Since I started my consultancy business, I’ve been contacted by a number of business owners who are thinking about selling. In the current economic climate, this is sadly understandable – but for many scaffolding business – particularly those that are significantly exposed to the housebuilding sector at present – it’s not surprising. Every business should be built with a view to a profitable exit strategy, but in all too many instances, this is not the case.
What I’ve discovered, however, is a gap between ‘wanting to sell’ and ‘being ready to sell’. In fact, this is a litmus test for the health of your business – is it sellable, or not? It’s not unusual for business owners to be unsure about whether they have built a desirable asset – if you’ve never sold a business before, how would you know what investors are looking for?
So I thought it would be helpful if I put an article together that highlights the things that business owners – if their business is an appropriate size – need to do in order to be sale-ready. And, because this includes building your business into something that another company might want to buy, I’m also looking at how to scale your business successfully to make it an attractive proposition.
It’s important to note here that scaling your business for sale requires planning and action several years before you want to sell. It’s not something you can do in six months. Just as with everything, preparation and planning is all.
Why scale your business?
If your exit plan is selling your business, you need have something valuable to sell. It’s important to note that it’s not you, the business owner, that you’re selling. It’s the actual business. In many cases, people work hard over many years to build a business. And when they are ready to move onto something new or retire, they are surprised to find that no-one wants to buy.
Scaling your business develops it from being merely a ‘lifestyle’ business to something that will have commercial and long-lasting value to an investor. So it’s worth thinking about how you can grow your business to make it an appealing purchase option – including considering your existing management structure as part of your plans. This is paramount.
There are several ways to do this – here are the main three ways I would advise:
- Increase activity and revenue with existing clients
- Expand into new sectors
- Expand your business geographically
You can choose to do one, two or all three of these, but remember that each requires a dedicated plan and approach, or you will end up spending money without getting the results you want. Here are my tips on how to scale sensibly. They’re based on my experience – I have done all these things, some successfully and some that didn’t go according to plan – so I have learned hard lessons along the way and I am sharing the benefit of my knowledge, including my numerous mistakes – for your benefit.
Increasing existing activity
This is often the most cost-effective way to scale your business. You have already built relationships with your clients, and they trust you and rely on your expertise. Your cost of expansion and growth should therefore be much lower, and primarily related to additional stock, vehicles, and recruitment of junior supervisory staff.
Talk to your customers to see what else you can help them with. Look for ways to upsell and cross-sell your products and services. Ask them for referrals to their own contacts and make them feel integral to your business success – as you are to theirs.
Business owners are often surprised by how much they can increase revenue from their existing client base. It’s always the thing I would advise businesses to do first, because it results in easier, low-cost wins.
For the other two options, there are some key steps to follow.
Research your market
You should never start an expansion without knowing what you’re letting yourself in for. Is there a market there at all? You need to explore this as far as is practical with the information available.
- The market size
- Potential market growth opportunities
- Existing competitors – is the market already saturated?
- Barriers to entry – specific accreditations, for example
- Potential gaps or untapped areas of the market
- The appetite for a new supplier
This will give you an idea of what you will need to do to gain a foothold in the new market, including the investment you need to make.
Any scaling strategy needs to be fully financially analysed and costed. This includes the cost of renting property, buying equipment, hiring staff, and keeping the business running on a day-to-day basis. You’ll also need to consider training and accreditation costs, if applicable and set a realistic level of working capital.
Hire the right people
If you are expanding geographically, it may be tempting to put someone from your existing operation into a management position. My experience is that it is far better to hire someone with local knowledge, market experience and contacts. This usually puts you ahead of the game, bringing the right connections and local knowledge to the business from day one.
Similarly, if you are expanding into a particular product or service market, bring someone in with experience in that market. As I know, getting this wrong can set the business back considerably – it can take a couple of years to find that you have the wrong people, and another couple to get it back on the road again – something you can ill afford to do.
This is really important – if you don’t have the right people there is just no point. The wrong people will result in a waste of time, effort and money – as well as a potential loss of reputation. Ignore this particular piece of advice at your peril!
Focus on training
Whether you’re using an existing workforce or hiring from scratch, always make sure you make qualifications and training a priority. For some new markets, your team might need particular qualifications and experience. You may need to acquire new accreditations, or bring in specialist knowledge so you can meet particular legal requirements. For example, the events industry is often considered a potential niche for scaffolding companies, but it comes with stringent legislation, and significant investment with, at times, low rates of utilisation. Don’t forget that it’s also a very seasonal industry, so what will your workforce do in the quiet months?
Keep on top of progress
Diversifying into other sectors in your business is a necessity if you want to build value, but it also comes with risks. By planning operationally, commercially and financially, you are reducing those risks as much as possible. Failing to plan increases risk. Much like a gambler shouldn’t bet more than he or she can afford to lose, if you don’t control your activity or financial exposure, you could break your entire business.
So it’s important to keep a close track of progress – usually by putting realistic KPIs in place and meeting regularly with your team to make sure they have the direction and support they need. Don’t try to do everything at once – a considered step-by-step approach is the key to success.
