6 things to consider before selling part of your business

Divesting a business can streamline your organisation and generate capital to reinvest in its future. But where to start? What are the challenges? And what’s the most effective way to get the best price? Interim Managing Director Andy Halsall, a transformation and disposal specialist, shares his advice.

1. Consider your options

Typically, when leaders consider a sale, they’re looking at business units offering non-core services or loss-making divisions that are too small, too different, or don’t fit with the current business strategy. The need for cash is sometimes the biggest driver, but if a business unit’s underperforming, how attractive will that be to potential buyers? 

You have to consider the art of what’s possible. Can it make money? How much can it make? What are the market opportunities? I went into an organisation that no longer wanted a small pest control business which was losing £0.5m a year. I was able to demonstrate that within six months it could be making £1.5m in profits, making it much more attractive to potential buyers and creating value for the seller. 

If the business being sold provides a service that’s part of a wider group offering to its customers, it can be worthwhile considering a preferred supplier agreement (PSA) or long-term contract as part of the sale. While this can sometimes limit the number of potential buyers it adds considerable value to any sale. 

this is a process worth doing even if you don’t end up selling – every business can be improved

2. Evaluate current performance versus optimum performance 

What does best-in-class look like for your business unit? What does revenue, gross margin and EBITDA look like in a perfect world? What investment will it take to get to that point and how long will it take? This evaluation process is something rarely done internally and usually requires bringing in outside expertise.

On one of my assignments I was asked by a large group to analyse a business that it wanted to sell. It was small in terms of group revenue at less than £100m but reasonably profitable. We analysed the market and business, got a clear understanding of its potential and likely value if sold. The leaders decided that they wanted to invest and grow the business unit and so a transformation plan, including target acquisitions, was agreed. So, this is a process worth doing even if you don’t end up selling – every business can be improved. 

3. Identity potential buyers

Understand your market and share, look at your competitors in that space and see which other groups /businesses may provide the same service as part of their portfolio. Who’s cash-rich and already on the acquisition trail? Competitors are often the most interested parties, but they’re also unlikely to enter into a PSA, so you have to be careful not to disadvantage yourself. 

Ideally, identify up to three buyers and make an approach directly – exploit existing relationships in your industry/network. Avoiding a confidential formal process using accountants, lawyers, investment banks, etc as managers often leads to more cash in the bank post sale. Ensure you at least discount the possibility of a direct sale and less formal process.

4. Optimise the business 

You’ve decided to sell and you know what optimum performance looks like. It’s time to get there. You need to start with a detailed turnaround plan and go for quick wins. For example, are the services being fully exploited and utilised by the rest of your group? That’s often where you’ll find rapid expansion. 

From the start, identify the big issues that may impact your sale and ensure they’re addressed. My approach is to sit with all the key people on day one to get a scope of the business. I then spend as long as is required around the whole business, on the ground as it were, as this is usually where key elements of your transformation are identified. Employees are sometimes the biggest challenge but they do represent the biggest opportunity, and you’ll need them engaged and motivated if you’re to transform the business. 

5. Balance speed and value

Once you’re on an upward trajectory, when’s the right time to sell? Each scenario’s different. It may depend on how many buyers are interested and how eager they are – as well as how desperate you are for the cash. 

If money’s not a pressing concern and you just want the best possible price, you’re typically looking at around 12 months – six months to turn it around and optimise it and then three to six months for the sale. Again, it will be longer if you go down the more formal process. It helps to have someone who’s done this before and who has a feel for the right time to act.

6. Don’t miss the details

There are many practical issues that get overlooked when preparing for a sale. It’s worth considering what you think any buyer may want you to warrant against as part of the sale agreement. With employees, make sure you’ve resolved any disputes, filled difficult vacancies and have a strong management team in place if you think the potential buyer will need one.

For customers, check important contracts and try to extend any that are close to expiry. It’s also worth identifying customers that other areas of your organisation serve – that’s a good way to increase revenue quickly and offer buyers an opportunity. 

Resolve any supply issues, make sure you have no or a very small bad-debt provision and demonstrate you pay all creditors in reasonable time. It’s vital to invest considerable effort into the transitional services agreement, this will ensure the separation runs smoothly.