In our last article, we covered how companies on the merger and acquisition trail have been affected by the COVID-19 pandemic.
We found that, even though the disruption is not yet over, 57% of executives are actively seeking businesses to acquire with most wanting to purchase companies with the goal of improving their overall operational capabilities and efficiencies.
In this article, we consider, from our experience as business brokers and M&A consultants, how to account for changes in turnover and profitability from the point of taking your company to market through to the negotiation and due diligence phases.
For business owners wanting to sell, now is as good a time as any to proceed. If you’re actively considering doing so, we want to share what’s the same about selling your company as before and what’s different.
Transparency is still key to building trust and keep sale prices high
Two things which have not changed during COVID-19 are:
- buyers want to own businesses where they can see room for improvement and growth and
- the absolute requirement for sharing accurate, up-to-date information with sellers.
There are three points during the process when a potential buyer may want to walk away or offer a reduced price for your company:
- initial marketing,
- negotiation, and
- due diligence.
When selling a business, our goal is to attract as many potential buyers with the required funding as possible in the beginning and keep as many of them in the process for as long as we can.
Our aim is to create a time-limited window at some point in the next three months during which a number of potential buyers will be herded into competing with each other for your company to force up the eventual sale price.
In the initial marketing, we share your achievements, your history, and where there is potential for improvement. We never present your company as the “finished article” and we highlight in our promotional copy the opportunities available to buyers on takeover to generate more sales and a higher net margin.
During the negotiation phase – when you and your prospective buyers meet face to face – we, of course, make a virtue of where the company is today but we focus on proving and demonstrating to them the promise of tomorrow by instituting a few key changes to the way your company is run.
Your buyer will already be having many of these same thoughts anyway and there is a strong advantage to you in confirming and adding to their beliefs.
But, first, how is price determined? What is a fair price for your business?
What is discount to future value?
The price we recommend you market your business for sale at is at a discount to its potential higher future value under new ownership.
Let’s say that you’re turning over £2m and you’re currently achieving a net profit of £400,000.
If the improvements we suggest to the buyer about running your company improves the net profit of your company to £750,000, it’s only fair that:
- you receive a premium for creating a company which, with some modification, will generate £750,000pa profit although it currently only makes £400,000 and
- your buyer receives a discount for having to do the work required to raise your company’s net profit from £400,000pa to £750,000pa.
You’ll rightly pressure us to achieve the highest price possible. Your buyer will pressure you to lower your price – that’s natural and to be expected.
If you refuse to budge on price, you may lose a buyer or two during the competitive window we’ve created.
At all points, we’ll share our opinion with you on each individual buyer’s negotiation tactics.
It’s also our job to manage buyers’ expectations and to give them as little reason as possible to ask for reductions.
Getting from due diligence to completion day during the COVID-19 era
Earlier, we mentioned the importance of openness and complete transparency.
Particularly during the negotiation process, you should freely share information which is not necessarily favourable about your business as well as what you’re doing or you’ve done to mitigate any problem or issue.
When you agree a price with a buyer, they should already know all the substantive details about your business.
If you’ve never sold a business before, what happens between shaking hands with a buyer and handing over the keys to your company is a process called “due diligence”.
Due diligence is an opportunity for your buyer and their accountants and solicitors to find out exactly what they’re buying.
Your buyer’s accountants’ and solicitors’ role is to protect the buyer from making a mistake.
If, during the due diligence process, they uncover something negative which you did not disclose or something which contradicts something you said during negotiations, this may cause the buyer to walk away or to offer a reduced price. The importance of a buyer feeling able to trust what you tell them cannot be overstated.
The value in being transparent about everything during the negotiation stage in particular is that imperfections in your business will already be priced in. Any unknown imperfections or difficulties uncovered later will not be priced in and the buyer will expect a further discount depending on the seriousness of the issue.
But given the upheaval of the previous year and a bit, how can you be absolutely certain that you will have disclosed all material information to a buyer because the world has been in such flux during this period?
The five main areas of concerns for buyers are likely to be:
- viability if your turnover and profitability have suffered during the pandemic,
- breaching of financial covenants with banks and other financial institutions,
- employee-focused change management (including downsizing) for staff working from home,
- disruption to supply chains (this may also be amplified by Brexit), and
- your company’s ability to perform obligations under its contracts to existing customers.
