A very successful businessman once asked me a question I’ll never forget, which was: “You’re either gonna sell your business or go out of business, which one do you want it to be?”
I was going to shoot back with, “It can’t be that simple” but he was right, wasn’t he? You are either planning your exit or someone is going to force it upon you. We’ll all choose the former but sometimes circumstances, not least a pandemic, can take down a good business.
For the most part, I am going to concentrate on a planned exit where you’ll be financially rewarded (hopefully handsomely) for all of your endeavours. If you are facing a forced exit, you still have some things to take care of so that you don’t have ongoing problems and can bounce back with another venture. I’ll tackle this at the end.
Planned business exiting
You wouldn’t sell your house without decorating it first, would you? Surely the vast majority of people would agree it is a good idea to extract maximum value. After all, it is a well-known fact that a new kitchen will add 6% to the value and a new bathroom will boost it by 4-5%. It is easy to do the maths from there, isn’t it? Spend ‘X’ and probably get ‘Y’.
That thinking extends to business valuations. Before you think, “What an earth does a marketer know about business valuations?” please keep in mind that I have an exit plan too, ever since I was posed the question by that very successful businessman in fact. Over the past few years, I have spoken to numerous accountants, lawyers, consultants and funders. Once we remove the vagaries of “Whatever someone will pay for it” or even worse “It depends” (yes, I have been on the end of those pearls of wisdom too) there are commonly agreed factors that the buyer will want to see to realise his or her return on investment. Those include:
- Loyalty of customers
- Duration of contracts held
- Lack of dependency on the seller
- Established systems and processes
- Brand power and potential
Typically the accountants (Mark Holt & Co are experts in this area) will then get involved in generating a valuation based on earnings before the interest, taxation, depreciation and amortisation (EBITDA) model. Once you have that figure in place, the valuation then depends on the multiples you can apply to it. For ease, say your EBITDA figure is £250K and you have scored pretty low on the above factors, you would be lucky to get an offer of more than 2 times multiple. If you score highly on those factors, you might get 5 – 10 times multiple. So, if you score low now it’s worth £500k but it could be worth up to £2.5m if you tick all the boxes. Of course, other factors come into play such as industry trends etc but, put yourself in the buyer’s shoes and you’ll see it makes sense.
So there are things you can do right now to increase your valuation and let’s face it, most businesses are made up of more than one shareholder so it makes sense to get a maximum valuation for you to exit and retire or invest in another venture.
Looking at the marketing aspects of those valuation factors, there are plenty of things for you to look at
There are plenty of things in that list that are dependent on effective marketing:
- How good is my customer data and can I access them all at a touch of a button?
- Is the brand dependent on me or a few key personalities?
- How slick is my marketing and can I show clear metrics and return on investment?
- How far does my brand reach and could it go further?
Here’s where the buyers start tyre kicking and nobody likes a tyre kicker – especially when you’ve put your heart and soul into building your business. In your head, you think you are on a 5 times multiple but the buyer isn’t convinced by your answers and offers 3 times. £500K is at stake.
The cost of all of that? Not a multiple that is for sure! We can advise you on what the ‘X’ is so that you can see how it improves your ‘Y’. Often, it really is like a kitchen or bathroom scenario.
Forced Business Exiting
As I said earlier, good people can get forced out of business as a result of circumstances beyond their control. It is important from a marketing perspective that you close things down properly and manage your reputation as best as you can.
If you close down marketing assets such as websites, YouTube channels, social media platforms (which could have a value) correctly your insolvency practitioner might be able to generate more funds for the creditors or preserve assets for a new buyer.
Also, reputation management is really important here. We’ve worked closely with insolvency practitioners and their clients to carefully explain the reasons why a business is in trouble and publicly apologise to staff and creditors. It might make a big difference when you recover from the unfair hand you’ve been dealt and want to get back into a new venture or employment.
This content was written for Mark Holt & Co accountants as part of their Business Success campaign to help companies emerge from the pandemic.
Written by: Martyn King (Managing Director)