11 October 2023, By Rohan Banerjee
Business owners must plan meticulously – and early – to ensure a smooth and lucrative ex it. Here are some expert tips for making your enterprise as attractive as possible to potential acquirers
People choose to sell part or all of their companies for many reasons. Some might be serial entrepreneurs seeking a rewarding exit, having decided that their time at the helm has run its course, for instance. Others might want to stay and expand their business but feel unable to do so unaided, leading them to explore mergers and acquisitions.
Whatever the motivation, there are ways to set up a business to give it the best chance of a successful sale. Here are some tips from experts in this field.
1. Always be ready to sell
Bill Snow is an investment banker and the author of Mergers & Acquisitions for Dummies. He believes that a business should always be ready for sale because it’s impossible to predict when a good offer might come along or when its circumstances might change. To do this, he recommends that firms have a number of things in place – for instance, accountant-prepared statements covering at least two years – that should make the process much easier.
Claire Trachet, CEO of management consultancy Trachet, agrees. She believes it’s “crucial that you can present the business’s revenue, operating expenses and payroll hours, as well as consistent net profits over a long period, in the most attractive way possible for the buyer.”
Trachet suggests that some smaller firms often miss out on the chance to attract big equity investments because they don’t think about it soon enough. “The simple message here is to prepare early and bring in the right people to help you do so,” she says. “Think of it as like a dress rehearsal before the real performance.”
Shirish Nadkarni is a serial entrepreneur who founded TeamOn Systems, a mobile email pioneer that was bought out by BlackBerry, and language teaching app Livemocha, which was purchased by Rosetta Stone. He says that founders “should always keep a shortlist of potential buyers. They should seek to build business development relationships with these companies so that they can demonstrate the value an acquisition could bring.”
2. Make a realistic valuation
A company’s selling price will largely correlate with the performance of that business. While there is some scope to factor in the firm’s potential for growth (or, if times are tough, recovery), the valuation should be based on what has happened rather than what might happen.
According to Trachet, the best time to sell a business is when it has “superseded peak profitability and is starting to reach maturity. When your formula has got you past the market cap and the model is starting to plateau, that is when an injection of capital could prove vital in taking the business to the next level.”
If the knife is falling, you don’t grab it. You wait until it hits the kitchen floor, then you pick it up
Nadkarni believes that the worst time to sell is during a recession, although businesses might often have little choice in the matter.
“During these times, there will be fewer buyers,” he says. “They won’t be willing to pay a significant markup for your business. In addition, its sales growth is likely to slow down, which will dampen the price you can get.”
A smooth and successful negotiation will be rooted in realistic expectations and a deep understanding of the company’s industry. It’s important for founders to temper their “emotional attachment”, Trachet says, and base the asking price on hard facts and figures.
It’s also important not to over-project. Consider a cautionary tale from 2010, when Google offered $6bn (£4.7bn) to buy Groupon, which spurned the deal. The discount voucher operation was making healthy profits at the time, but did not foresee the social media boom, the rise of Google Reviews or the growth in the number of firms launching loyalty schemes and subscriptions. In 2022, Groupon suffered a net income loss of more than $234m. Its market capitalisation today is a mere $161m.
It will come as no surprise to anyone that struggling companies are hard to sell. “They are the falling knives of the M&A world,” Snow says. “If the knife is falling, you don’t grab it. You wait until it hits the kitchen floor, then you pick it up. A company with declining sales and profits will struggle to find a buyer. Why buy something today when the price tomorrow could be cheaper?”
3. Ignore criticisms of ‘selling out’
In 2015, Camden Town Brewery, a London-based craft beer producer, became a subsidiary of Belgian giant AB InBev after an £85m takeover. Critics of the move have suggested that, in becoming part of a corporation, Camden Town has compromised on its original vision and lost its identity.
But its founder, Jasper Cuppaidge, who remained with the firm as MD for two years after the sale before taking a broader consultancy role, has always defended his decision.
There are advantages to being under the wing of a larger company. The deal enabled Camden Town to spend £30m on a new facility that can produce 40 million litres of beer each year. This means that it can brew all of its core produce in house, rather than relying on third parties.
Before the takeover, Camden Town was focused purely on the UK market. Today it exports to parts of the US and France.
“We’ve taken everything in our stride,” Cuppaidge told Management Today in 2017. “Nothing’s changed: the beer’s the same; the people are the same. We’re just better.”
If a seller is genuinely concerned about how their company might be run after being acquired, they always have the option to negotiate transitional or even continued involvement.
4. Be open to partnerships
That brings us neatly to partnerships, which can be the first step on the way to an acquisition. Nadkarni recalls how, rather than looking to be bought, TeamOn first approached BlackBerry to sign a deal for the company to license its technology.
“BlackBerry decided that our market was strategic and that it made sense to acquire the business. While we had other funding alternatives, we decided to accept its offer because it had relationships with most big carriers around the world and would be able to expand the reach of our technology to millions of consumers,” he says.
Nadkarni believes that it’s important for entrepreneurs to keep an open mind on how to maximise value for investors and accelerate growth. “Acquisitions should be viewed constructively, as they might help the company gain a far greater number of customers, thereby helping to realise the vision of the founders,” he says.
5. Accept and own the decision
When it comes to selling a business, Snow says, there are several “different right answers”. It is a seller’s prerogative as to why they may relinquish some or all of their company. It could be a question of ideology, ambition or enthusiasm. All are valid considerations.
John Kelley founded and ran Vouchertoday, an online discovery platform not dissimilar to Groupon, between 2018 and 2022, before selling it to a high-profile media firm in the US. Vouchertoday’s branding was replaced by its new owner, he explains, which really wanted the firm for its technology.
For Kelley, the sale was an acceptance that he had taken the business as far as he felt he could and an acknowledgement that he had lost his passion for the enterprise.
“We had reservations about the advent of a cookie-less future on the internet and the challenges it posed for affiliate sites,” he says. “Concurrently, brands began recognising the potential of establishing their own discount pages, which often suspended us in terms of search-engine rankings, diminishing our revenue.”
Kelley adds that he is “content” with his decision to sell. “As entrepreneurs, we often hold on to what we’ve built, but there comes a point when letting go becomes necessary. I would strongly recommend that all founders take the time to reflect and engage in discussions with their teams to determine the next steps for the business.”
The proceeds of the sale have since enabled him to get several new projects off the ground.
Snow believes that business leaders should always try to “make themselves expendable” and that companies should be judged on their efficacy rather than their ownership. “A company that can operate without its owner means that a new owner will have a better chance of success,” he explains.
Ultimately, particularly for founder-CEOs, selling a business is an incredibly personal decision. But being organised and honest about what a takeover or a merger could mean, without succumbing to any ego, is the key to ensuring that a favourable outcome is achieved for all parties concerned.
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