Hidden gems

Business owners planning their exit need to ensure they maximise the value of the company’s assets.

As the UK economy emerges from recession, returning confidence is driving a renewed interest in merger & acquisition activity in the business community. Many shareholders are resurrecting their exit-planning strategies and are keen to explore ways to improve their business value. But to succeed requires careful planning and knowledge of what buyers are looking for.

The rising demand for quality businesses – from both domestic and overseas buyers – has seen those that have been able to create a sustainable competitive edge commanding premium prices.

Every business has different attributes, some or all of which may be of interest to potential purchasers. The issue is that many company owners are (rightly) focused on their internal operations and are therefore unaware of what would make their own particular business attractive to potential purchasers. This can mean that they have potential hidden assets, with real tangible value, that will never get realised on sale of the business.

Goodwill assets

The traditional method of valuing a company based on historical cash flows will usually undervalue quality businesses because it does not factor in the value of many sustainable competitive advantages such as people, customers, internal processes and intellectual property; the ‘goodwill assets’ of the business. Left unconsidered, they will often be lost in the sales process, leaving business owners uncompensated for their years of hard work in creating a sound business.

“Business owners can take action to either enhance the key business attributes that command premium prices or, at the very least, showcase them in the best possible light,” points out Tony Müdd, divisional director at St. James’s Place. “Unfortunately, this important stage often gets overlooked and owners don’t achieve the best possible valuation for their business.”

Müdd believes that business owners ideally address this crucial stage of the sales process two to three years before their planned exit date. Where companies have fundamental issues to address – such as the strengthening and incentivising of secondary management teams – these can be time-consuming exercises that should not be rushed.

Of course, some company sales are driven by personal circumstances where the vendor has less time to address these issues. This is not necessarily a problem as, with appropriate guidance, business owners can still ensure their ‘hidden assets’ are presented to potential purchasers to improve the chances of obtaining a premium price.

Best buyer

Having established a robust business platform to present to the market, the next task for owners is identifying a strategic buyer willing to pay a premium for the benefits the business can provide.

“Always consider purchasers who could obtain a genuine and sustainable benefit from acquiring your business and who can deliver significant future growth using their existing clients in conjunction with their service lines or products,” suggests Müdd.

Possible options could include:

  • Overseas companies requiring a growth platform in a new geographic area
  • Sellers of complementary products who could exploit cross-selling opportunities
  • Companies seeking an entry route into a new market
  • Customers or suppliers who may be looking for vertical integration opportunities

Selling a business is a once-in-a-lifetime transaction for most owners. Recent economic improvements have created an opportunity for shareholders to realise premium prices on sale. Experience suggests that the generation of sustainable competitive advantages and the identification of a strategic purchaser can increase business valuation significantly.

Andrew Rogers

As a Partner Practice of the prestigious St. James's Place Wealth Management, I have provided financial advice for businesses and private individuals for 27 years.

My wealth management services focus on building relationships, based on my core values of empathy and trust to fully understand each client’s unique financial needs and future aspirations.

With many years of hands-on experience in the financial services, I have the industry knowledge to work closely with clients to provide solutions that meet both their immediate and long-term personal and business goals.

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