8.5 min read
In week 3 of our ‘perfect’ business sale series ‘Creating Competition’, we examine how to best drive value in the process and attract the right buyers.
Creating an Auction
You have worked hard for your success and now you want to realise that value by a full or partial business sale. Companies are difficult to value and different buyer will have different ideas and motivations with very little consensus on what your business might be worth. This means that the best process to drive value is to market your business on an ‘offers’ basis, creating a choice of buyers and inviting bids and competition, through an ‘auction’ like process.
Avondale’s research provides a global reach and participation by varied multiple buyers and investors. We recommend that data and information is presented using a marketing data room. This will not only position the business and drive the ‘we want, we need motivation’ of potential purchasers but it will also create sufficient transparency for buyers to bid from anywhere in the world. Covid 19 is accelerating this approach, with the vital ‘can we work together’ face-to-face ‘meeting’ now occurring later in the process. It is also best to establish a timeline where acquirers or investors are invited to put forward expressions of interest which should detail:
- Financial and deal structure considerations
- The general strategy behind the acquisition and prospects
- Timing and funding aspects
- Any specifics around key management and personnel
The expression of interest will be determined using the information in the marketing data room, including the confidential Information Memorandum and will be subject to contract. All acquirers should have the same information to ensure a level playing field and if bids remain at similar levels, a final sealed bid may be invited. This is where all acquirers simultaneously submit sealed bids for your business to create the ‘perfect’ sale. The highest bidder is usually declared the winner of the bidding process, although other aspects such as deal structure, track record, culture, funding and timetable will all be important decision drivers.
There is a significant strategy for negotiations to maximise any sale or purchase. The approach requires a mutual understanding of each other’s motivators, and the ability to ‘walk in their shoes’. An auction will reduce direct negotiation; however, negotiation may still form a key part. Both buyer and seller will form a view that a transaction meets their strategic objectives and will therefore be willing to explore further. However effective negotiation is the difference between success or failure. Leaders may be naive in the assumption that transactions are all about price – but this is not the case. Culture, integration, risk allocation, payment structure, funding and timetable all form integral parts of the deal equation. Integration of all the elements is a key part of maximising value beyond the price. Listed below are some of the key insights to negotiation tactics:
- Empathy: people are emotional therefore, never assume rationality even though leaders always pride themselves upon it. Impulse and trust will play a key part in negotiations.
- Strategies: try to be a few steps ahead than the other party.
- Alternatives: if a deal is not right, both sides need to be open to consider other options.
- Listen: negotiation requires understanding even if you do not agree.
- Charm: saying ‘no’ very firmly, with a smile is always more effective!
- Win the big points and lose the small ones to secure optimal terms.
- Avoid ‘no’ – people want to be listened to even if you disagree.
- Always trade and never give anything away for free.
Some sales are all-cash, particularly the more successful projects where competition has been intense to acquire the company and the seller has been well prepared for an exit. However, increasingly, ‘deferred or performance-related payment’ structures are used in private company acquisitions to both help fund a deal and de-risk a transaction for a buyer. The risk inherent in a company has a material effect on valuation. The greater the risks, the lower the value. In some cases, buyers can defer payments to offset ‘risk’. An acquisition with a deal structure that incorporates deferred or performance payments can increase the value to a buyer especially if there are interest-free future payments, tying up less capital on completion. There are a multitude of different deal structures and each has its own unique flavour and structure. The most common structures (excluding cash) often include the following:
- Shares – these can provide a good investment going forward as the business grows – but how will they be realised? A quality shareholders agreement is essential.
- Deferred – this is simply lending the acquirer the money to buy your shares – perhaps where bank funding is difficult. What covenant, security and interest are on offer?
- Earn-Out – typically, these payments are deferred, as above, but with an extra caveat that they are only paid based on performance triggers such as turnover or ongoing profits. It can be a great way to realise extra value on growth, but very careful structuring is required to avoid debate and ensure payment wherever possible.
The deal type will also have an impact on the structure with management buyouts and private equity transactions for example typically having highly structured components and often a combination of the above. The ‘perfect’ sale requires careful crafting of the structure and your advisors’ experience will be central to this.
The Best Buyers – the right exit strategy
The right process and auction should create the ‘perfect’ sale and drive both the value and deal structure. Research is critical to ensure engagement with the right buyer. Ultimately, there will be a choice of acquirers from whom you will select who to grant exclusivity. This will depend on their financial position, ability to complete a deal and track record. A trade sale is not always the best route. Investment sales and in particular, partial exits, where vendors retain a stake, can be very exciting, often in combination with promoting the management team to full leadership. An employee ownership sale can also be an important exit strategy method with the attraction of 0% tax on a sale, as is currently the case in the UK.
In summary, the ‘perfect’ sale requires finding the right exit strategy, with the right type of buyers and investors and using the right deal structure.
In week 4 of our ‘perfect’ sale, we examine due diligence, timetable and completing the sale. If you would like to discuss any aspect of our services in confidence or would like some advice, please call +44(0)20 7788 8250 or go to www.avondale.co.uk