For many business owners, their business is their life’s work. It’s their baby, and handing it to someone else is not an easy decision, and they often feel that nobody can run it as well as they do. And this personal view needs to be fully thought through before proceeding with the sale.

The Importance of getting mentally prepared to sell

This is a very interesting  psychological area as many business owners struggle with the idea of selling their business. They feel they are either letting their clients down or letting their staff down or both! In fact, it couldn’t be more the opposite as they are looking for a safe pair of hands for their business to continue the legacy they have created, to protect their clients and staff and to give them all a continued great future. Once a business owner gets to grips with this and understands more about the process to achieve this, they can move on to the next step.

A business owner should not see selling their business as an end but as the start of the next chapter of their life. In many cases, their business defines who they are, so they need to find another purpose, another vision, another dream and spend time thinking this through. We have had some fantastic conversations with business owners about what they are going to be doing when they have sold, and it’s so good to hear them being excited about it.

How does a seller start to understand this part of the process?

There isn’t a right or wrong place to start, but there are key areas that a seller should address and get comfortable with, as this will make their journey so much easier and much more exciting.

There are five key areas to look at, so let’s start with the most contentious/difficult area… the subject of money. A business owner has a right to capitalise on their life’s work. This is why they made sacrifices, took risks, ended up working seven days a week at times, missing their children’s nativity plays or sports days and working through stressful times, especially over the last decade or so. They should never forget where they started and what they have sacrificed to be where they are today. They deserve it.

1.      The Price - Need vs. Want

The seller needs to know their price. The phrase ‘I want as much as I can get’ doesn’t wash. An owner needs to think hard about what they need as a capital event compared with what they want, i.e. as much as they can get! These two figures may be very different, but they are both crucial, and they will help sellers during negotiations.

A seller must work out what the business needs to give them in relation to a capital event. This would be the same as taking a financial advisory client through a cash flow planning exercise.

A seller should bear in mind that they may well be earning less after they sell their business, so they need to be comfortable that they have sufficient cash flow to continue to provide the lifestyle they want. This is critical in getting this buttoned down.

Once this has been worked out, it will give the seller the minimum consideration needed from their business to make it work for them.

For example, let us say this figure is £4m in total before tax to give the seller what they need. This doesn’t mean their business is worth £4m. Their business is worth what it is worth to a buyer. You need to overlay what the market would value their business at.

Handling the valuation point with clients

Once we have gathered sufficient data on the business, we are able to then match that across what we see in the market to help our clients understand the range of values that may be available for their business based mainly on different multiples of either FUM, EBITDA or OAF. Most firms will be sold on a multiple of EBITDA, but it is helpful to see what the other valuations bring in.

Hopefully, what is being paid and what the seller needs are similar. This greatly helps with negotiations as the owner knows what price they can’t go below. Therefore, if they get offered a higher figure than this, it is far easier to then push the acquirer further, knowing that they are going to exceed the seller’s target. It’s just a matter of how far an acquirer can be pushed.

Sometimes the amount a seller needs and the value do not align, and at this stage, an honest conversation needs to take place. Naturally, we will do everything we can to help our clients get the best price, contract terms etc, but if they need £4m and their business is worth £2m, the deal is not going to go ahead - we are not magicians! However, this highlights just how important it is to plan in advance and in this case, it might mean the business owner puts off selling their business and looks to grow it further before selling. Alternatively, the owner may need to readjust their lifestyle and future plans.

2.           Defining the vision

In our experience, most business owners don’t have a clear plan as to how their life will map out following the sale of their business. Usually, something has happened to make them think about selling their business, and it’s understanding this trigger and then helping them explore and build it out further. This comes down to being able to help someone paint a clear picture of what their future looks like after selling the business.

We encourage sellers to think about their dream and define the vision of the future. This vision is important and needs to be discussed with the seller’s spouse/partner/family as they are critical to this.

We really can’t emphasise how important this is, and we generally have a rule of thumb…if a business owner cannot articulate what their future is going to look like after they have sold their business and be excited about it, there is a very high probability that during the difficult stages of the sales process, they will pull out. It just gets too hard, and because they don’t have a clear picture of why they are doing this and going through all the hassle, they give it up as soon as it starts to be too difficult.

