If your business is profitable, you might be forgiven for thinking it’s already a sound option for potential investors or buyers.
But after working alongside companies for decades – in roles that inevitably includes helping owners prepare for investment, buyouts and exits – we know that these parties are asking a much broader question:
Aside from the firm’s financial performance, what exactly am I buying, and how confidently can I expect it to keep performing after the current owner leaves?
If selling your company or attracting investment is part of your plan for the next few years, here are some of the things you need to focus on to ensure your business is in a strong position for a successful transition.
Generate reliable profits – and provide evidence they will continue
Buyers are certainly interested in your latest profit figure, but more than this, they will want to understand how you achieved it.
Imagine two companies each generated £500,000 last year.
The first has delivered steady growth over five years, has contracts providing visibility over future revenue and maintains consistent margins.
The second reached £500,000 after winning one unusually large project, and its records show that its profitability has fluctuated significantly in previous years.
On paper, their latest results look similar. However, from a buyer’s perspective, they’re very different propositions.
Consistent earnings, realistic forecasts and a healthy pipeline provide genuine confidence that the business performs sustainably and doesn’t rely on one exceptional year to look good on paper.
Create recurring and predictable revenue
The easier it is to anticipate future revenue, the easier it becomes for an investor to understand the opportunity. Long-term contracts, retainers, subscriptions and repeat purchasing patterns are valuable because they make earnings visible.
Some project-based businesses can still be attractive – but if patterns show that the company is starting every financial year from scratch in terms of seeking out revenue, this creates a great deal of uncertainty.
Start tracking the proportion of revenue that comes from returning customers, contracts or other predictable sources. You may already have more recurring revenue than you realise.
Develop a healthy and varied portfolio of customers
If your company turns over £5 million, but one customer accounts for £2 million of it, losing them could fundamentally change the economics of the acquisition. A strong business boasts a diverse spread of customers with varying spend, so there is less risk that a high proportion of revenue might disappear overnight.
Build a company that isn’t dependent on its owner
If you are an owner-manager and you are personally responsible for winning your company’s major contracts, maintaining key customer relationships, approving expenditure and resolving day-to-day challenges, what’s going to happen when you leave?
A buyer doesn’t want to discover that they’ve acquired a company whose most important asset has vanished post-sale.
Reduce this dependency by developing a capable management team, documenting processes and spreading important commercial relationships throughout your entire team. Another useful test is to take yourself away from the business for several weeks – the problems that find their way back to you will reveal what needs to be delegated further.
Read more on how to create a business that isn’t dependent on its founder, or get advice on how to stop micromanaging your staff.
Gather management information you can trust
Our finance directors have encountered plenty of successful companies whose owners intuitively understand how the business is performing but struggle to demonstrate it through the numbers.
This might not be a huge issue at an operational level, at least not from the ground – but it will become a problem during a transaction.
A buyer may want to understand profitability by customer, product, location or division. They might ask you why your gross margin changed 18 months ago, how accurate forecasts have historically been or what drives working capital requirements. If you can’t answer these questions without spending hours digging into spreadsheets, the buyer or investor is going to lose confidence in what you are offering.
Good management accounts, regular forecasting, clearly defined KPIs and reliable underlying data are a must in all circumstances, because they demonstrate that the company is being managed with financial discipline (and they make due diligence must less painful when it’s time to move on).
Create healthy margins – not just revenue for the sake of revenue
Buyers will understandably want to know whether an increasing turnover actually creates value for the organisation.
Imagine a business increases its sales from £6 million to £8 million, but gross margin falls from 35% to 27% because it has discounted its fees heavily to win the new work. This company will look vastly different to an £8 million business that has protected – or even improved – its margins during a growth phase.
Your goal here is to understand your firm’s profitability at a more detailed level. You need to know which customers generate the best margins, which products or services consume too many resources to make them legitimately profitable, and whether the price increases you’re implementing are actually keeping up with costs.
Generate cash and control working capital
As you already know, profit doesn’t necessarily translate neatly into cash.
Customers regularly take 90 days to pay an invoice. Inventory levels can soon become excessive. A substantial amount of cash can easily become tied up in work that’s in progress. All these scenarios are red flags for buyers, who will scrutinise how efficiently the company converts its activity into something that’s positive for its bottom line.
Keeping debtor days under control, managing stock carefully and producing reliable cash flow forecasts are all ways that you can strengthen the underlying business. Taking these steps will also help you avoid an uncomfortable question during negotiations: why does such a profitable company always seem short of money?
Introduce systems and processes that can support growth
Investors often aren’t buying a business simply because they like what it is today – they’re thinking ahead to what it could become, and they’re deciding whether your proposition is scalable.
If doubling turnover means doubling your administrative headcount, replacing your finance systems and relying even more heavily on the founder, this would make it difficult to expand. On the other hand, established processes, well-chosen technology, good reporting processes and capable managers will all suggest that any additional revenue can be accommodated without costs increasing at exactly the same rate.
Discover more ways to strengthen your business.
Write a credible plan for the future
Historic performance aside, investors will want to know where the next stage of growth could come from.
Perhaps there is an opportunity to expand geographically, introduce new services, increase buy-in from existing customers or improve profit margins. You need to be prepared to explain how these changes will lead to revenue growth, outlining the people, the investment and the working capital your buyer will need to achieve your forecasts.
Keep your finances in order
Lastly, good housekeeping matters. Unresolved tax issues, contracts that are in dispute, poor credit control, undocumented director expenses or unusual transactions with connected companies can all raise concerns during due diligence.
What’s interesting, though, is that problems like these are not always dealbreakers – investors can take a view on what’s in front of them, but they find surprises much harder to manage. If an exit is on your horizon, identify and share your financial, operational and commercial weaknesses early enough to address them rather than hoping the buyer won’t notice.
Would you want to buy your own business?
One of the biggest mistakes an owner can make is waiting until they’re ready to exit before preparing the company for sale. Getting the business into good shape can take years, and the hard work generally needs to begin 3 to 5 years ahead of time.
Remember, however, that everything that is going to make your business more attractive to buyers and investors will also make it a better business for you to own. Follow the advice here, and you will have stronger financial visibility, less dependence on individual people or customers, better cash management and a clearer idea of where and how you’re going to grow – and you’ll also be ready to impress interested parties when it’s time to move on.