2020 vision: Planning ahead for family businesses
Many well-run family operations have managed to avoid too much hardship over the past few months by keeping an eye on cash flow. However, with Brexit and a general election on the horizon, potential buyers are still choosing to hold back until the situation is clearer.
Nevertheless, this slowed enthusiasm from investors should not be seen as an excuse for business owners to sit back and await its return. Instead it provides the perfect opportunity to make the business as attractive as possible.
Regardless of the route a business owner might be thinking of taking, be it a trade sale or management buy-out, there are a number of areas that must be considered in order to ensure that the highest possible value is gained from the sale.
Business health check:
- Financial viability – The financial health of the business is vital and can be one of the biggest concerns when preparing for a sale. Management teams should aim to establish an attractive enterprise value in order to prove that the business is sustainable. This can be done in a number of ways, including reducing debtor and trade sale days and working capital adjustments. Sale values are calculated by multiplying the profits by a set multiple, therefore the better the bottom line, the better the valuation.
- Market conditions – Monitoring market conditions ahead of time is essential. If the market is performing well, then it might be a good time to exit. If not, a change of strategy could be necessary.
- Management structures – A strong leadership team is attractive to most potential buyers. To form this, team members’ strengths and weaknesses must be considered at an early stage to allow time to shape the management structure. This process can involve having honest conversations about performance and future plans, these are not always easy subjects to broach, especially if family members are involved.
- Paperwork – All key employees should have a rock-solid contract in place containing restrictive covenants, and wherever possible, suppliers and customers should be locked into long contracts.
- Business structure – Assessing the structure of the business and whether it is set up in the most tax-efficient manner is a wise move and may protect against significant tax liabilities when the business is sold.
It is hard to predict what 2020 has in store for all organisations, not just family businesses. Therefore, if an exit is likely to be on the cards, planning ahead will continue to be crucial to a successful sale.