This is a massive waste of time and money for everyone concerned and could have a negative impact on the business as well.

So we encourage potential sellers to think about this long and hard before starting this journey, as it will save them time, money and stress.

3.           Defining Working Life following the sale

We spend a lot of time looking at what a seller’s working life will look like when the deal is done. This is important if they plan to stay on for any period after the deal.

Many people make this change well as it allows them to step back from doing all the stuff that gets in the way of seeing clients. They immerse themselves in what they enjoy and are happy to focus on that and experience a better work-life balance.

In the worst case, a business owner still behaves as if the business is theirs and constantly pushes back against change or believes that the new rules do not apply to them. This has disaster written all over it.

The good news is that many acquirers are not just buying the business. They are buying the business owner and their skill. They want to find ways of working with the seller to keep their entrepreneurial skills and business acumen thriving, as it will benefit them. The key here is to be very clear about what role the seller wants to play and what this will mean to them going forward.

You only need to read some of the financial press to see examples of where it might not have worked, as both parties hoped or were led to believe. If you did a review of these examples, in most cases, you would be able to put this down to not enough time, detail, and due diligence from both parties being done to get absolute clarity on critical points.

We keep in contact with our clients after the deal has happened to make sure that everyone is still living up to their own end of the deal, and because we spend a great deal of time getting this right at the front end, our clients do not tend to experience this.

Part of this is ensuring full details are laid out in the sale and purchase agreement (SPA) so that there are no areas of debate or lacking clarity around who does what and when, etc.

This comes back to a cultural fit between the two companies and people being honest with each other, and there are many good examples of this today.

4.           The Impact of Money

We all hear lottery winners stating that their win won’t change them, but what is the reality when an individual has sold their business?

The seller has just banked a significant sum of money, and if they don’t think it will change them or change how they feel, they’re wrong.

We recommend reading ‘The Chimp Paradox’. It’s a great book by Professor Steve Peters and a mind management program/understanding. Basically, your Chimp represents your emotions. For example, how you feel when someone cuts you up in traffic or when you have a packet of biscuits, and you want to eat one, but your Chimp encourages you to eat the whole packet!

Now imagine an individual has sold their business, and the new owner, who they now work for, is putting pressure on them or annoying them. At the slightest hint of pressure or annoyance, the seller's Chimp will be jumping up and down on their shoulder, telling them to tell the new owner to stuff their job. They don’t need the hassle; they can walk away as you have money in the bank. A capital event does change how an individual views matters so a seller needs need to be very clear as to why they want to continue working so they can manage their Chimp! They must remember why they are still working and follow their new vision.

A business owner should never underplay this process's personal and mental aspects. Life is too short not to be happy!

5.           Surviving the Due Diligence Process

The reality is that the business owner is going to be running a business, maybe doing client work, dealing with day-to-day issues as well as selling their business, which involves numerous meetings, negotiations, working with your accountant and legal advisers etc. On top of this, they will experience up to four separate Due Diligence (DD) firms coming in and crawling all over the seller and their business, asking questions, querying information, and implying that they have done certain things wrong. It is unpleasant and will make sellers doubt why they are doing it.

At this point, it is essential for business owners to go back to their vision, their new future and remind themselves why they are going through the process.

Another little point is to ensure the seller has a break before they start the DD process, as we would advise they don’t take another one until the deal is done. And then book another one when the deal has been completed. The seller will need a break, and so will their spouse/partner. It’s vital that the seller’s spouse/partner is bought into this as they will also feel the pressure.

IN SUMMARY

Selling a business isn't merely a financial transaction; it's an emotional odyssey. Business owners often grapple with a blend of sentiments, from anxiety about betraying staff and clients to excitement for future prospects. This journey underscores the crucial importance of mental and emotional preparedness. Entrepreneurs can navigate this process with clarity and conviction by understanding the actual worth of their business, defining post-sale life, and bracing for the rigours of due diligence. As they approach this pivotal crossroad, it's vital to remember that selling is not an ending but the beginning of a fresh chapter. With the right mindset, the next phase can be just as rewarding, if not more, than the last.

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