PARTNER INSIGHTS | SEVEN THINGS SERIES
By Zahid Hussein, Managing Director, Z Group.
Our Seven Things series brings you practical advice from the partners and advisers we work alongside. This time, Zahid Hussein of Z Group shares what founders should prepare before starting a sale process.
I have worked with founders through more exit processes than I can count. The ones that go well, where the founder walks away with significantly more than they expected and with their legacy intact, share a common thread.
They started preparing long before they needed to. Here are seven things I would want every founder thinking about an exit to have worked through before the process begins.
1. Know what your business is actually worth today
Not what you think it should be worth. Not the number you need to retire comfortably. What a buyer would actually pay, in cash, today, based on what the business generates and what it would cost them to run it without you.
Most founders significantly overestimate their valuation because they are valuing their effort and their potential, rather than what a buyer sees: maintainable earnings, free cash flow, risk and multiple. Understanding the real number, and the gap between that and where you want to be, is the foundation of everything else.
2. Remove yourself from the critical path
This is the most common thing that destroys value in a sale process. A business where the founder is the product, where the key relationships belong to them personally and where decisions cannot be made without them, is not a business a buyer can acquire with confidence. It is a job with good margins.
Removing yourself from the critical path takes time. Build a management team that can run without you. Document what lives in your head. Transition client relationships to the business rather than to you personally. Start this earlier than feels necessary, because it always takes longer than expected.
3. Clean up your financials
A buyer’s due diligence team will go through your accounts in forensic detail. Anything that does not make sense, anything that looks like it mixes personal and business expenses, and anything that suggests the reported profitability is not maintainable, will either kill the deal or reduce the price.
Get your management accounts current and reliable. Reconcile anything that needs reconciling. Understand your adjustments, the items that are genuinely non-recurring and can be added back to improve the EBITDA picture, and make sure they are defensible. Clean financials do not just make the process smoother. They command better multiples.
4. Understand your tax position before you agree a number
The headline number is not what you walk away with. After capital gains tax, potentially income tax on earn-out payments, and your advisers’ fees, the net proceeds can look very different from the gross figure agreed at heads of terms.
The tax structure of a transaction needs to be thought through well in advance of the sale, not negotiated at the last minute. Business Asset Disposal Relief, share versus asset sales, and the treatment of any deferred consideration or earn-out are decisions that need to be made carefully and early. The difference between a well-structured and a poorly structured exit can be hundreds of thousands of pounds.
5. Know who your buyer is likely to be and what they value
Not all buyers are the same. A trade buyer from your sector values your client relationships, your team and your market position. A financial buyer, such as a private equity firm, values your earnings quality, your growth trajectory and your management team’s ability to execute without you. An overseas buyer may value your UK market access above everything else.
Understanding who is likely to want your business, and why, changes how you prepare it. You present different things, emphasise different metrics and shape the story differently depending on who is sitting across the table.
6. Get your legal documentation in order
Legal due diligence is where deals slow down and sometimes fall apart. Contracts that are not properly executed. Shareholder agreements that have not kept pace with changes in the business. IP that is not clearly owned by the company. Employment arrangements that are not properly documented.
A buyer’s lawyers will find these things. Having them identified and resolved before you go to market puts you in a much stronger negotiating position and keeps the process moving at the pace you want.
7. Have a plan for what comes next
This sounds personal rather than commercial. It is both. Founders who have not thought about life after the sale often get cold feet at the critical moment. The business has been their identity, their structure and their purpose for years, sometimes decades. The prospect of walking away, even for a life-changing sum, can trigger something that rational analysis cannot always overcome.
I have seen deals fall away at the final stage because a founder was not emotionally ready, even when they were financially ready. Think about what the next chapter looks like before you start the process, and be specific: what you will do with your time, how you will stay engaged and what the money makes possible. A founder who is genuinely excited about what comes next is a far more effective seller than one who is unsure.
Where to start
Take the Exit Readiness Checklist before you start any sale process. It maps the ten most critical preparation points, rated by their impact on your valuation, and shows you where to focus first.
For the legal side of your transaction, speak to Bill Cogan and the team at Seven Legal.
This article is for general information only and is not legal, tax or financial advice. Please speak to your own advisers about your circumstances.
Author: Zahid Hussein
Managing Director of Z Group
Zahid Hussein is Managing Director of Z Group, a boutique chartered accountancy and advisory firm working at board level with ambitious founders who want to scale and, in time, exit on the right terms. Before Z Group, he spent years valuing technology businesses from the sell side.
