Professional Advice
When the eventual inevitability of a sale crystallises into an objective, even a distant one, decide what sort of help you will need to achieve the best price.
For a business with a sale value of under £5m, some vendors may consider
using a business broker, but larger businesses usually find it is worth
running a full sales process with a team of experienced advisers.
The cornerstone of that team is your corporate finance adviser. It is a
good idea to stage a beauty parade of competing candidates to compare
their experience and approach. Research them thoroughly and ensure they
have experience of selling businesses, a proven track record and, where
possible, some knowledge of your sector. Obtain references and look
beyond your regular advisers. While an auditor knows the business, he or
she may not be best placed to sell it.
Your chosen adviser should help you to review the company and be able
quickly to identify any areas needing attention that may have escaped
your notice. They should make sure that all the documentation you will
need during the process is in order and that they and you understand the
key selling messages you will need to communicate clearly. Remember no
one buys a company’s history, however comforting; they only buy its
future.
Your adviser will also assist you to find and vet potential purchasers,
in addition to any you may be able to suggest. He can provide a target
list for your approval which may include overseas buyers or companies
not operating in your sector but a related one, perhaps selling
different products or services to the same customers.
At this stage, your adviser will make every effort to protect your
confidentiality by withholding information that could identify your
company as he or she trawls for interest. Speculation at this stage is
unhelpful, unsettling employees and possibly bringing a negative
reaction from customers and suppliers.
Your adviser’s exploration of the market should ideally yield a list of
about half a dozen parties who have expressed an interest. In
consultation with you, this can be narrowed down to three or four to
take forward to the next stage. No other factor maximises the value of
your business more than having competition among potential purchasers.
At this stage, the chosen bidders will receive a Sales Memorandum which
does identify your company, charts its history and forecasts its future.
This is the shop window for your company, a key selling tool but, while
not legally binding, it should be accurate. Your adviser will help you
to strike the balance between presenting the facts in the best light and
counter-productive spin.
Your corporate finance adviser will rehearse you for face-to-face
meetings with potential purchasers including helping you to identify any
synergies which may exist and can heighten an acquirer’s interest; can
counsel you on when to hold out for a better offer and when to accept
the deal on the table because holding out tips the scale towards losing
the sale altogether.
You generally get one chance to sell at the best price. You do not want
your adviser to have over-estimated or underestimated the value of your
company or the eagerness or reluctance of the potential purchaser.
It is also important that you choose someone you will feel comfortable
working with. Selling your business is a stressful time and you need
empathy as well as expertise from your adviser.
It is no exaggeration to say that choosing the right corporate finance
adviser is crucial to achieving the best outcome for you.
How much will it cost to employ an adviser? The answer depends upon the
complexity and duration of any process. Many advisers charge at an
hourly rate or fixed up-front fees. You may be able to negotiate a fee
for the whole process, perhaps including a success fee linked to the
price you achieve. Make sure you understand what is covered and what is
not covered by any fee structure you agree to avoid unpleasant
surprises.
However, it is worth remembering that a cheap adviser is the one who
gets you the price that meets or exceeds your expectations and an
expensive adviser is the one who fails to achieve your agreed target
price or, indeed, any sale at all, no matter what their comparable fees
are.
Alongside your corporate adviser, you will also need a lawyer, whose
role is to document the acquisition, a process which often requires
negotiation with the purchaser’s legal team on important contractual
matters, including such thing as Warranties which may have a post sale
impact on you. To view an explanation of warranties visit Stage 6: Completing the Sale.
The main document to be agreed by the legal teams is the Sale and
Purchase Agreement, which deals with all the terms of the transaction.
This is the contract you and the purchaser will sign at the Completion
Meeting.
Again, it is worth taking the time to research the competing claims of
different legal teams. Choose a lawyer who is used to closing deals and
in whose judgement you have confidence.
