Sales documentation
Two main documents need to be drawn up in coordination with your advisers at the outset of the process. The first is the Information Memorandum, a document that outlines all the key details that will attract buyers and maximise the value for your company; the second is a Non-Disclosure or Confidentiality Agreement which legally binds potential buyers from sharing any confidential information which they learn as part of the sale process.
The Information Memorandum must contain basic company profile details
alongside information about the sector in which you trade and your track
record of success; all financial figures including turnover, profit,
the value of your assets, any debts and other liabilities; any
outstanding litigation. This list in not exhaustive and will vary from
company to company depending on its particular circumstances.
The Information Memorandum is a selling tool; it is your chance to
showcase your business. So draw attention to any specific strengths,
such as unique patents or long-term customer relationships or a
performance which outstrips that of comparator companies in your sector.
However, you must ensure that the Information Memorandum does not
contain company-sensitive information such as customer names or pricing.
This can be discussed with serious potential buyers at a later stage.
The Information Memorandum should also set out your preferred sales
structure and timetable.
The Non-Disclosure Agreement starts life as an off-the-shelf legal
document which is flexed to cover the special requirements of a vendor’s
particular company. It serves as a deterrent to potential buyers
sharing any confidential information to which they only become party
during the sale process.
The practical effectiveness of these documents is debatable. A
competitor who expresses an interest in purchasing your company and
receives an Information Memorandum is likely to glean a good deal of
useful inside information. It is not unknown for a competitor with
little intention of tabling a bid to enter a process on a “fishing
trip.” This is something your corporate finance adviser should be able
to guard against.
Identifying potential buyers
Identifying likely buyers for your business is a joint enterprise between you and your management team, if you have taken them into your confidence about the sale, and your corporate adviser.
Identifying likely buyers for your business is a joint enterprise
between you and your management team, if you have taken them into your
confidence about the sale, and your corporate adviser.
You should be able to identify companies that would be likely to meet
your valuation of the business because it will benefit their activities.
Factors such as your customer base, products, skilled employees and
distribution channels could all be attractive.
You may also know firms interested in investing as an expansion,
regionally or internationally, or in the economies of scale you can
provide.
Your adviser who should have a broader view of the market and a wider
range of contacts may be able to add to the list potential buyers you
might not have considered, including overseas companies.
Your adviser will also provide a filter, weeding out those buyers who do
not appear able to fund the acquisition of your business and those who
may just be on an intelligence gathering trip from a competitor.
You do not want to waste time with buyers who are not serious. On the
other hand, having a number of bidders is helpful in achieving a full
price. Your adviser will find a discreet way of letting a bidder know
that, in the initial stages, he is not the only one in negotiation.
Alongside your price expectation, you may have specific ethical
requirements, or seek protection for your employees or guarantees about
the long term future of your business. These issues will be addressed
during the negotiation of the Sale and Purchase Agreement but it is as
well to remember that once you have banked the purchaser’s cheque, the
company is no longer yours and it is unlikely to be run in precisely the
way you would have managed it.
Not surprisingly, corporate sellers find this an easier issue to resolve
than family owners who have an emotional attachment to a business they
or their predecessors have built from start-up.
Initial meetings with potential buyers
Like courtship, every sale is different. Some proceed at a whirlwind pace, some drag on for months of mutual indecision. Some, of course, end in disappointment.
Just as in a courtship, how fast you want to proceed depends a great
deal upon how well you know the potential suitors. How open you want to
be about the relationship depends on how fully your management team and
workforce has been taken into your confidence about the decision to
sell.
The sight of a team from your principal competitor strolling round your
head office or factory, taking notes is unlikely to go unremarked or to
boost morale if you have not carefully prepared the ground. While this
may seem self-evident, at an early stage in the process you should
operate on the basis that a sale will not go through and you will need
the support of managers and workforce to continue to run your business
profitably.
Your advisers can provide considerable help with arranging initial
meetings and, indeed, may represent you at those meetings. You may wish
to be cautious and wait for an initial or indicative offer before
meeting potential buyers and showing them your premises.
The initial stage should end at a deadline set by you and your advisers
by which potential buyers have to refine any indicative offer they have
made, outlining their proposed price, how they will meet any special
conditions you have stipulated and the structure and timetable for the
transaction.
Granting a bidder exclusivity
With bids on the table, potential purchasers will be keen to ensure that they will not be wasting their considerable investment in time and money if they proceed further.
In some, usually major, sales, there is a second round where bidders are
given further information about the company and have to refine further
or re-confirm their offer in the light of that information to meet a new
deadline.
