15 Feb 2021 10:37 AM

Of course, every business owner will say that they want to prepare for an exit.  But, to be prepared not only takes commitment and investment, it also needs a cultural shift for many business owners, especially new start-ups.

Most business start-ups are predicated on the ability and skill of an entrepreneur in selling a product or a service.

Hopefully, as time moves on, the entrepreneur will take on more people, more premises and buy whatever equipment/facilities that the business needs. This hopefully produces an upward trajectory of necessary revenue and profit. 

But – and to paraphrase Shakespeare, here’s the rub: is the entrepreneur building up a corporate structure, with streamlined processes managed by competent, skilled managers?  Are all the checks in place that ensure the business adheres to regulatory practices such as health and safety, employee legislation, intellectual property and HRMC tax legislation? 

Does anyone want to buy the dream house on the hill – at full price – that has faulty wiring, a jungle called a garden, a ‘draughty’ roof and who knows what else if the owner has been negligent in its upkeep.

The golden rule for an owner to maximise exit value is to ensure ‘their house’ is in order!

We were approached last year by a company – on a Thursday – telling us that overseas trade investors had identified their business as an acquisition target and wanted a meeting on Saturday. The owners had never considered valuation models, deal structures since starting the business four years previously.

The buyer was keen to gain a foothold in the UK market and an outline deal was agreed.  We then had to look under the bonnet and found:

  • The accounts were being prepared by a part-time bookkeeper and there was an absence of management information to enable anyone to drill down on product margins or detailed overhead costs.
  • There were discrepancies on the VAT Returns
  • Benefits in kind had not been correctly accounted for
  • Trademarks had not been properly registered
  • Probably most alarming of all, the company had invested too much in stock, the principals taken too much money out of the company and they now were desperately short of cash.

Irrespective of the above, and despite even more such regulatory issues, it was a great company.  It had a superb product – relevant and needed in the current market and had set up a fabulous supply chain to the high street majors - plus it had a reasonable online business.

So, on the basis it had a great offering, a keen and eager inward investor and owners who not only wanted to cash out but needed working capital, the deal was finalised after a lot of legal and financial negotiating : Happy Days!

But…..and here's the question. Did selling a business when it was not ready, cost more than good advice and investment would have cost?

If you are thinking about starting the journey towards an exit, please contact me to talk about what you need to think about and how we can help.