Own a business? Have an ‘early’ discussion with your accountant about selling.
If there is one thing I would like to see more business owners do, it is having an early discussion with their accountant about selling their business. For many shrewd business owners, the sale, or exit discussion starts when they are first investing!
And by a ‘sale’ discussion, I mean thinking ahead about positioning the business for when circumstances inevitably change for the current owner (s) and they ultimately want to exit their shareholding in the business.
There are many scenarios – but these are often just a distraction
The actual sale event could be in circumstances that are within the owner’s control – because the owner may want to retire; for when they no longer want to be in business; when other priorities arise; perhaps the owner(s) would like to see their family take on the business or simply at some stage the owner(s) will want to get a return on their investment. Or it could be unfortunate circumstances beyond the owner’s control – poor health or worse.
In many ways the potential cause for this ultimate sale doesn’t matter; instead, I see a business owner’s nirvana as being able to positively, proactively and successfully lead that change when it is needed and, in the meantime, maximise profit and value for the business.
From my experience, the reality is that the sale discussion can be an informative and liberating discussion when facilitated in the right way and the right people are involved. There are many actions that an owner can take to prepare for sale given the right options and time to implement constructive changes.
I feel there is often reluctance to have this hypothetical sale conversation and there could be a list of reasons that the conversation doesn’t take place in a proper fashion:
- Perhaps it’s because an owner doesn’t know where to start;
- There may be a few ‘false starts’ or that the conversation happens in a piecemeal fashion with multiple parties over time instead of a co-ordinated focussed discussion; or,
- Perhaps it’s unclear who to engage with and who to trust to give an unbiased, independent and informed view that can be trusted.
Involving the Right People – Critical to Success
And therefore, I’d suggest that your accountant is an excellent place to start. Your accountant will typically have had a longer-term relationship with your business and as a result, has comprehensive historical financial knowledge about the business and can benchmark information from their wider client base. Good accountants will also have the network to introduce you to other experienced advisors.
If you are wanting to ‘super-charge’ these conversations, then (in addition to your accountant) I think it makes sense to include someone in the meeting who has current market experience in the sale process to provide those direct insights. For example, a suitably experienced business broker (of course I would say that!).
What’s the Right Conversation to have?
From my point of view there are two separate conversations to have, which are (in order):
- Strategic Priorities – define what the overall high-level strategy is for the business that aligns with the goals of each of the owner (s). This conversation should openly discuss perceptions around current vs. aspirational business value and the practical timelines for each of the owners. It is important that everyone is ‘on the same page’.
- Operational Initiatives – once there is alignment in strategic priorities, what are the practical initiatives an owner can put in place to strengthen the business; improve profitability and increase the probability of a successful transaction (when the time comes).
A Case Study – getting your head in the game!
A recent example of a strategy meeting was an owner meeting I facilitated with a well-established family-owned contracting business. The business itself is in a good, profitable financial position, but could do things to improve on that profitability.
Aside from the three directors/owners and myself, the business’ Chartered Accountant also attended. The timing of the strategy meeting coincided with the presentation of the draft financial statements for the recently completed 31 March 2018 financial year.
The accountant was able to provide excellent insights and observations based on years of involvement with the business. These insights included the importance of managing margins on significant contracts and building resilience into the business (especially around managing exposure to potential credit risk from bad debts). It’s a capital-intensive business and we were able to focus on capital requirements and the level of repairs and maintenance within the business. We also talked about governance and how to strengthen management to support the directors within the business and increase focus on areas of priority.
I was able to provide a perspective on current market conditions, implications for value and possible considerations regarding best timing to go to market. We had an open and honest conversation about what they would like to get for their business if they did sell it; I was able to provide my own feedback and could outline the resulting options.
From these discussions, it is my experience that the logical timelines to a transaction (either now or in the future) are uncovered – timelines that are consistent with the goals for each of the owners (hopefully they are all aligned – if not, that’s a subject for another blog!).
In my client’s case it becomes obvious through discussion that, regardless of what the owners wanted to do, the best timing for them involved reassessing things in six months. This was because there were substantial contracts in front of them that would be beneficial to complete in order to get further ‘runs on the board’. In the intervening time the directors and management could focus on maximising margins.
While we touched on possible operational initiatives in the initial strategy meeting, in this case, the operational initiatives will be fleshed out over the coming months (as opposed to having a distinct separate meeting). This will be achieved through re-instigating regular board meetings (often with the accountant in attendance), which will now have more focus regarding overall strategy and there can allow for greater discussion regarding operational initiatives that they can introduce (I’ll leave the subtopic of operational initiatives for another blog).
How will things turn out? Well, it’s too early to say. However, in the meantime, the directors and owners are all aligned, re-energised and focussed on improving governance, management and ultimately profitability. Even if they don’t sell in the short term they increase their chances of a successful sale down the track and should enjoy a more profitable business in the interim.
The alternative – it’s not very positive…
For me, the above approach is a lot more positive than other scenarios where the sale conversation is left too late or only happens when the owner decides that a sale must happen ‘today’. Unfortunately, this often means that it is not only too late to make a positive impact on value for any sale (especially where current appraisals may indicate value sits considerably short of shareholder goals and /or expectations) but can also reduce the probability of a sale succeeding, neither of which are particularly attractive outcomes. This potentially leaves the business owner mentally defeated and in the horrible downward spiral of ‘oh well, I may as well keep the business and just wind it up’.
To me, that would be a shame and not a positive or proactive way of dealing with an otherwise avoidable situation. It’s also no way of positively creating a lasting legacy for a business.
Please give me a call if you would like to have a positive sale discussion (or at least talk to your accountant!).