Seven steps to selling your business

By Darcie Rae

- Last updated on GMT

Seven steps to selling your business

Related tags: Restaurant, Hospitality, Finance

The sale of a business is unexplored terrain for many people. It’s likely to be something that you only go through once in your life and therefore vital that you get it right first time, with the right advice and support. Here’s seven things to consider when selling your hospitality business.

1 Know what your business is worth

Despite current political uncertainty, there has been little change in the overall prices being paid for SME businesses. Capital is available, either from financial (private equity) buyers or banks, and interest rates remain at historic lows. This year the results, as published in the SME Valuation Index, show that the average deal size was £5m, after dropping in 2017 to £3.4m from a five year high of £5.7m in 2016. However, perhaps the most interesting statistic is that the median EBITDA multiple was 5.8 (the multiple applied to earnings before interest, tax, depreciation and amortisation, excluding any outliers), the highest it has been in the past five years. There are of course many other factors that influence the value of your business, but the Valuation Index clearly evidences there is demand out there for good quality, owner-managed businesses. Even if selling your business might seem some time off, with Brexit on the horizon it could be more pertinent than ever to know your business’ worth. While it is proven that those who start to plan their exit at least one to two years in advance are more likely to reach a successful completion, those who plan their exit more than three years in advance have a better chance of achieving a higher valuation.

2 Don’t ‘wind down’

I often come across people that have made the decision to sell their business because they’re ready for retirement, want to concentrate on other business interests, or just try something new. The problem is that they may have already started losing focus on the business and ‘winding down’ before they have made the decision to sell. Occupancy rates start to decline (because a busy hospitality business tends to need all hands on deck) and so do their profits. I can’t emphasise enough the importance of focusing on the business right up until the point the sale goes through, a buyer is not going to pay for the profit you aren’t making. It is important to get an adviser on board – they can manage the sale, leaving you to do what you are good at - running the business.

3 Ensure good housekeeping

Any buyer will almost always want to do both legal and financial ‘due diligence’. This is the investigation and research carried out by the buyer and their advisers into the business’ affairs; it highlights risk and identifies areas where the buyer might be exposed to future losses and costs. For the sellers, this will be the most labour intensive part of any sale. However, if everything is in order and readily obtainable, not only does it reduce the time the due diligence process takes, but it also avoids any last minute price reductions as a result. In a hospitality business, staff contracts, supplier agreements and documents relating to the property within the business are often areas where there is frequently missing documentation.  The more gaps in evidence and records the due diligence identifies, the more the buyer thinks – ‘what else have they missed or not done?’

4 Make yourself disposable

Most buyers want to know that there’ll be some continuity in the way the business is run, at least for an initial period post-sale. If there’s an existing management team, that can run the business without your input, then the buyer can have more confidence in the owners stepping away. Often we find that the sellers don’t give any real consideration to this and although people are in place that responsibilities can be passed over to, this is done too late in the day and the buyer therefore deems it necessary for a longer hand-over period from the sellers.  The key here is to make yourself ‘disposable’- the less the business, and the secondary management team need you, the better.

5 Maintain timely and reliable records

I’ve come across many hospitality businesses that don’t have a clear view on profit until their year-end statutory accounts are prepared - this can be eight or nine months after the year-end. A buyer will want reliable and readily available management information. This means monthly management accounts, statistics relating to wet and dry gross margins, average room rates and occupancy levels. As well as giving you timely information to act upon, this offers the buyer comfort that there’s been no decline in business right up to the point of completion - again protecting the value of all your hard work. Monthly management accounts are good practice regardless, but introducing them at least 12 months before embarking on a sales process will give monthly comparable information which can help you, and the buyer, track progress.

6 Plan ahead

Ideally, if you are thinking about selling your business, you should start getting some specialist advice three to five years in advance. At the very least, your adviser will be able to give you an understanding of whether your valuation expectations are in fact realistic and, more importantly, they will be able to advise you on ways you can maximise that value before embarking on the sales process. This is not just centred around improving profitability, but advising you on what any buyer will be looking for in their due diligence, getting your ‘house in order’ and looking at the overall structure of the business to find ways to save tax when it comes to selling up. On average a sale usually takes somewhere between six and nine months from start to finish. However, the more time you invest in planning (the time you spend on your business before it goes on the market), the smoother (and quicker) the sales process is likely to be.  In reality, the speed of sale is generally dictated by demand in the market sector and geography of the business in question.

7 Use a corporate finance adviser

As a corporate finance manager I would say this, but while you may have a fantastic relationship with your accountant, not all accountancy firms have specialist corporate finance teams and, although they may have the ability to sell your business, they won’t necessarily have the experience or dedicated resource to ensure you get the best outcome. Specialist advice, careful planning and structuring are essential and can make the difference between achieving the best outcome, merely achieving an outcome (which may not necessarily be the best one), or languishing on a business for sale listing until you give up on the process entirely.

Darcie Rae is a corporate finance manager at Armstrong Watson, a leading firm of accountants, financial and business advisers that specialises in accountancy and strategic business advice for the hospitality, leisure and tourism sector. Click here for more information on its services

Related topics: Advice

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