In this day and age, very few of this generation will be handing down the “family company” to the next generation. The exit for most owner managed businesses is a management buy out (MBO) to the second tier management or a trade sale.
One of the benefits of a sale to the management is that they “know the business”, but in any sale, and particularly to a larger corporate, the stress of the process and the likelihood of a happy ending can be greatly improved by ensuring your business is managed with an eye on the ultimate objective – a smooth, tax efficient disposal at a sensible price. We call this process "grooming your business for sale."
Dealing with instability
From the day you decide to sell or someone makes an approach, a degree of instability creeps into any business and, given that the process can often take up to a year, putting some, if not all of the building blocks in place as a matter of normal commercial practise can and should shorten this.
Very often, businesses have no real competitive advantage in the market place but exist either through long-term personally built relationships or a degree of price competitiveness linked to hard work in servicing the customer base.
During the grooming process, you should seek to develop some unique selling points that are sustainable. These might include better trained managers who are then multi-functional, an increase in product development, re-branding or even a series of partnership relationships that enable a wider, differentiated and more guaranteed market penetration.
By the time a company is “up for sale”, it should be on the radar of a number of likely buyers and known for specific skills or products. Create an image reinforcing your strengths, publicise accreditations and ensure that every opportunity is used to obtain press coverage from appointment of new staff, through to winning contracts or launching new products. These press releases should be available on the company’s website, which should be refreshed at least quarterly.
Good quality management information is crirical
Nothing turns a prospective purchaser away from a business more than inaccurate, incomplete or delays in receiving information. Consider the information you would wish to see if you were purchasing a business and ensure that this has been recorded for at least two years prior to the sale. This should include: robust monthly management accounts; customer and product concentration details; margin analysis etc; all reconciled through to the statutory accounts.
Whilst the approach adopted by acquiring companies is not always identical in each case, there are probably six distinct stages which are common to each acquisition: receipt of preliminary information (often anonymous); a review of a sale memorandum; meeting with the vendors; generation of an offer; due diligence; and finally the legal process.
It should be borne in mind that each of the stages mentioned above, effectively represents a hurdle that you as the vendors have to get through in order to merit the purchaser taking things further. To put this into some sort of context, the principal questions which most acquirers ask themselves during the review are:
- Does the business fit into our existing operations and/or development strategy?
- Are there ways in which we can add value to the company we acquire?
- Does it fit the financial criteria which we have set?
Tidy up your trading structure
The structure of a business should be as tidy as possible to prevent complications and additional costs arising. The area is complex both commercially and tax wise and ideally should be addressed with your advisor as far in advance of the sale as possible. Areas that sometimes cause problems are: minority shareholdings held by potentially problematical parties; over complicated group structures; inter-company or related party trading; and underlying results not visible from statutory or management accounts.
Meetings with acquiring companies and their advisers is equally critical and often tells them things that the Sale Memorandum doesn’t! Clearly, given the process that an acquirer will go through in order to buy a business and the fact that the vendors’ commitment post deal is sometimes important, the personal chemistry between the vendors (and their senior management) can be critical.
Acquirers usually prefer this meeting to take place at the vendors’ business itself as this gives them an insight into its operation that neither the Sale Memorandum nor meetings at their advisors ever could. Vendors are naturally reticent to do this but they should bear in mind that the visual confirmation of what is represented in either the Sale Memorandum or in preliminary meetings is very important as it tends to confirm views gleaned from the first two processes.
Due diligence
Having agreed the details of the deal and documented these in ‘Heads of Agreement’, the acquirer and their funders normally initiate a due diligence process.
In some cases this takes the form of assessing the commercial viability of the business in detail, either by themselves or industry consultants and may include drawing up a plan as to how they can integrate the two operations. Contemporaneously with this, most employ a firm of accountants to undertake a detailed financial due diligence. This stage of the process is really a verification of the representations that have been made in progressing the transaction to this stage.
Nonetheless, it often throws up unexpected issues and is probably the most time consuming aspect for the vendors. A prompt and considered response to all questions asked again builds confidence: the opposite will cause a purchaser to lose confidence and kill a deal.
It is highly likely, that providing due diligence is proceeding well, lawyers will have been appointed, and will have started working on the principal aspects of the legal documentation prior to completion of the financial due diligence. It is equally likely that the due diligence will give rise to the need to reconsider some of the detailed financial and structural aspects of the transaction and more specifically, identify areas that need further legal protection.
The dos and don’ts of selling your business
- Prepare high quality information and have available all necessary back up on a timely basis.
- Bearing in mind that you are selling your business, subject to commerciality, be open and honest in all conversations with the purchaser.
- Make every attempt to develop a personal relationship with the acquirer as this will enable the two of you to agree things which matter - outside the clutches of corporate advisers.
- Continue to run your business as though it is not going to be sold until the money is in the bank and never be afraid to walk away from the wrong deal.
- Finally, and probably most critically, ensure that you appoint competent advisers, with whom you feel comfortable. In most instances this will be the most important transaction you will undertake during your lifetime and it is important to ensure you get it right.