Maggie Morrissey: The process of selling a business has changed, have you kept up?

Partner at KPMG, Maggie Morrissey, has been carrying out due diligence for 15 years. The market has never been tougher, she warns, but the deals are out there, you just need to be ready

Do you want the good news or the less good news first? The good news is that there is still activity in the small business and mid-market company sector.  

Deals are being done. The less good news – although it is manageable – is that those deals are becoming very protracted.

I remember back in the pre-Lehman days when there was a frenzy of deals.

People were almost buying businesses blind. If you think of selling a business as like selling a house, it used to be almost as if people were buying a house without even going inside it.

Now things are much more complicated and take considerably longer. I’ve been doing due diligence on businesses for 15 years, and I’ve never seen deals as drawn out as they are now.

To continue the house analogy, when you sold a business it used to be enough to hoover, mow the lawn and make the beds. Now the purchasers are likely to want to lift up the floorboards. If it used to take six to 12 months to sell your business, it’s now probably going to be more like a year to 18 months.

Companies are not reacting quickly enough to this change of pace. We feel they could do more to help themselves – particularly the vendors of businesses.

So, as the potential vendor of a business, what can you do to prepare yourself for this elongated, more complicated acquisition process?

One of the more frequent issues with companies that have grown from being small and entrepreneur-led  to a middle sized business, is that suddenly the founder finds it’s quite difficult to stay on top of everything.

Sometimes entrepreneurs find that although they’ve grown a successful company from a commercial perspective, they don’t necessarily have the resources to manage all aspects of the business. Just because you’re a good builder, it doesn’t mean you’re going to be good at running a building company.

This leads to a situation where entrepreneurs can try to sell their business without really knowing what they’re selling, nor what it looks like to a purchaser. To their potential buyers, it feels as though they’ve been sent the details of a two-bedroom house, then they go to visit only to discover it’s actually a one-bedroom house.

In times like these, a potential buyer might also wait to see what your next month’s trading looks like before finalising a deal. Bad or deteriorating results could change their minds. Again, you need to make sure you are prepared for them to play that move.

Sometimes what’s missing among small and medium-sized businesses is the rigour and control of regular reflection upon how the business is performing financially. A large company will do monthly accounts to check themselves, whereas smaller companies do not always have the discipline and habit of doing that. That’s understandable, especially if they’re very cash focused.

Also, entrepreneurs are often creative people – numbers aren’t always the priority. But some SMEs only do their accounts at the year end, and if you’re looking to grow and sell that’s probably not enough. Even quarterly would be better than once a year.

As a result of all this, it is not uncommon for us to come in and look at a small business and discover it doesn’t have hard robust numbers.

When we look at a business, we like to think of ourselves as like a surveyor. Now, typically, if you’re buying, you bring in your surveyor after the house purchase is on the hook. But because of the way things are, we’re suggesting to business purchasers to get in the surveyor before that stage.

To anticipate that, our more sophisticated clients who are selling businesses will ask us to come in before they put themselves up for sale. In effect, it’s like doing due diligence on your own business to prepare it for sale.

“There is great appetite for deals out there, and they are happening. It’s just harder getting them over the line”

It gives you the chance for someone independent to take a look at your business. That means that if they find something wrong with the business, the equivalent of damp in a house or a roof that needs repairing, you can be prepared.

I don’t mean you have to show your hand, but you can anticipate your buyer’s reaction when they find out. You can build the fault into your pricing. That way, you’re covering yourself against price chipping and haggling.

It’s the house equivalent of saying: “No, I didn’t tell you the house needed a new roof, but the price was lower because it’s an old house and it’s obvious it would need some repair work. So I’m not going to lower the asking price, which already reflected the house’s age.”

Having said all this, I definitely wouldn’t want to give the impression that this more complicated acquisition process is prohibiting activity. There is great appetite for deals out there, and they are happening. It’s just harder getting them over the line.

The extra good news is that there are more small business and middle market deals happening than larger deals, not least of all because the debt financing is easier to secure from banks when it’s small amounts of money or they can be funded out of cash flows.

The important thing to remember is that if you’ve got a commercially good business, just make sure its financials are robust and sound. And spend a bit of time prepping it for sale, behind closed doors. A good business will still sell, but just be prepared that the purchasers will take their time, and they will turn over every stone – or lift every floorboard!



Social Bookmarks