The benefits of not exiting – taking your business to £2m+ EBITDA

Market conditions aren’t right 

While from a personal standpoint, the time might seem right for you to sell your business, be it due to approaching retirement age or that your motivation for running the company is fading, there are a number of wider macroeconomic factors to consider first.

It's extremely important to look at the wider picture and understand not only the current financial state of your business, but also the general state of the industry in which you operate, and the overall attractiveness of the space for a potential acquirer. Assessing market conditions and how the economy is performing may indicate what level of interest you might obtain from a future acquirer, which makes the timing of sale pivotal to strike the best deal. For example, selling during a recession in which industries are in decline presents a higher degree of risk and uncertainty, making it a less attractive proposition for potential acquirers, unless your business model is robust, can demonstrate resistance to external shocks and can maintain strong levels of demand. In such instances, a prospective purchaser will see the value in an acquisition, irrespective of external factors. In contrast, waiting until market conditions are more favourable for your needs, when there are heightened levels of activity, upward industry growth trajectories and cheaper access to capital, will entice a wider pool of strategic buyers, providing a greater likelihood of multiple offers.

You could get a better valuation by waiting 12 – 24 months

When optimising for value, the best time to sell your business is when performance is strong, financials are trending upwards and demand for your products/services is at an all time high. But exiting too early in an upwards trajectory could mean missing out on realising additional value from a sale if you were to wait a while. When assessing whether you’re receiving the right price for your business, you should consider not only what your business is worth now, but also what the next 12 – 24 months look like.

Owner managed businesses are typically valued on a multiple of their revenue or profit. The revenue or profit used in this calculation is typically determined by the prospective purchaser by reviewing a combination of both historic and forecast performance. The general consensus is that a more established, more proven business with strong growth prospects will generate stronger revenues and profitability, thus attract a higher multiple as the risk is lower.

Typically, there are various hurdle rates with regards to the correlation between existing levels of financial performance and pool of potential acquirers. For example, a £1m+ EBITDA business may attract a pool of 10 interested buyers. However, by growing a business further to £2m+ EBITDA, you significantly widen the net of prospective purchasers, presenting a more favourable opportunity for a stronger valuation, and therefore a higher price paid.

There isn’t an appropriate buyer

Typically, owner managed businesses are built from the ground up, with strong values and cultures embedded into each employee. While a potential buyer might pay a reasonable price, there are other factors to consider when deciding whether to hand over the reins. Finding the right home for your business is equally important, ensuring a new owner’s views and long-term strategy are aligned with those of the existing company and associated personnel. 

While you might not consider this important if full ownership/control is passed to the buyer, often transactions can contain an ‘earn-out’ pricing structure, which is an element of contingent consideration that exists as an incentive for exiting management/shareholders to ensure a smooth transition to the new party and continued growth post-acquisition. If synergies and strategies are not aligned and the business suffers as a result during the earn-out period, you may end up with less cash than previously anticipated. 

Tied in to the previous two points (timing and valuation), the right buyer for your business will likely pay a higher price, and ultimately be a better fit overall. If this isn’t the case and the quality of prospective parties is low, it’s worth considering pausing the exit process, taking the necessary time to grow your business further with a view to attracting not only a higher purchase price, but also a stronger quality of buyer and a better overall fit for the business moving forwards.

What should I personally do?

While your initial desire might be to exit today, it could be preferable to further grow your business instead, which could present you with much stronger opportunities in the long run. If you’re in a position of uncertainty and contemplating what’s best for your business, the experience of an advisor is invaluable in providing you with an understanding of current valuation, analysing performance to date and identifying the key areas for growth. This will allow for the correct positioning of your business, maximising value along the way and ensuring the exit from your business is at the best price when the time is right.

Find out more about what to expect when exiting your business

View the rest of the articles in our series 'Selling your business: how to plan your exit strategy' to find out the essential elements you'll need to consider when planning for a successful exit.

Plan your exit strategy

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