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FAQs on selling

It is impossible to respond to this short question with a short answer – indeed, many long books have been written on the subject! We will, however, try in a relatively short answer to provide some general guidelines.

There is always a yardstick for quoted companies, i.e. the number of shares in issue multiplied by the market price at any time. However, in practical terms the only real answer to the question is to market the company and then it is simply worth what anyone will pay for it.

Of course this doesn’t mean that there is not a large amount of science as well as a lot of imagination and flair in achieving the highest price when selling a company. The starting point is to look at all the important factors which will influence value, which may include some or all of the following:

  • The underlying assets employed in the business. It is, however, naive to think that a business is simply worth the net asset value. Indeed, it is often necessary to reassess the current value of the net tangible assets – for example, freeholds are often under-valued (being included in the accounts based upon the historic cost)
  • The tangible net worth of a business (i.e. tangible assets less liabilities) is only one factor in the valuation. In simple terms, if a company is achieving a return significantly less than one would expect from the risks of investment in a private company then one may seek a large discount on the asset value – otherwise it may be better and safer to put the capital elsewhere. On the other hand, if the return is a lot higher than one may reasonably expect on the capital employed in the business, then it is realistic to apply a premium to the net asset value
  • Are there any intangible assets? These could include patents, licences, logos or purchased goodwill for example, and may or may not be shown on the balance sheet. Such assets would need to be looked at critically but in simple terms should be able to demonstrate their inherent value relative to current or future earnings
  • The profits of the business. The purchaser of a business may be much more interested in earnings than assets and businesses are frequently sold based upon a multiple of earnings i.e., P/E ratio see FAQs, Section 5 Acquisition of a business.
  • Purchasers will obviously be much more interested in recent earnings than those from years ago. In looking at multiples of profits, the average profit is often “weighted” towards the more recent years. They will not simply look at historic profits but should be much more interested in current and future (i.e. anticipated) earnings potential when negotiating a deal based upon a multiple of profits
  • Lifestyle or other adjustments. It is far from uncommon for private companies to publish profits which bear little or no relation to the underlying profitability. Private companies are frequently used as “lifestyle” businesses with substantial private expenses of the shareholders/directors being passed through the company. In addition, remuneration or pension payments may be made which place a cost on the company relative to the direct employment of the directors which is greatly in excess of the cost of replacement management if the company was sold. In seeking to obtain the best price for a company it may be necessary to adjust the underlying profits to take account of this.
  • Any Unique Selling Points (USPs) which may increase the value of the company. In seeking to obtain maximum value for a company, it is important to establish any USPs which may set the company apart from its competitors and thus enhance the value
  • What are the future prospects? The value of a company can be significantly influenced by future prospects. These may not just be the prospects of the company itself but also those of the industry/sector in which it operates and the economy as a whole
  • Are there any complications? To obtain the best price for a company it is often necessary to remove any possible complications. For example, the vendor may wish to retain freehold property; there may be awkward minorities, and so on. These sorts of issues need to be addressed at an early stage in the sale process
  • Is there any undue dependence? Undue dependence upon any one or more of a number of factors can significantly reduce the value of a company. This could be dependence on a key supplier or suppliers, undue dependence on a small number of large customers, dependence upon a limited range of products or key personnel
  • The quality and depth of management. This will be of key interest to a potential purchaser. If they wish the company to remain largely autonomous then it will be essential to demonstrate the appropriate structure and depth of management in order to obtain the maximum price for the company
  • Are there any benefits from rationalisation? Rather than looking for continuity of management, a purchaser may be looking to obtain benefits from rationalisation and this may include parting company with some or all of the existing management. Demonstrating synergy with a purchaser and benefits from rationalisation can significantly enhance the value of a company
  • How heavily borrowed is the business? The borrowings of a company can significantly affect the value. For example, in theory a company with £2m of assets and £1m of bank debt has the same net assets as a company of £1m of assets and no borrowings – it is easy to see that a purchaser may find the latter company more attractive in spite of the theoretically identical net asset base

The above is a long answer to the “simple”, six-word question but is far from exhaustive. There are many more factors which can affect a company’s worth, for example, the current or future competition within a market, the size of the company, how diversified the business is, and so on. The lesson is clear, however, and that is simply that the very best professional advice must be obtained to maximise your selling price.

We will provide a clear indication of value at an early stage. It is important that this should be an internal target which is not disclosed to any potential purchaser otherwise this sets a price ceiling in the negotiations.

