How to line up the sale of the century

The dream of selling your business can easily turn into a nightmare. Gareth Chadwick highlights some pitfalls and how to avoid them

It's the stuff of dreams. You start your own business. Build it up over several years. Sell it for millions and head off into the sunset for a life of fun and fast cars. But while selling a business can put dreams within reach, without the right preparation and planning, the selling process itself can easily turn into a nightmare.

It's the stuff of dreams. You start your own business. Build it up over several years. Sell it for millions and head off into the sunset for a life of fun and fast cars. But while selling a business can put dreams within reach, without the right preparation and planning, the selling process itself can easily turn into a nightmare.

Perhaps not the primary reason why many entrepreneurs start businesses, cashing it in further down the line is certainly an attractive secondary reason, and one that often becomes more attractive as time progresses. A new start-up has little of value to sell, anyway. But after a few years of successful growth and profitability, it becomes a more likely prospect for a sale. The commonest reasons for selling can be split between personal aspirations and the business's competitive environment.

At a personal level, once the challenges of starting the business, proving it can succeed and establishing its position have been achieved, management commitment and drive may decline. The focus for some entrepreneurs is on creating a new business and making it succeed, not necessarily in spending the next 10 years running it. Equally, age may be a factor. The decision to sell could be based on realising some of the personal investment - in time and effort, as well as money - that has been put into the company to make it a success, while the owner is young enough to enjoy the rewards.

The second key driver is the competitive environment of the business. It might have reached the stage where the existing owner realises that the business would be better served with a change of ownership, perhaps to bring in the necessary investment, experienced management or international breadth.

"Any business owner has to be constantly thinking about the strategic direction of the business. They have to marry up what is happening externally in the market with what is happening internally, in terms of their own skill set and aspirations. There will come a time when the two don't fit and selling the business becomes an attractive option," says Jim Rogers from accountants and business advisers Grant Thornton.

David Balfour started his own recruitment agency when he was just 26 in 1989. By 2000, it had six branches and turned over £3m. But the market had changed, and so had Balfour's motivations, along with those of his two junior business partners. So, he decided to sell most of it and start again.

"One of my partners had lost interest, the other wanted to go in a different direction. I wanted to re-focus the business into something else, something better. Selling off part of it allowed me to do that," says Balfour.

The sale process is when the real challenge starts. For a larger or public company, the focus is on achieving the maximum price to get the best value for shareholders. But for a smaller, owner-managed business, more emotive issues often come into play which might mean that price is not the only consideration. There's the simple emotional attachment to something that you have personally created, particularly if it has your name above the door. There's also a higher degree of loyalty to staff, customers and suppliers, many of whom will have helped build up the company from its early days.

Rogers says that for many owner-managers, that emotional attachment translates into not necessarily seeking the maximum sale price. Rather, it can mean that the sale is focused on finding the buyer that best understands the business and its values, and one that can best secure the future of its employees and customers.

But whether a price- or people-focused deal, the process of selling the business is the same - as are the pitfalls.

The biggest danger is that the demands of the sale process distract from the day-to-day running of he business. Few owners have been through a sale before, which often makes them unprepared for its rigours. It rarely takes less than six months from initial agreement to a completed sale, often longer, and it is six months of constant pressure, tough negotiations and precise detail.

So the chances are that both the sales process and the business suffer. It can mean that the business ends up being worth less than it was when the sale process began. A buyer won't hesitate to use that to their advantage when negotiating the price. Equally, not having the time or experience to manage the sale process effectively greatly increases the risk of the deal failing.

Advertising entrepreneur Paul Simons of Paul Simons & Co, split the management of his company in two when preparing for its sale to a competitor. His two co-directors focused exclusively on the business operations; he spent six months doing nothing but prepare for the sale and manage negotiations. He also brought in external advisers to oversee legal and financial issues.

"Most people are understandably naive when it comes to selling. They are not prepared for how demanding it is, which can lead to silly mistakes through ignorance or lack of preparation. You need to make sure you are up-to-speed with every aspect of the business - and bring in some experienced professional support for the duration of the sale," Simons says.

David Balfour followed a similar strategy, distancing himself from the operational management to focus on the deal: "It is one of the hardest things to do, but you've got to, or, alternatively, get someone in to manage the deal while you stay focused on the business. It isn't over until you've banked the cheque, and trying to do too much yourself increases the chances of something going wrong before you get to that stage."

Discretion is a major issue. Understandably, most business owners don't want their competitors to know they are considering a sale. But potential buyers need to be informed that there is a deal to be done. This is where professional deal brokers - accountants, corporate financiers - can help, making discreet, anonymous approaches to targeted companies.

As a deal progresses, the risks increase. If the sale falls through after several months of high level discussions about confidential issues such as business profitability, pricing, suppliers, customers and business strategy, the potential buyer could walk away with some extremely sensitive information about the business. Given that over 50 per cent of businesses are sold to companies they know, the potential buyer in possession of that information could easily be a competitor, customer or supplier.

It is part of a communications tightrope that has to be negotiated, which has an internal and external aspect. Management and employees play a key role in most businesses, but how soon do you inform them? Who needs to know and when? Too soon and the risk is that staff begin to worry about their job safety and look elsewhere. But leaving it until the last minute is often impractical in terms of effectively preparing the business for the sale, and it could mean having to spend several months deceiving the friends and employees that have helped build the business into what it is.

"Key management usually needs to be brought into the loop fairly on, but some businesses go to great lengths not to tell the rest of the staff until later. I've attended sales discussions in a caravan in the middle of a field, because the managing director was so worried about people finding out before he wanted them to," says Rogers.

A caravan is an extreme example, but confidential off-site discussions are common. It illustrates the importance to a successful deal of appropriate discretion and effective communication, both internally and externally.

Get them right, and get the management of the process right, and the chances of a successful deal are greater. Get them wrong and the deal could fail. If that happens, it might not be the sale of the business that is the priority, it could be its survival.

'We concentrated on creating a top-class management team'

Strong management and a commitment to new product development are the cornerstones of Len Mann's business ethos. And they paid off when it came to selling up.

In February this year, 54-year-old entrepreneur Len Mann sold his broadcast electronics business for £10.7m.

Mann founded the business, Link Research, with his brother David in 1992. Initially a distributor of communications satellite receivers, by 2001 it was developing and selling its own wireless camera technology. Now, Link Research technology is behind many of the wireless cameras at events worldwide, including this year's Boat Race.

By 2004, turnover had risen to £7m and the brothers decided the time was right to sell. "It was always in the back of our minds that we would sell the business. But it wasn't our only option. We had two main options. One was to sell the company. The other one was to extricate ourselves from day-to-day control and retire, by bringing managers in," says Mann.

"We concentrated on developing a top-class management team that could take the business forward and look after the employees either way. It meant it was less reliant on us as individuals. We also maintained our commitment to developing new products."

The acquisition of a subsidiary in 2003 raised the company's profile and led to three approaches to buy it. None came to anything, but 18 months later the most serious of the bidders, Vislink plc, also the company's biggest customer, came back.

"We discussed it and came up with a proper plan for how it could work financially and time-wise. As a dynamic British-based business, in largely the same sectors as us, we felt Vislink was the ideal option in terms of developing the company and looking after the staff."

The deal went through in February, with Len Mann remaining as managing director of Link Research, under the umbrella of the Vislink Group. His brother retired.

Says Mann: "We were very pleased and it has worked out perfectly so far. But the sale process was the most stressful time of my life. They say getting married or selling a house is stressful. They are nothing compared to selling a business."