In some sales of scarce assets in which there is a high level of
interest from fiercely competitive bidders, your adviser may suggest you
allow more than one bidder to race to Completion.
More usually, sooner or later, your adviser will help you to decide if
you should give a favoured bidder a period of exclusivity in which to
conclude the Sale and Purchase Agreement and how long that period should
be. During that period, which is not usually less than three weeks, you
and your advisers agree not to continue to provide information to or to
negotiate with other interested parties. This new deadline provides
time for the chosen purchaser to conduct due diligence and for the deal
to be finalised.
However, not all periods of exclusivity end in a sale. The would-be
purchaser may discover matters during due diligence which cause a
downward adjustment to his valuation of your business. The purchaser may
ask for Warranties or Indemnities from you in the Sale and Purchase
Agreement which you are not prepared to give.
A wise adviser makes sure that bidders who have not been given
exclusivity are, as far as possible, kept warm until a sale is
completed.
Assessing offers
If your Information Memorandum was accurate and there were no unpleasant surprises hidden among the mountain of due diligence paperwork, your preferred bidder should now be able to make a firm offer. Few, if any, bidders emerge from the due diligence process with an increased offer; most seek to chip away at the price on the basis of real or imagined uncertainties thrown up by the due diligence documentation.
The purchaser may assume he is in a position of strength with other
bidders having faded away during the exclusivity period. This is an
opportunity for your adviser to demonstrate his worth, having kept the
exclusivity period short enough that the interest of other bidders will
not have waned completely and deploying the arguments that can hold the
bidder at or close to his original offer.
Assuming you reach agreement on price, you and your advisers need to
ensure that the buyers have proof of the finances they will use to
purchase your business and that the timescale from this point to
Completion meets your requirements.
Methods of delivering the agreed price to you can vary. Cash payments
are increasingly rare in the current market. Buyers may offer a deferred
payment schedule, or a deal that involves a combination of cash and
shares in their company. If the purchasing company is listed on one of
the markets, it is possible to judge the value of the shares on offer.
If it is not, you may be reluctant to buy shares without an obvious
route to turn them into cash.
If the purchase is by way of a deferred payments schedule, you may wish
to ensure that the payments are guaranteed. Buyers sometimes offer a
deal based on the future performance of the company. You will need to be
confident of a buyer's ability to maintain the performance levels to be
assured of receiving full value in this type of transaction.
Alternatively, a buyer may also seek to link staged payments to an earn
out, requiring you and perhaps other members of the management team to
remain in the business receiving the deferred part of the purchase price
at agreed intervals for achieving set targets. You should bear in mind
that during this period you will not own and therefore be in total
control of the company. Decisions taken by the new owner can impact of
your ability to hit the agreed targets.
You may also be asked to give an undertaking that you will not set up in
competition to the purchaser.
Whatever the payment method, it is likely Capital Gains Tax will be
applied to the transaction. Seek expert advice before Completion. Relief
may be available and you should seek to minimise your liability.
Communication with stakeholders
As a business owner, you will have responsibilities to your stakeholders, which you must fulfill before selling. An awareness of these responsibilities is necessary if you are to make the transaction as smooth as possible and avoid breaching legislation.
Under the Transfer of Undertakings (Protection of Employment)
Regulations 2006, commonly known as TUPE, you will be required to inform
and consult any unions or other organisations that represent your
staff, while employees must also be offered the same terms and
conditions under the new ownership.
You must also inform your suppliers or business customers of the change
of ownership, as it will directly impact upon their business. A customer
may require certain ethical standards in products and will be keen to
ensure these are continued or a supplier may be concerned if the volume
or type of goods purchased or payment terms are likely to differ
significantly.
Shareholders also have rights to consider in any transaction. Minority
shareholders have the right to sell their stake in the deal - known as
tag-along rights - while majority shareholders have the right to force
minority shareholders to join the sale, known as drag-along rights. The
minority owner must be offered the same price, terms and conditions.
Problems are best avoided by seeking expert advice at the start of the
sale process, keeping shareholders informed and gaining their agreement
during the process and giving information to the workforce at the
earliest opportunity.
Dealing with employees is probably the most difficult task. You and
other shareholders are likely to depart as the new owner takes over; the
workforce will hope they will not be departing and that their jobs are
secure.
Be cautious about what guarantees you give to the workforce. Whatever
assurances you have sought from the purchaser during the sales process,
it is not unknown for a radically different policy to be introduced once
the new owner has taken control, as workers at Cadbury recently
discovered.