This depends on the motive or pressure for selling all or part of the business. Quite clearly, if there is pressure to sell due to lack of retirement planning, difficulties within the company, the departure or demise of senior management, and so on, then this can have a significant downward pressure on the price. There may also be other factors:-

  • business strategy
  • the availability of finance for expansion or acquisition
  • shareholder disagreement
  • management buy-out or buy-in opportunities
  • tax planning
  • ill health
  • boredom and desire for a new challenge.

There is not necessarily an absolute ‘best’ time to sell a business, other than at the height of a ‘boom’ period perhaps. However, a business exit strategy that is well planned, rather than a disposal ‘on the hoof’ is likely to significantly increase the chance of a successful sale of the business. Part of the exit strategy is a professional valuation of the business to determine a selling price expectation. The valuation will consider the financial aspects of the business and compare it to its marketplace and its competitors as well as an analysis of off-balance sheet factors which can play a significant part in determining the value of the business. If the sale process is structured, priced accurately and managed properly then normally a suitable buyer can be found.

The sale of a business may not always be wholly price driven and may include a softer element such as employment protection or rewarding loyal staff. It is, however, essential at an early stage to identify the goals, design a strategy and plan the disposal operation.

Be prepared for the whole process to take anywhere from five to twelve months, from instruction to completion, but prevailing market and economic conditions may significantly alter the timetable.

It is essential to present a business in the best possible light and careful preparation is necessary to achieve the maximum price. Initially, we would require such information as your latest set of management accounts, historical statutory accounts, business plans, profit and cash flow forecasts, Memorandum and Articles of Association, shareholder agreements and company literature – we prepare a full checklist of information and documents required, for you to work with. We would then use this information as part of our pre-sales planning, in order to work with you to groom the business for sale. The grooming process can take anything from weeks to months or even years.

All possible deterrents, impediments to sale or reasons for delay need to be anticipated and addressed at an early stage.

From the initial information gathered, we will discuss with you your business’s saleability and we will provide you with a clear indication of value at an early stage. We will assist with the key sale documentation including the Sale Memorandum which needs to make the business appear as attractive as possible. Good, clear documentation should be backed up by exciting, but robust and sustainable financial projections. Thereafter, the marketing exercise will commence.

The marketing exercise goes way beyond simple advertising and is designed to establish the maximum number of potential purchasers. It may be that there are a number of obvious purchasers within the particular industry, although often the last thing a business needs is to risk competitors becoming aware that it is for sale.

It is often the case that it is not the obvious purchaser who will pay the best price, your buyer may not even be considering an acquisition or be in the same industry but could still be identified by our research team as an ideal purchaser to add value to their business and thus pay the maximum for yours.

Our team does not limit their search for suitable purchasers to the UK , an overseas buyer may often pay a premium to acquire a foothold in the UK by way of strategic acquisition.

Once we have compiled a target list we can then make the appropriate approach, not by way of blanket mail shot but often directly by telephone. We are acutely aware of confidentiality and only submit the Sales Memorandum to serious qualifying purchasers who have already signed a Non-Disclosure Agreement (NDA).

The initial meetings are followed by the compilation of a short list. The subsequent negotiation stage is generally approached through carefully controlled discussions with the agreed short list of potential bidders. Exclusivity is withheld at this stage, thus the restricted number of entrants is drawn into the all important bidding situation in order to enhance the sale price and overall terms of the deal.

Careful checks are made to establish that the bidders are financially robust before finally selecting the preferred purchaser.

In addition to maximising the price by establishing competition between bidders we will also assist you with the crucial terms of the deal. The proportion payable in cash, the terms of any earn-out, the warranties and many other matters that are key to establishing the right deal with the right purchaser.

The traditional way of charging for the sale of a business is to calculate a fee based upon a percentage of the proceeds. Most M & A specialists work on a reducing scale of, say, 5% on the first million, 4% on the next million, 3% on the next million and so on. The logic for this is that there may be nearly as much work involved in selling a business for, say, £1m as for £10m. It is still necessary to prepare a Sale Memorandum, there is the same requirement to evaluate the financial strength of bidders, negotiations still have to be carried out with the bidders, and so on. Thus, there is sound logic to “loading” the smaller sale relative to the larger sale.

Whilst the traditional basis of charging has merit in logic, it does not necessarily incentivise the vendor’s adviser to obtain the best price. In saying this perhaps it is easiest to use the analogy of the estate agent who under-values a house, selling it at £450K instead of £500K – this being in the knowledge that he has lost 10% of the potential commission but achieved the sale at only half the effort required to realise top dollar. Similarly, if an M & A specialist is only getting 1% of the band between £9m and £10m then it is probably easier to “roll-over” and accept an offer of £9.2m rather than fighting for £9.9m!

