According to government statistics, merger and acquisition activity in the UK have achieved historic highs for a number of years in a row now although analysts expect a pause in that rise as the world economy recovers from the COVID-19 crisis of 2020.
If you’ve never sold a business before, we’ve prepared this article, primarily designed for owners of companies with £500,000 a year or more in turnover, detailing what you need to do to be ready personally and professionally for the process.
We’ll examine in greater detail:
• knowing in your own mind whether it’s the right time to go
• preparing your company for market
• negotiating with buyers and how to approach it
• navigating the sale from the handshake to completion day.
KNOW IN YOUR OWN MIND THAT IT’S THE RIGHT TIME TO GO
Making the decision to sell, in our experience helping clients, is either:
• easy – you’ve had enough, you’ve given everything you can give to the business, you don’t have the fight left to expand it anymore and, if you don’t want to expand it, you can’t see the point in staying.
• hard – you might be about to come up to retirement or you may be suffering from ill health. You still have a love and a passion for the business but, even though your mind might be willing, you’re not sure that you have the energy left.
• forced – turnover may be on a steady decline, your directors’ loan account may be of such a size that you can see no clear way to pay it off, and/or fall-out amongst directors/shareholders has introduced paralysis into the company’s decision-making process
For each business owner, the reason is different. It’s something you need to be absolutely sure that you want to do however.
Around half of all potential business sales fail to complete because the owner has a change of heart. These owners then face significant legal and accounting fees even though the deal does not go ahead.
PREPARE YOUR BUSINESS TO GO TO THE MARKET
Once you’ve made a positive decision to put your company up for sale, the next step is to start getting it ready for the market. In addition to working with an M&A expert, many companies employ the services of a financial advisor at this point if they don’t have anyone in situ at the time to fulfil the role.
A financial advisor is either a very experienced Chartered Accountant, a former full-time financial director at a large company, or sometimes both.
They will come around a few times in the first month to set up the systems needed to perform their role over the longer-term.
After that, they will usually visit your business once a month to make sure all of your records and management accounts are up to date. During the period covering negotiations right up until completion day, they’re generally available for you with a few hours’ notice outside their normal visitation schedule.
Your financial advisor will normally have been involved in either the sale of the company that he or she worked for or on the purchase of businesses on behalf of their company.
Upon engagement, a financial advisor starts understanding your business, how it makes money, its cash flow cycles, its methods of operation (marketing, sales, fulfilment, after-care, and so on), and the responsibilities of each member of staff.
Once they have achieved a sufficient understanding of your company, they then begin the process of making your business as prepared as possible for future sale. That may include making small changes to the way your business is run to improve profitability and to reduce expenditure.
The reason that this preparation is necessary is that, with businesses of a certain turnover and above, the due diligence between the time an offer is made through the Heads of Terms being signed to completion day (the day on which legal ownership of your business transfers to the buyer) is extensive. Delays in providing information or providing out-of-date information lengthens the process more and it may imperil the deal.
Your M&A advisor will recommend that you contact your solicitor too so that they can prepare for involvement in the due diligence process.
NEGOTIATIONS
M&A advisors, like those at IBA Corporate, first identify what might motivate an acquirer to purchase your company and they build a list of prospects to contact with information about your firm.
Our marketing campaign is intensive and focused using the following methods of outreach to selected buyers:
• Database of interested buyers – contactable by phone, postal mail, and email and categorised by the type of business they’re interested in buying, their available funds, and their potential motivation for purchasing
• Network of accountants, solicitors, and private buying groups – we work with hundreds of accountants, solicitors, and private buying groups with their own thoroughly-researched databases of interested buyers
• Private equity groups and search funds – in addition to family offices, these organisations are becoming increasingly prominent purchasers of businesses
Upon receiving an enquiry, your M&A advisor then vets each prospect. They will tell you who is enquiring and whether they have the funds to make the purchase.
Your M&A advisor will then send a confidential information memorandum following their signing of a non-disclosure agreement and following gaining your consent. You are perfectly free to tell your M&A advisor that you do not wish your information memorandum to be sent to a particular enquirer if that’s what you wish.
After this, your potential buyer will probably want to arrange a meeting to discuss a potential offer if they are still interested in finding out more.
If you agree, it would be advisable to attend the meeting with your solicitor, your accountant, your M&A advisor, and your financial advisor. Your buyer will probably bid low so you will need to be prepared to pitch the business at a higher price than you’re happy to accept.
At IBA Corporate, our aim is to arrange multiple meetings with buyers within a short window of time so that we can encourage and develop a competitive bidding environment. We then precis each offer advising you on the price offered, the proposed method of payment, and the potential advantages and disadvantages of each prospective acquirer’s offer.
At the end of the bidding period, if you and an acquirer are happy to go ahead, you then shake hands on it.
Your solicitor and your buyer’s solicitor will want to draw up a letter of intent (sometimes called a Heads of Terms agreement or a memorandum of understanding) – effectively a blueprint for the process between now and completion day.
The letter of intent will contain a general description of what the buyer wants to purchase, how much they’re willing to pay for it, when the payments will be made, and so on. This is the road map towards completion day – the day on which ownership of the shares or selected assets of your business transfers to the acquirer.
FROM THE LETTER OF INTENT TO COMPLETION DATE
Once the letter of intent is agreed and signed, the process of due diligence begins. Concurrently, your solicitors and the acquirer’s solicitors begin to draw up the sale and purchase agreement – the governing document covering the transaction to which you and the acquirer will be legally bound.
Due diligence is a very detailed process allowing your acquirers to assure themselves of everything the company owns, the people who work for it, its financial performance, its assets and liabilities, and much more.
Your acquirer’s offer may change as a result of the discovery of adverse information during due diligence. You should be as open as possible about potential and future problems with your business during the negotiation so this can be reflected in the initial offer. Discounts agreed during the negotiation process are nearly always less than discounts as a result of the discovery of previously unknown adverse information during due diligence.
IBA Corporate note – when a company is sold, it is not unusual for the buyer to pay for it in multiple tranches. The payment you receive on completion day is called the “initial consideration”. Later payments are called “deferred consideration”.
IBA Corporate has extensive experience in assisting our clients navigate the sometimes very challenging period of time between when an offer is made and the day on which the deal is done.
CONTACT IBA CORPORATE
To speak with an experienced M&A advisor on selling your business, please contact us by email, by telephone, or by using the contact form on our website.
Let us find out more about you and your business and explain the approach we would take step-by-step to find a buyer for your company and how we take the deal you agree from the handshake through to completion day.