The insider’s guide to a successful business exit

“Begin with the end in mind” may sound like a line from a self-help book, but when it comes to selling your business, it’s the best advice you’ll hear.

Chris Spratling knows this first-hand. With more than 30 years’ experience buying, growing and selling businesses, his ventures range from leading a management buyout of Reader’s Digest UK to scaling and selling a vitamin and supplement business and acquiring an accountancy firm and an equine feed business.

He has now turned his focus to advising leaders on how to exit their business. His book, The Exit Roadmap: The insider’s guide to selling your business profitably, distils decades of lessons into practical strategies, cautionary tales and personal preparation tips that can help to make the difference between a successful sale and an expensive disappointment.

For Spratling, the first step towards a successful exit should start with mental preparation, not financials or operations.

“Even in larger businesses,” he says, “there’s a real miss when key individuals don’t understand their motivations for exiting or have no clarity on valuation range and personal readiness.”

That readiness means knowing how much you need to meet your post-sale life goals, understanding the tax implications, structuring the deal for maximum efficiency and even planning where you want to be tax-resident if selling for a significant amount.

The consequences of neglecting this can be costly. Spratling cites the example of a client he advised who sold their business for £25m but because two married co-owners failed to transfer shares to their spouses, they missed out on a second set of Business Asset Disposal Relief. This small step could have added £200,000 each to their returns.

Even for those not currently considering a sale, it’s worth preparing in case an unexpected opportunity presents itself.

“Well over half the businesses sold across the world are done so off the back of an unsolicited approach,” he says. “You need to have clarity about your motivations for selling and whether the business is in a state to receive optimum value right here, right now. Then when you get that unsolicited approach, you can at least make an informed decision about whether now's the right time to do it. Make time to educate yourself on what could be the most significant decision of your life.”

Spratling has a framework he uses to determine the factors buyers look for in a company. These 10 drivers of business value are:  

1. A history of strong growth
2. The potential to scale
3. Recurring or contracted revenues
4. Positive market positioning and differentiation
5. Low reliance on key staff
6. Low reliance on key customers
7. Low reliance on the owner
8. Healthy working capital
9. High customer loyalty
10. Protected intellectual property

These drivers both boost value and reduce the risk for the buyer. That’s because buyers want businesses that deliver a strong return without nasty surprises.

The effectiveness of these factors is demonstrated in a story Spratling shares about an online training business he advised. His client wanted to sell at the same time as a major competitor. The two companies had similar turnover and profits, but the competitor was over-reliant on a few key staff and customers and had poorer cash flow. Spratling’s client sold for nearly double the multiple of its competitor.

“That is primarily because we spent time addressing their key drivers of value, so it stood up to scrutiny and due diligence much better than the other business,” he says.

Most deals collapse during due diligence and readiness can take years. Wellness entrepreneur Lara Morgan almost lost the sale of her business, Pacific Direct, in 2009 over missing paperwork for fire extinguishers in its Chinese factory. M&A advisors can run pre-sale due diligence to avoid similar issues – and avoid buyers using small problems to reduce the offer.

Spratling has some sobering stats to keep in mind: only around one in five businesses brought to market sell. Of those that do, 50 per cent will be dissatisfied within a year and of those, 75 per cent will regret selling at all.

“Given that, for most sellers, this is a one-time event, you want to get it right in terms of getting optimum value for any business, irrespective of size,” says Spratling.

To avoid this happening, there are common pitfalls business owners should try to avoid:

1. Failing to plan early. Many owners have between 75 and 80 per cent of their personal wealth tied up in the business, meaning early planning is essential.
2. Overestimating value. Less than 40 per cent of owners have had a formal valuation. As a result, expectations are often unrealistic.
3. Operational dependence. Businesses are over-reliant on the founder, key staff or a handful of customers.
4. Poor financial records. “There's nothing that's going to put an acquirer off more than a seller who doesn't know their numbers inside out,” Spratling warns.
5. Too few potential buyers. Targeting three or four prospects limits competition and leverage.

Spratling’s final piece of advice focuses on people. “Good businesses are driven by great people,” he says. “Build high-performing teams and they’ll build a high-performing business. Hire the best talent you can, even if you think you can’t afford them yet.”

Run your business as though you might sell tomorrow. You’ll not only increase its value for any future exit, but you’ll also make it stronger, more profitable, and more rewarding to run today.

You can apply to join us for an upcoming masterclass on how to exit your business successfully, in partnership with RBC Brewin Dolphin.