On the above basis, we are increasingly taking instructions which are based upon turning the traditional approach on its head. Once we have agreed a realistic minimum value for a company then, up to that value, we may charge only 1% on the first tranche, 2% on the next tranche and 3% or 4% on the next tranche. However, after that price has been achieved, we will then apply a significantly higher percentage. We have found vendors increasingly appreciative of this method – if we charge a higher percentage of proceeds above and beyond what can reasonably be expected, then the vendors are only too happy to receive the additional funds net of our fees! Each project is unique but we are usually quite happy to take instructions based upon relatively low costs with a substantial carrot.

Regardless of the overall structure of the remuneration package relative to the sale of a company, it should be noted that significant disbursements are generally re-charged and also that the agreed terms generally include an up-front payment. This is necessary in order not only to demonstrate commitment from the vendor but also to cover some of the up-front costs relative to preparation of the Sale Memorandum, initial meetings and other matters.

Not always! There are a number of reasons for this:

  • The short-list of bidders which needs to be whittled down to a preferred bidder may contain a bidder or bidders where there is some doubt that they have the financial wherewithal to complete the transaction. In such circumstances it may be worth trading “top dollar” for certainty
  • The consideration frequently includes elements other than cash. The security and certainty of such other elements needs to be carefully evaluated and if, for example, a sale is a retirement matter, then it may be better to take certainty than to seek the “top brick of the chimney” by way of a contingent deal
  • One of the more delightful situations which Hyde Corporate Finance has come across time and time again is the “softer element” to a sale. We frequently find that a vendor has spent his/her life building up a business and therefore does not want the company to be sold simply for the highest price. This may be because he/she simply does not feel comfy passing what may be a lifetime’s work to a particular company but, more often than not, it is because the highest bidder is not perceived to be the bidder most likely to look after the loyal staff of many years standing.

Company sales should generally be commercially driven rather than tax driven. The objective is normally to sell at the highest price. Having said this, a keen eye on the tax situation can prove invaluable. In particular, the following are important:

  • The lack of sound tax advice can often leave the potential vendor with a tax “headache” after the deal. There are so many areas in which the parties to a transaction may unwittingly leave themselves open to attack from the Inland Revenue, that clear skilled advice throughout the whole transaction is absolutely essential
  • It is often the case that, by judicious but legitimate arrangement of the transaction, the tax consequences can be mitigated to the benefit of the vendor. Indeed, it is often possible to achieve more for the vendor at less cost to the purchaser (but, of course, at some cost to the Chancellor!) such that both parties can do better. In fact, it is not uncommon for legitimate but carefully planned tax savings to be the difference between making or breaking a deal
  • Unlike so many M & A businesses, Hyde Corporate Finance has the breadth and depth as a business to retain top quality tax advice in-house such that any tax issues can be immediately addressed and arranged to the optimum benefit of our clients.

Don’t use your accountants, unless you are fortunate enough to have unusually commercial accountants. Unless this is the case, they are unlikely to arrive at or achieve the maximum value for your business. They are steeped in theory but very few have been in the real commercial world inhabited by our team. They are used to negotiating theoretical valuations with the authorities using values based upon applying multiples to historic profits, but this is not the reality of what a potential buyer is really interested in!

Of course a potential buyer will have some regard to history but achieving the maximum price will be driven by other factors, a key issue often being the quality of the customer base. Another key factor is what the business can achieve for the purchaser under new ownership, with new investment, potential cost savings, with fresh ideas and the benefit of synergies with the new owner’s business. These are some of the key areas which will help us to work with you in order to realise the maximum price.

We limit the number of businesses we work with, which means that we dedicate the time and resources necessary to get you the best result.

You will always know what is happening as you will deal directly with the person responsible and accountable for doing the work for you.

We have a highly skilled team of professionals who provide a wide range of financial, commercial and tax skills all in house. Thus the expertise and experience from a great many transactions is available to ensure the success of your particular deal.

We work with a wide range of clients, including individual entrepreneurs, partnerships, LLPs’, limited or public limited companies (PLCs) in most commercial, manufacturing, media and financial sectors. Generally, we receive instructions from profitable concerns with a turnover between £1M and £100M.

Our skills are also available to assist clients who prefer to sell their business to either an MBI, MBO and BIMBO.

We represent clients from all over the UK as well as overseas. Moreover, we are more interested in your business and its industry sector than where it is located.

Your lawyer has a key role to play in the selling of your business. It is therefore important that your legal representation is experienced in the M&A arena – if not, then you would be wise to seek alternative representation.

The suitability of legal representatives is a matter which we review with you at an early stage. If it is decided to seek alternative representation then this can be via your own contacts or using one of our recommended associates who have the appropriate depth of knowledge and experience to ensure that the process is run seamlessly from beginning to end.