to an external party (individual or company), the full sale value will not necessarily always be received in cash at closing: a significant amount of the payment is usually delayed anyway, whether this be through seller financing, an earn-out, or a lock-up period on stock.
Target Strategic Acquirers First
In most cases though, the owner will seek an external buyer to acquire the company. In the case of almost all small businesses, the eventual acquirer will either be an individual or (preferably) a strategic buyer. Specifically targeting these people is the best approach. But the owner will have far more success if the business is automated.
Automating your business is a multi-faceted process which requires concerted effort, but is highly rewarding. It is centred around two areas: systematising and stabilising the business. It makes small companies act like larger companies, and can be achieved even in very small businesses turning over less than £500k.
Factors Involved in Automation:
- Systematisation (Reducing Reliance on Owner)
- Management team (often operational staff taking on some management responsibility)
- Long-term contracts
- Preferred supplier lists
- Recurring income
- Diverse clients (not all eggs in one basket)
- Internal risk reduction
- Compliance (health & safety, legal etc)
- Internal contracts (employment contracts, leases etc)
We help our clients to automate their businesses in order to gain more freedom, improve their performance and add value from an M&A perspective.