When you started your business, you had a plan. As it’s grown over the years, you’ve put strategies in place to build on your products, services, customers and profits. It stands to reason that as you approach a business sale, doing so without a plan makes no sense at all.
Once you’ve made a decision to sell a business, whatever your timescale, it’s time to act. Strong metrics are essential to prove the health and potential of your company to potential buyers.
Charlotte Walters, Principal at Avail Financial Planning, an Associate Partner Practice of St. James’s Place, has advice for those embarking on exit planning, and at the guidance and technology that is available to smooth the way.
What is the role of business intelligence in exit planning?
Potential buyers of a small or medium-sized enterprise (SME) always want to see as much data as possible to support their decision and potential offer. This starts with metrics such as regular growth in revenue and profit, to show your firm has a compelling and sustainable proposition. Some SME acquirers even refuse to look at firms that don’t meet certain eligibility criteria – such as £1m revenue and 15% profit.
To make sense, the data must be benchmarked against firms of a similar size and sector. For example, some industries, such as grocery sales, might operate on very tight margins, while others, service as service-based businesses, might expect a higher margin. Good growth at a manufacturer might be 10% to 15% a year, but in a dynamic young tech company, it might be much more.
Once you’ve attracted a buyer’s attention, they’ll look at more detailed metrics, such as working capital and cash- flow forecasts. If you have recurring revenue, especially with customers on contracts, that helps make your firm attractive. For example, if you have monthly contracts that require notice to end, the acquirer can see that income is reliable.
Andrew Shepperd, co-founder of Entrepreneurs Hub, said:
“Annual recurring revenue (ARR) is good, and monthly recurring revenue (MRR) is even better. It could be a subscription or rental business – anything from a managed phone service to insurance paid in monthly instalments.”
More metrics to help sell your business
Other important metrics include low customer and staff churn, which show you have happy customers and employees. If either of these churn rates are high, it suggests your products, services or employee proposition aren’t competitive.
But customer churn isn’t everything. Purchasers also need to look at retained profit as a percentage, year on year. For example, if you have 100 customers each paying £1,000 a year, but the next year you have 95 customers paying £1,250, that suggests your product has become more valuable. Losing a few customers isn’t necessarily a problem in that context – if your costs remain the same, your revenue and profits will still be higher.
Other information you could show potential acquirers includes a good record on Environmental, Social and Governance (ESG) factors; a good credit history; and low or no complaints, court judgements, tribunals or regulatory fines.
“The due diligence process will find these things out, but it pays to be transparent up front,” said Andrew.
“Otherwise, it will breed mistrust and make the buyer wonder what else you’re hiding.”
Investing in reporting technology ahead of an exit
Many types of reporting and analytical tools can help you produce, review and present these figures. As the business owner, you may have a good idea about what drives these beneficial metrics. But for someone who doesn’t know the business as well as you, technology can highlight the most important features and bring them to life.
Business-intelligence tools and other types of software can also often help automate and speed data retrieval and provide insightful analysis you may not be aware of. They can help arrange all this information in easy-to-use dash- boards and attractive, digestible visual information that can catch the eye of potential acquirers. They can also help you produce regular figures, which is important because potential buyers will want monthly updated figures 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.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
Avail Financial Planning is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the groups wealth management products and services, more details of which are set out on the group’s website.
Find out more about Avail Financial Planning on 01525 654771 or 07508 810753 or visit the website.
SJP Approved 17/05/2023
Charlotte Walters
Avail Financial Planning
Associate Partner Practice of St. James’s Place
