When you initiated your business venture, you had carefully curated a plan. As the business has evolved and exploded over the years, you’ve diligently implemented strategies to enhance your products, services, customer base and profits. It logically follows that when you contemplate selling your business, doing so without a well-structured plan becomes illogical. Once you’ve made the decision to sell your business, regardless of your timeline, it’s imperative to take action promptly.
Demonstrating robust metrics becomes imperative to showcase your company’s vitality and potential to prospective buyers. Here at Avail Financial Planning, Associate Partner Practice of St. James’s Place, we can offer valuable guidance for those embarking on the journey of exit planning. We also delve into the guidance and technology available to facilitate this process.
What role does business intelligence play in exit planning?
Potential purchasers of a small or medium-sized enterprise (SME) invariably demand a wealth of data to support their decision-making and potential offers. This starts with essential metrics like consistent revenue and profit growth, underlining your firms compelling and sustainable value proposition. Certain SME acquirers may even decline to consider businesses that fail to meet specific eligibility criteria, such as achieving £1 million in revenue and a 15% profit margin. To provide context, its crucial to benchmark your data against firms of a similar size and within your industry. For instance, industries like grocery sales may operate on razor-thin profit margins, while service-based enterprises might expect more favourable margins. What qualifies as significant growth can vary substantial; a manufacturing company might deem 10% to 15% annual growth commendable, while a dynamic young tech firm could aspire to much higher growth rates.
Once you have captured a potential buyer’s attention, they will scrutinize more detailed metrics, including working capital and cash-flow forecasts. Having recurring revenue especially from customers on contractual agreements, enhances your firm’s appeal. For instance, monthly contracts with notice requirements provide assurance of consistent income. Andrew Shepperd, co-founder of Entrepreneurs Hub, emphasis the allure of annual recurring revenue and even more enticing monthly recurring revenue. This could encompass subscription-based models or businesses that receive payments in monthly instalments, ranging from managed phone services to insurance premiums.
Additional metrics to bolster your business’s attractiveness include:
- Low customer and staff turnover: Demonstrating low turnover rates among both customers and employees signifies a competitive edge in your products, services, and workplace satisfaction. Why not speak to us about how we can help to create a more attractive offering financially, in addition to the ‘normal’ salary expectations.
- Retained Profit as a Percentage: Year-on-year comparisons of retained profit percentages can highlight the increasing value of your products or services. Even if you lose a few customers, if your costs remain constant, your revenue and profits will still rise.
- Positive Environmental, Social and Governance (ESG) Factors: A solid track record in ESG factors, a favourable credit history, and minimal complained, legal judgements, tribunals, or regulatory fines further enhance your business’s reputation and desirability.
Andrew advises transparency in revealing such information upfront, as the due diligence process will eventually uncover these aspects. Transparency instils trust and prevents potential buyers from suspecting hidden issues.
Various reporting and analytical tools are available to assist in generating, reviewing, and presenting these crucial figures. As a business owner, you likely possess insight into what drives these favourable metrics. However, technology can pinpoint the most vital aspects and make them more accessible, especially to those less familiar with the business.
Business intelligence tools and other software solutions can automate data retrieval, provide insightful analysis and present information in user-friendly dashboards and visually appealing formats, capturing the attention of potential acquirers. They also facilitate the generation of regularly updated figures, a crucial requirement during negotiations.
“Before a sale, you’ll need some kind of system to help you gather and present all this information,” said Andrew. That could include accounting software, enterprise resource planning (ERP) and customer relationship management (CRM) systems and other business systems such as inventory control and costing software.
Dedicated business-intelligence software can go a step further by ingesting business-critical data from other systems, then analysing and presenting it in a user-friendly way, which could make all the difference during a sale process. Such analyses support decisions that will increase productivity, revenues and growth – so it could make sense to invest in this software as far ahead of the sale as possible. Whether you need new software and how much to spend on it depends on your specific business needs. Factors in the decision include what you have already, how much time the new kit is likely to save and what other benefits it offers, such as presenting tools and an easy-to-use dashboard.
“If you’re an SME spending, say, £100,000 on a new ERP system and data warehousing, you’re unlikely to recover that in your sale price,” said Andrew. “Besides, the new buyer may want to replace it with their own system.
“But if the software costs £10,000 and it helps you uncover useful analysis – and helps your business to appear sharper and more professional – the return on investment could speak for itself. For an SME, a moderate spend on some analytical tools can be incredibly good value and transformational in understanding and presenting the business to others.”
Exit strategies may involve the referral to a service that is separate and distinct to those offered by St. James’s Place.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
