14 Apr 2022
By Stuart Clark, Managing Director at Russell & Russell Business Advisers.
Every so often a flurry of activity ripples through the Scottish business community, of a nature that makes the more astute business owner look up from the pile of problems on his or her desk and sniff the air.
Such a disturbance in the normal run of things has taken place over the last couple of months, with a series of notable acquisitions – some of them chunky enough to be heading well into nine-figure territory.
Some were smaller, such as the husband-and-wife team at KF Dental in Leith selling out to Clyde Munro Group, and Rupert Barrett’s premium market holiday firm Largo Leisure being snapped up by private equity’s Limerston Capital.
Others were more like City deals, with Telefónica Tech shelling out up to £175 million for Glasgow-founded digital transformation and data analytics company Incremental. The owners of Ayrshire’s Giglets Education have sold to Sweden, as has Scottish education technology company Sumdog.
It is only natural for owners and major shareholders in other businesses to look at these kinds of deals and mull over how much their own enterprises could be worth and whether they, like the current clutch of sellers, could be sitting on the beach with a pina colada later this summer.
At least, one would assume that to be an understandable reaction. But the remarkable fact is that the great majority of owners have never paid much attention to their eventual exit strategy, or even how the business would continue to operate in their long-term absence.
I would say that in the region of 95% of my clients have never unilaterally raised the subject of how they could extricate themselves from their businesses with their commercial dignity intact and with a fair reward for the long hours and years which they have spent building their firm up.
Many, it is fair to say, are too intricately involved with the day-to-day running of the business to peer too far ahead but, like death and taxes, the time to hand over the reins will eventually arrive and it is only sensible to ensure that when it does, the best possible price can be achieved.
So, exit planning cannot start too soon. It matters not that the event may be years ahead – implementing everything that must be in place to successfully sell the business can run without conflict alongside ongoing operations. We talk about getting “sale ready” – this isn’t necessarily the day you NEED to sell, but the date that you CAN sell if you decide to (and know you’re getting rewarded for your efforts).
It is important to have a clear idea of what post-business lifestyle is desired – whether it is a small retirement cottage and a quiet life, or travelling the world at the very front of the plane – and how it will be successfully funded. Getting out at 50 will obviously require substantially more capital than at 70.
Many people have a nicely-rounded financial figure in mind which they would hope to achieve when they sell but, as with house sellers, this can be unrealistic and a professional valuation and clarity about predictions are necessary first steps.
Valuation can be based on a number of factors, however the most common method is based on a multiple of profits and it is prudent to do everything possible with costs and overheads in the run-up to sale to improve margins, so that the underlying profitability trends are rising – thus increasing not only value but attractiveness to a buyer. However, recurring revenue models are also increasingly attractive and could mean a change of tact is required to the business model.
Identifying who to sell to must also figure, whether it be a competitor, a supplier seeking to consolidate the supply chain or professional investors on the hunt for upside potential. Dealing with an interested buyer can avoid the world of pain associated with opportunistic predators.
When to sell is a major factor – ideally when the business is in tune with the commercial zeitgeist, when it is compares favourably to similar operations and when both top and bottom lines are on an upward trajectory.
Capital Gains Tax, Business Asset Disposal Relief and Inheritance Tax will all weigh heavily on a decision and owners will obviously have to seek advice from the professional services advisers who quite possibly have already guided them through the birth, growth and maturity of their businesses.
The series of successful exits referred to above will certainly provide food for thought and will perhaps spur business owners to consider seriously what they would wish to achieve. As ever, professional guidance will dramatically crystallise that thought process.