There will be clauses in the Sale and Purchase Agreement with give rise
to differences of opinion between lawyers acting for vendor and
acquirer. Your lawyer needs to recognise what is just a tactical joust
between lawyers and what is really important to you to keep the process
moving forward.
You will need to agree a fee structure with your lawyer to keep a check
on mounting deal costs.
A sales process needs momentum. Even so, some deals can take up to six
months to complete. It is not always possible to predict how conditions
will change during that time, but good advisers will help their clients
understand timing issues. A talented set of advisers will ensure that
the sale process runs smoothly and will maximise value.
For a list of corporate financial advisers and corporate lawyers in the Midlands click
here.
A key part of preparing for sale is raising the image of your company
and again a strategy for doing this should be in place long before a
sales process gets underway.
If you are contemplating a flotation on one of the markets, you should
ensure you have been on the radar of your sector analysts at the
investment banks and brokers for long enough before the listing process
is launched for them to have an idea of your company’s track record and
comparative performance within your sector.
At the least, you should produce annual reports and accounts as if you
were already a public company and mail them, in hard copy and electronic
form, to the relevant analysts. You may want to consider also providing
half yearly or quarterly updates.
In every sector, there are some analysts whose opinions count and can
move markets and some who make up the numbers. Do your research to
identify the key analysts and try to meet them – not easy because busy
analysts have little time for companies which are not already listed.
This is where it is useful to have another adviser as part of the sales
team, a public relations expert. Few small to medium sized companies can
afford an in-house PR, but there is no shortage of PR agencies willing
to help for a fee.
The largest specialists will only be interested in representing major
companies, a policy reflected in their client list and the level of
their fees. Smaller, regional companies will better fit the budget of
most companies.
Once again, research, testimonials and a beauty parade are the first
steps to choosing your PR. At the very least, they should be able to
demonstrate a record of regularly winning profile for their clients in
the trade magazines that serve their sectors. At best, their contact
list should mean they can open doors which would otherwise be closed to
you.
Again, agree the fee upfront and understand exactly what you will
receive for your money. The contracts you sign with your advisers will
be the first of many documents during the process and they are as
important as any in a successful outcome.
Results Count
The value and importance of good advisers and of PR should not be under-estimated – especially when we have two ex-PR men as Prime Minister and Deputy! – but fundamentally results count.
A track record which shows steadily increasing profits during normal
market conditions and the resilience to remain profitable during an
economic downturn inspires confidence in a potential purchaser.
If that record shows that in good times and bad your company has
out-performed comparator companies in your sector then you should expect
a premium valuation.
The wise purchaser will also look behind those bottom line figures to
see how they have been achieved.
Of course, keeping a firm grip on costs will enhance the bottom line but
businesses cannot be built on cost-cutting alone. Inflating profits by
starving the company of investment in equipment or people is a
short-term, temporary tactic that will not help you to achieve a premium
price.
No new owner wants to start by putting back into the cost base costs
which should have never been cut in the first place.
A purchaser will also want to examine whether the profit growth is based
on winning new customers, opening up new markets, launching new
products or has been achieved artificially by acquisitions which may
have left the company servicing a significant debt. The value of
sustained generic growth is higher than that of expensively acquired
growth.
A purchaser will also look at the results in the light of the broader
picture for the future of the sector in which your company operates.
Premium prices were still being paid for canals at the dawn of the
railway age – and purchasers lived to regret it. More recently, regional
newspaper purchase prices reached record levels as the internet began
to take their core advertising business.
So purchasers will be wary of your company’s future projections and will
view them in the light of the broader landscape. Your company’s past
can build confidence; its future builds the purchase price.
Proper preparation will ensure you have the documentation to enable a
purchaser to answer these questions and to become comfortable with the
underlying strength and prospects for your business.
You should avoid short term fixes to improve results artificially, such
as manipulating working capital by reducing stock levels, postponing
essential capital expenditure or halting marketing spending. Make sure
your sales forecasts are robust and credible on past evidence. Buyers
and their advisers quickly see through such stratagems and discount
their offer accordingly.
