Timing is a big deal

In the first of a 10-week series of management briefings on finance, property and law, Gordon Blair looks at selling a business.

The best time to sell a company is when you don’t have to. This is when it is possible to sell from a position of strength rather than weakness. Strength may be assessed in many ways, but usually it is when the firm is enjoying strong performance and can confidently predict growth in the medium term — a minimum of 12 and up to 36 months ahead.

Very often such a company will have caught the attention of would-be buyers, and there may be unsolicited approaches. In this case, the directors should seek professional advice, as there will probably be other prospective buyers who may be prepared to offer better terms than the ‘sweetheart deal’ sought by the approacher.

Approaches are often made because an organisation has scarcity value. A good example concerns a company that was the last independent producer of self-adhesive labels for the pharmaceutical industry, and represented the last chance for an eager company to buy into the market. A highly acceptable outcome was achieved, but it was due to timing: it is surprising how rapidly scarcity value can diminish. So if you are operating in a niche market and you identify a window, go for it.

Take advice to confirm your feelings that the time is right. After all, potential buyers’ views can change exceedingly quickly if they decide competing directly is a cheaper route into an attractive market niche.

The timing of a deal may also depend on investment to re-equip a manufacturing plant, expand product ranges, or widen distribution networks. Once such investments prove well considered and profits start flowing in, the company is an attractive proposition. But a serious buyer will quickly spot attempts to massage the sale through this avenue.

In selling a company when it is strong, you will probably also be doing your staff a favour. Talented people are likely to seek new challenges and greater responsibilities, and membership of a larger organisation could present a chance for career advancement.

On the other hand, if you have recently lost a high-profile manager, this could deter a prospective buyer, so let the dust settle for six months. Equally, if you have suffered a profits reverse but are confident you will recover from it, sit tight until you do.

It could be that you have to consider a sale when you don’t want to. It is common for thriving companies to be forced to seek a buyer because their balance sheets prevent them from taking on contracts of the size they need to maintain sales growth. Selling to a company with a stronger balance sheet is an option for avoiding stagnation.

Once again, companies in this situation should seek advice, as things may not be as bleak as they appear.

It is a similar scenario with firms whose strengths lie in home, local or regional markets and whose only way forward is through a globalisation of sales. Such businesses are not unattractive to others — a shortlist of possible buyers operating on a worldwide basis may be drawn up, and the company could well end up as part of a group which provides an excellent international marketing platform.

By joining another group, the business would get the chance to penetrate a market that might have taken three to five years to get a foothold in by its own efforts. This would be a strategic partnership as much as a sale, because all parties achieved their objectives.Perhaps the most unfortunate forced sales come about when company owners fail to keep an eye on technological advance.

A good example is the printing industry. A few years ago an investment of £500,000 to £600,000 could keep a medium-sized group up to date with new technology. Nowadays the figure is more than £1.5m. Many businesses discovered too late that they did not have the funds to invest to maintain their market position, and had to put themselves up for sale. For such firms, it is now a buyers’ market.

The lesson here is that increasingly complex or expensive technology can rapidly change the rules of the game, so owners must be vigilant to decide if they need to invest just to stand still.

It is important to take advice as soon as you feel you wish to sell, even if it may be in three years’ time. When the decision is taken to sell, the process should be managed to an agreed timetable to minimise uncertainty and eliminate the risk of a buyer slipping away.

And remember, to achieve the best price there is often an element of deferred consideration, which means the seller will have to stay with the business for up to two years following legal completion. Then there will be another three months to prepare the final accounts. So even if you appoint somebody tomorrow to sell your company, it could be three years before you finalise the transaction.

But, if you are satisfied that your timing has been right and you have achieved the best possible price, the wait may just be bearable.

Gordon Blair is a partner of Livingstone Guarantee.