selling your business
If you decide to sell your business then there several factors to take into account. The option to sell your business is not quite the same as any other kind of sale. Therefore to get the very best price then it is important to engage experts.
Possible sale options
If you decide you want to sell your business, there are different types of exit routes open to owners:
- Trade Sale – you can sell your business to another company. It is hard to retain confidentiality during a Trade Sale. The trade buyer will probably seek to consolidate the acquired business into an existing operation. Increased staff uncertainty can also happen in this case;
- Management Buy Out (MBO) – Existing management within the business acquire the company. The MBO team often find it hard to raise the funding needed. The MBO process is therefore very draining on the Company’s management resources;
- Management Buy In (MBI) – Outside buyers acquire the company and place their own team into the business. This requires the company to be financially secure and valued at least at c£500,000;
- Buy In Management Buy Out (BIMBO) – The most favoured exit route for debt funders. This is where the MBO team can’t either raise the equity or debt funding package. They then therefore need to seek an outside investor to strengthen their credibility;
- Partial MBO/MBI – Where the shareholders agree to sell their holding in stages.
The valuation of your company is not a science. Market forces will drive the ability to sell. Your ability to present your business as a great opportunity will also be a driver. When you decide you want to sell your business, you can apply a number of principles when valuing your business:
- Earning Multiples – Normally based on historic and possibly forward forecasts for earnings. These are measured before depreciation, interest and tax. You also need to adjust them for “average Directors” drawings. The range for this earning multiple can therefore vary from less than 4 to greater than 10. It depends on many factors;
- Net Asset Value – The book value of the company as shown in the balance sheet. In many cases owners may expect to achieve more when using this approach;
- Cash Flow – use past and forward forecasts for cash flow. Debt funders will focus on past figures, whereas investors may include forward forecasts.Timings and risk may lead to some discounting.
You will get best values where the business can show one or more of these attributes:
- Size – larger businesses attract higher values than smaller businesses;
- Strong past financial performance and forecast always attract higher values. Every £ invested or spent and not fully recovered in the 2 years prior to selling your company WILL REDUCE the company’s value;
- Protecting IPR/Technology by patents, copyright, etc, will enhance the value;
- A business operating in a growing market is better. It will attract a higher value than a similar business in a market that is flat or declining.
Information Memorandum (IM)
Your advisors will produce the IM. It will set out all the main financial, operational and legal issues that a bidder will need. This is in order to make an Indicative Offer for your company. Any offer will be subject to Due Diligence and Contract. This IM will need to include the past 2 year’s financial performance. It will also include the current year and 2 year’s forecast for profit, cash and balance sheet. You will provide the IM under a “Non Disclosure” agreement to interested parties, thus protecting its confidentiality.
You will need to appoint a Deal Team to include:
- Specialist Corporate lawyer;
- Tax Accountant;
- Corporate Financial advisor.
You will normally pay these fees from the proceeds on completion as you cannot charge them to the company.
Negotiate deal structure
When you come to negotiate the deal remember the following principles:
- Competitive negotiations — Retain a competitive bidding environment. Your business will always be worth more when you involve two or more parties in the bidding;
- Cash is King — Maximise the cash on completion as part of the deal structure. Also earn-outs or deferred payments are always a risk;
- Short time scales — Keep any period of “preferred bidder” exclusivity to no more than 2 to 3 months.
Heads of Terms
Confirm the deal structure in a Heads of Terms, normally prepared by the purchaser. Your lawyer should review this document even though it is non-binding.
The purchaser and their financial backers will undertake a verification process. This will include the financial, operational and legal information you have provided in the IM. This process is called Due Diligence. You will also need to provide hard copies of a wide range of documents relating to your company.
A “Non Disclosure” agreement will be used to cover the Due Diligence process . The bidder will sign this document before receiving the IM. It may also be covered in the more detailed Confidentiality clauses included in the Heads of Terms.
The purchaser will normally need 1 or 2 copies of these data files. You will retain 2 copies. Your lawyer will use one of these to create the “Disclosure Letter”. Due Diligence will normally take 2 to 4 weeks. Expect completion to be about 2 weeks later.
Sale & Purchase Agreement (SPA)
The SPA is normally prepared in draft form by the purchaser’s lawyers. This is the legal document or series of documents. They will cover all aspects relating to the sale and purchase of your company. The SPA will be the basis under which the assets are being purchased and by whom.
The warranties section will cover those warranties that you will provide the purchaser. Normally this is 2 years for non-tax warranties and 7 years for tax warranties. You will disclose any known breaches in the Disclosure Letter.
The SPA will also include any handover process. This is normal in this kind of transaction. It may also identify possible restrictive covenants. These are to prevent you from competing against your company post completion.
This is the formal signing of the SPA and other legal documents. It is the point at which the purchaser will transfer the funds agreed on completion. The funds will be transferred to your lawyer’s bank account. This is also the time when you will pay the fees of your advisors.
There may be further payments relating to the deal post completion. This will depend on the nature of any earn-out or deferred payment.
- Prepare the business for sale;
- Appoint specialist advisors;
- Ensure accounts and legal records are accurate and current;
- Be conservative with financial forecasts ;
- Protect IPR;
- Don’t forget that cash is king;
- Maintain a competitive bidding position.
- Have an unrealistic view on value and time scales;
- Hide bad news;
- Incur or invest in non productive costs or assets before the sale process starts;
- Over sell your business;
- Agree to large earn outs or deferred payments.
When you decide to sell your business, the process of preparing your business for sale is critically important. We can help and if you’d like to talk to us about how then please call or email. We will get back to you straight away.