In summary, you need the following for each diversification project you undertake:
- A business plan
- A detailed budget coupled with an accurate cashflow projection
- A realistic and agreed strategy
- An achievable action plan
- Monthly progress checks
In addition, it’s really important to accept that putting this strategy in place may take longer than you think. There are many reasons why you might be delayed. If you’re confident that it’s the right strategy, however, you can work with these delays so you can achieve your end goal.
Scaling for sale
Businesses diversify at many stages of their lifecycle, and can diversify several times in order to build the business that the owners and board have created a vision for. When the ultimate goal is the sale of the business, there needs to be a considerable amount of thought and forward planning. If that planning isn’t in place, you are unlikely to attract the right sort of interest – even if you have diversified successfully.
If you are thinking about preparing your business for sale, here are the things I would advise you to consider:
Create a 2/3-year business plan – you really do need to plan ahead. It will let you put all the right things in place, including financial goals, to demonstrate that you are serious about getting a good price for the business you have built.
Incentivise your senior leadership – if you are running a successful business now, it’s because you have a good team working with you. If you fail to retain the key people in that team, you will lose value in the business. So make sure you have a good quality incentive and retention plan in place.
Build good quality, long-term contracts – you need to be able to demonstrate good market penetration, valuable long-term contracts and a solid pipeline. These are core attributes for a buyer, so if you don’t have these in place yet, now is the time to start building.
Have niche markets or expertise – you will be more attractive to a buyer if you are filling a gap in their own business. So having at least part of your operation in a niche market, or a team with particular expertise will make you more attractive. Without it, you are just one of many businesses all doing the same thing. What will make you stand out from the crowd?
Be prepared to stay on with the business – most acquisitions require certain key people to stay with the business for a further two or three years post sale. It’s unusual for a business to be sold and the owner released immediately. This will also apply to your senior team and to those with specialist expertise.
For this reason, your sale document must also show clearly that, with investment, the business can expand significantly over the next 3-5 years, both in volume and profit.
Understand the earn-out clause – this is related to the point above. In order to make sure they get the most value from a sale, acquiring businesses will, in most instances, require an earn-out clause. Typically, the value of your sale is an agreed multiple of your EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortisation. A buyer may acquire 75% of your shares valued at the multiple agreed – 4 x EBITDA, for example – and hold the remaining 25% of the shares, with the expectation that the business expands over a two to three years, which in turn will increase the EBITDA value. The remaining 25% of the shares are then valued at the new EBITDA, using the previously agreed multiple. This gives the previous owner and senior leadership team the incentive to continue to grow the business, and maximise the value of their remaining shares in the business.
Work with reliable advisers – when you come to sell, you will need experienced and reliable legal and accountancy advice that helps to make sure you, your business and your people get the best deal. You need advisers who have good quality corporate transaction experience, preferably in the scaffolding and access sectors, and who are not afraid to be straight with you when it comes to your responsibilities and negotiating terms.
It’s possible to scale your business for sale, and to make that sale successful for you financially, and to secure the long-term future for your business and the people who work in it. But it must be properly thought through, carefully planned and regularly measured and reviewed if you want your plans to succeed. The first step is to find someone to work with who has the merger and acquisition experience to work with you to put the right strategies in place at the right time.
Prepare for your own next steps – I’ve spoken to many business owners who have been surprised by how they feel about their lives after selling their business. Among all the ‘business’ preparations, it’s easy to forget your own role and to make preparations for what that might look like. This can result in a significant ‘loss of identity’ – something that should not be underestimated, and can be very difficult to deal with.
For example, if you are staying in the business after sale, are you ready for the change? It won’t be your business anymore. You may not have the same decision-making capabilities and you might – for the first time in years – have a manager, sales targets and performance expectations. How will you feel about that?
And if you’re leaving the business, what will you do next? You’re used to working 24/7 – can you stop that straight away? Do you have other things lined up to keep you busy? Are you mentally prepared for such a huge and immediate change to your daily life? It makes sense to prepare yourself for what your post-sale life looks like.
How can I help?
Alongside my industry experience in both merger and acquisition, I understand how to build a business that other investors will want to buy. This is a process that must be right across the board – from the assets you have to the contracts you hold; the client relationships you’ve built to the quality of your senior management team. You have to get everything right to maximise the value of your business.
Working with you and your team, I can advise on the steps you need to take in the short, medium and long term to reach your goals. This may be a process where the business is sold to your employees, for example, under the Employee Ownership Trust scheme, for example.
The route you choose to take will depend on how quickly you want to exit your business, and the value you really want to get from it. Failure to build a business that’s an attractive investment will leave you with one of two options: either gradually wind your contracts down and sell your assets – which your clients will exploit to their advantage – or sell your equipment, sites and even contracts onto your competitors. After a lifetime building your business, these are the least-best options, so why not give your business the time and investment it needs in order to reward you and your workforce when it’s time to exit?
This article was originally published in Issue 20 of the ScaffMag magazine.