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Clients’ challenges for selling their business

Many are wondering if the UK businesses sale market and process will continue this year due to Covid-19. This applies to people looking to sell, and also to transactions at various stages of completion but now on hold. Ken Gorman, senior director at Transworld London South West comments

Business buyers and sellers generally have a long-term mindset – five years or more.

A seller may have already run a business for 20 years, so their desire to retire and sell up remains. In fact, after enduring yet another challenge, following previous financial crises and recessions, they may be more motivated than ever to pass their business onto the next generation!

A buyer will normally have strategic purpose for wanting to buy a business; starting a new career or expanding a business are key examples. Buyers generally consider a ROI horizon of at least five years.

As with all downturns, there are winners and losers. The losers cannot survive and run out of cash or become unviable. The winners survive and get the trade the losers left behind. Businesses with a strong recurring revenue base, that focused on essential services, were profitable before the downturn and have resources to weather the storm, are generally well placed for the long term.

For over 40 years, Transworld has seen economic ups and downs, and business sales have continued regardless; last year we did over 1,000 transactions globally. Sometimes there needs to be adjustments to pricing and terms, sometimes more reliance on seller financing is needed, but sales continue.

Accountancy practices for sale

The majority of accountancy practices will fall into the category of an essential service with good long-term recurring revenue with value to a buyer. Its client base must still file taxes and keep books and records up to date. The client base tends to be sticky – it is difficult to switch accountants – and settles their accounts as they need future work. In fact, our brokers who focus on financial services are seeing an uptick in activity, as with the last recession: when times are good, people get lazy and do not pay as much attention to financial detail. When money is tight, companies want to take a hard look at the detail to help conserve cash and make important decisions.

The typical reason people buy accountancy practices is that it is an efficient way to expand, and much easier than acquiring clients organically. While not every buyer is in a strong position during a downturn, many are flush with resources, take a long-term view and see the downturn as an opportunity to grow.

As typically only 20% of practices are for sale at any one time, only 20% of buyers need to be looking in order to fully satisfy supply and demand. It is not a requirement that everyone, or even most people, are doing well for there to be vibrant buying and selling in a given sector, as long as that sector is inherently viable in the long term.

As with all businesses, the buyer will be looking for a return on investment over time. They are typically buying the cashflow from the client base, and maybe some professional people to expand. Calculating profit after acquisition is tricky for an accountancy practice, as the buyer may have a different cost model. For this reason, as a short cut, the discussion on accountancy practice valuation usually starts at around the value of their annual billings. 

The challenges of selling a business

The current situation presents two main challenges that need to be worked through, and that may slow, but not derail, the process. 

Firstly, businesses are generally purchased according to a ratio of free cashflow. The Covid-19 shut-down will negatively impact the cash flow of the majority of UK businesses. It is unknown how long this will continue, but being optimistic, it will be an interruption lasting several months.

After a period of recovery, many buyers will want to see that profits have returned to normal and be confident that cashflows have resumed and will support a purchase price and the debt service on the business. If the current situation continues for three more months, it probably requires a further quarter for profits to return to either ‘normal’ or the ‘new normal’. In some cases, but not all, this may require a valuation adjustment.

The second challenge is that most businesses are bought using some type of leverage or debt, like a ‘buy to let’ flat. Generally, this debt is asset-backed, and in business acquisition, the biggest asset is often the debtor book.

In a shutdown like Covid-19, if a business is not operating and billing customers as normal, debtors will be paying down the debtor book, so there will be a reduction of assets to leverage against. It may take two or three months to complete work, issue invoices and rebuild the debtor book back to normal levels. This is purely hypothetical as all businesses and situations are different, but it supports the assumption that some transactions will be delayed.

How to approach this period

It usually takes two to four months to complete a sale. This period begins the moment a buyer and seller agree to do business. It includes due diligence, and the drafting of financial and legal contracts, which all take time. So, if a buyer and seller have decided they are a good fit, there is good reason to commence a transaction while the recovery of profit or cashflow and the debtor book is taking place. Full recovery becomes a proof point at the end of the process.

Most businesspeople have experienced economic crises in many forms alongside the usual business cycle. The task is always to keep strategy moving forward despite short-term challenges. The fundamental reasons for people wanting to buy and sell remains as strong as ever. So, regarding the current crisis, remember: this too shall pass.

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