Depending on the sector you operate in, there may be multiple concerns for potential buyers across these five areas or there may be none.
From an M&A consulting point of view, the most effective way to approach this when taking a business to market is exactly the same as sharing information about general operational problems with buyers – honesty, openness, and transparency.
Whatever disruptions have been caused by COVID and whatever the consequences of those disruptions, we want them “priced in” when you come to an agreement with a buyer.
During the initial marketing phase and negotiation stage, we would suggest that information on the effects of COVID-19 be included in promotional materials (including the information memorandum which goes to buyers following the signing of an NDA) and in handouts during the negotiation phase.
Following our initial consultation with you, we’d seek permission, if you engage our services, to contact your solicitors and accountants with a view to creating a COVID-19 due diligence folder in preparation for questions like to arise from your buyers’ professional team.
Please call or email us to find out what the discounted future value of your business might be in the current climate and whether now is a good time to take your company to market.
Buying or merging with companies in the post COVID-19 era – what are the options and opportunities available to you?
At the start of the pandemic, we were told that “we’re all in this together” and we responded to the call. Despite the best efforts of government and the NHS though, it turned out some people were more vulnerable than others to COVID-19. Likewise, depending on whether you were employed or self-employed, there were wide disparities in the financial help available to individuals.
For businesses, it was much the same.
For many companies, turnover fell off a cliff in Q2 2020 and recovered to near normal levels shortly thereafter. For others, especially those which were forced to close, government support was available but cash continued to drain out of their bank accounts every month because the support they received didn’t match their outgoings. And for a handful of companies in the right space at the right time, the last 15 months have been positive, transformative, and they have a significant cash war chest behind them now.
For everyone in charge of running a business since March 2020, the crisis has brought out our creativity and ingenuity. We have made our companies more efficient and we have found new ways to market. We have sweated every asset possible and reskilled ourselves and our workforces.
Although business owners’ abilities to survive the pandemic solvent were a relief to them, it also brought other considerations into view like:
- “Is survival enough for me?”,
- “Do I really want to rebuild this business and get back to where I was in March 2020 in two or three years’ time saddled with debt?”, and
- “Do I care enough any more to do this?”
For many business owners, the answer is “yes” still but not for all.
As experienced M&A consultants and business brokers, there is more opportunity right now for companies on the merger or acquisition trial to achieve their goals. For those business owners who answer no to one, two, or all of the questions above, now is the right time to approach them.
Looking for opportunities
First, speak to your board and/or any external business advisors in your employ (part time financial directors, performance consultant, management consultant, and so on).
What can you do to reshape your business to make it more profitable and less dependent on third parties? The more you’re involved in all aspects of the creation and delivery of your products and services to the end user, the greater your ability to generate higher gross profits and manage quality control across your business.
Are there parallel markets you could sell to? Your products and services may have a natural fit to other products and services offered by another company. By merging or acquiring a company with a profitable track record in supplying those complimentary products and services, the pool of clients and prospects for your expanded range of products and services becomes much wider. How much would it cost and how long would it take to create a competitor and how much attention would management have to pay to the project? It might be simpler to buy or merge instead.
Are there geographical markets in which you don’t have a presence? A merger or acquisition would also save the time, effort, money, and creativity required to set up a branch or presence in that area together with the ability to piggyback on the respect that brand name holds among its existing clients and prospects (until such time that you decide to replace it with your main branding).
Current sector strengths and weaknesses
Depending on the strength of their balance sheets, available cash, and the level of pressure to repay debt/come under covenants again, there are likely to be discount opportunities in the following sectors – automotive, aviation, construction, hospitality, leisure, natural resources, real estate, retail, and travel.
Areas in which there may be less of a discount available include technology, energy, food, online retail, logistics, and healthcare.
If you have a particular target in mind and the company is part of a larger, more broad-based conglomerate, directors may be under pressure from shareholder to start a campaign on non-core divestment. This may be a good time to make a cold approach.
All sellers or merger acquisition targets may not just be receptive to a lower sale price but on payment terms more favourable to you. There may also be “loan to own” opportunities where you take on some or all of a target’s debt in exchange for a shareholding in the company.
To speak with us about both on-market and off-market merger and acquisition opportunities, please get in touch with us by phone or email.