Business owners who have decided that it’s time to prepare an exit strategy may find themselves wondering how to sell a business as efficiently – and with as little stress – as possible. They may also find themselves weighing up different options for exiting, from a straightforward sale of assets to the prospect of an MBO.
One popular method of selling a business is to offer it to would-be acquirers as a going concern. This option has several key benefits for both the seller and the buyer, which makes it a prospect worth looking into in more detail.
With that aim in mind, we’ve prepared the following concise guide to help you work out if selling your company as a going concern could be the best option for you and your business.
What does selling a business as a going concern actually mean?
The simplest definition of a ‘going concern’ is a business that is healthy and sustainable in terms of finances and operations. In short, a business that will continue to function at optimal levels after the acquisition process has been completed and remain profitable.
Unsurprisingly, businesses that are designated as a going concern are liable to be particularly sought-after by would-be investors. For one thing, they will be able to run the business efficiently right from the off – and, for another thing, they will feel more assured that they’ll receive a decent return on their investment.
The benefits of selling as a going concern
There are several significant advantages to selling your business as a going concern. These include:
1. It’s lower risk
It’s no secret that investors tend to prefer new ventures that offer a smaller element of risk. Therefore, one of the biggest benefits of selling your company as a going concern is that it is an option that provides less risk than other acquisition targets – and not only for your potential acquirers but for you as well.
This is because your business will continue to be fully operational throughout the M&A process and beyond. That means it will be less likely to lose any vital relationships with staff, suppliers or customers, and will continue to generate revenue.
For you, this means being able to leave while knowing your business will continue to function at optimal levels. For your buyer, this means investing in a company that they know is going to be effective once they have bought it.
2. Your business will be higher in value
A flourishing business with a solid financial record, a robust supplier network, and a loyal customer base is going to be valued higher than other businesses. As a result, you are likely to receive significantly more money when you sell your business than sellers seeking to offload a more distressed company.
3. A more streamlined acquisition process
The M&A process of buying or selling a business can be frustratingly lengthy and complex, particularly if obstacles arise during negotiations or due diligence. However, if you’re selling your company as a going concern, you are more likely to experience a streamlined and stress-free journey to deal completion.
One of the reasons for this is that your buyer is probably going to find it much easier to secure financing, as their lender will view your company as a viable investment with lower risk. What’s more, your buyer will be less likely to raise time-consuming objections, as they will be keen to purchase such a healthy business.
Finally, another reason for the process to run more smoothly is that your business will not be sold piecemeal as various assets but as a single entity. This means less legal and financial red tape for you to get tied up in – and, therefore, a more streamlined route to completion.
How to get classed as a going concern
If you are keen to advertise your business as a going concern, there are several financial criteria to take into account to help you gain this classification. The most commonly used tend to be your net profitability ratio, your current ratio, and your debt ratio. Let’s explore these in a little more detail.
Net Profitability Ratio
The net profitability ratio is a metric that demonstrates your business’s efficiency and can help you work out the financial value of your company. To calculate this ratio, here is the formula you need: (net profit/net sales) x 100.
What constitutes a favourable ratio will differ from one industry to another, but, in general, a ratio of 10% will be viewed as average while a ratio of 20% will be deemed to be relatively high.
Current Ratio
Current ratios are a means of measuring a company’s ability to pay the various debts and financial obligations it currently has, within the course of a year. In other words, this ratio reveals a business’s ability to pay off its short-term debts.
Also known as the ‘working capital ratio’, this metric compares a company’s current assets against its current liabilities. A current ratio of over 1.00 offers an assurance that a business can remain solvent, at least for the next year.
Debt Ratio
A company’s debt ratio indicates the proportion of its assets which are financed by debt rather than equity. In this case, the lower the ratio the better; anything below 1 is favourable, while a value higher than 1 indicates to investors that your company has more liabilities than assets.
Drawing on these and other significant financial metrics, both you and an independent auditor team can ascertain if your business can be sold as a going concern.
Any questions about your M&A strategy?
Hopefully, we’ve cleared up any queries you may have had about what it means to sell your business as a going concern. However, if you have any more questions – not just about going concerns but about any aspect of selling your company – don’t hesitate to get in touch.
Here at Harris Acquire, our friendly and knowledgeable team specialises in guiding buyers and sellers through the entire acquisition process, removing the stress and uncertainty from the process, and helping you reach a successful deal.
If you would like us to help you sell your business and make a deal that’s right for you, don’t hesitate to call us on 01926 757100 or send an email to Hello@harrisacquire.com.