Assets – a plus or minus
It may seem self-evident that the more valuable your business assets, the higher the price it is likely to attract. However, assets that depreciate in value over time can depress the price whatever their current book value.
Assets are categorised as tangible and intangible.
Tangible assets include premises, car fleets, machinery, IT equipment,
investments, debtors, stock and order book. The impact of substantial
property holdings can fluctuate with market conditions. The value of
expensive manufacturing machinery or IT equipment will be written down
as the years go by but few purchasers want to be confronted with urgent
capital expenditure requirements. That commitment will be reflected in
the price offered.
Intangible assets include intellectual property such as brand names,
patents and copyright; intellectual assets such as contracts or
licences; and intellectual capital which is the accumulated knowledge
and skills of the business, including the staff. All can enhance the
price your business is likely to attract.
Part of the sale process will be to produce an asset register, showing
exactly what the company owns and its value.
Resolve disputes and outstanding litigation
It is unwise to go into a sale process with unresolved legal issues. These can range from disputes with suppliers or customers, with official bodies ranging from the tax authorities to the environment agency or with employees claiming to have been treated in a discriminatory way.
You may believe you are 100 per cent in the right and that any claim
against you will fail. A potential buyer will want to be protected from
the worst possible outcome of any potential litigation.
This protection will be reflected in a lower purchase price, putting
part of the price paid into escrow – that is setting it to one side
until the outstanding litigation has been settled which with the
possibility of appeals may take years – or by seeking Indemnities from
you. To find out more about indemnities visit Stage Six: Completing the Sale.
It may be painful and frustrating to settle a dispute you believe you
can win but it will remove what could be a major stumbling block in the
sale process.
In recent years, deals have fallen through because of deficits in the
company’s pension fund. This may be a bigger problem to solve than
negotiating a settlement to a legal dispute. Consult your company’s
pension adviser about how the problem can be mitigated.
Data rooms and due diligence
All businesses, whatever their size, face a hurdle in the sales process which can be time-consuming and frustrating for seller and purchaser alike. It is known as due diligence.
This is the process in which the purchaser or the purchaser’s adviser
examines the comprehensive records and projections of the selling
company.
Due diligence covers three broad areas - financial which includes
checking results and projections and other accounting matters; legal
which includes verifying deeds of ownership, contracts, employment
records, health and safety matters, litigation history; and commercial
which is an assessment of the business’ market position. The documents
or their emphasis will vary from industry to industry.
This confidential data is usually lodged in a data room in the offices
of the seller’s advisers or at the offices of the selling business.
This room is kept under tight security and staffed during agreed opening
hours. Only previously accredited representatives of the potential
bidders are allowed to visit to view the documentation.
More recently, virtual data rooms have being introduced to avoid the
costs of maintaining a data room and to provide more convenient 24-hour
access, which could be vital in overseas transactions. Virtual data
rooms involve a secure website where password-permitted representatives
of the bidders are able to view documents. To maintain security,
functions such as printing or copying are heavily restricted.
The workload for management and particular the finance and HR
departments, if the contents of the data room have to be assembled from
scratch, is overwhelming. The result is almost certainly that vital
information will be missing from the data room, requiring more work for
the seller to find or re-create the missing documents and frustrating
the purchaser or bidders. In extreme cases, problems with missing
documentation can make a purchaser suspicious about the candour of the
vendor company.
The way to avoid this is to begin collecting the required data under
appropriate headings as a normal process of business long before a sale
is contemplated. It can then be taken from the company’s archives and
numbered and ordered to the requirements of your adviser without
bringing the day-to-day business of your company to a standstill. Your
adviser will tell you when certain documents should be placed in the
data room. It is a tactical decision whether you wish to release every
piece of information at the outset or to give a purchaser less time to
digest documents which might unsettle a bidder and affect his valuation
at an early stage in the process.
