Our series of articles on the ‘Perfect’ Business Sale a couple of years ago proved to be very popular, so we thought it would be good to start 2023 with a summary of what we believe are the key strategies to achieve the perfect business sale.
The ‘perfect’ business sale is a fast, fuss-free transaction on the right terms and with the right buyers. The following are the steps to achieve this:
Choose the right exit option
For this article, we assume a trade or investment buyer but do not forget there other very attractive exit options such as employee ownership sales or Management Buy Outs (MBO) that may work equally well for you. A good adviser will steer you in the right direction.
Value build in advance
Review your current business model, forecasts, and information prior to a sale. How can you stand out against the competition? How can you reduce risk, increase productivity and ensure that you have the right data and metrics to drive the ‘we want, we need’ motivation in buyers? Can you position your business ahead of market demand in a growth niche where there is minimal competition? The question ‘what is in it for the acquirer?’ should be foremost in your thoughts. Buyers want growth and the ability to demonstrate your business’ prospects, will drive buyer motivation.
Do your own vendor due diligence
Buyers carry out an in-depth exploration of all aspects of your business – commercial, legal, cultural, and financial. Be prepared for this – collate relevant information and data upfront and ensure that it is current. Your advisory team can help by building a marketing data room that will enable both UK and global buyers, who have signed NDAs to review the information without distracting you.
Get the timing right
Choosing the best time to sell is always a balance of external market appetite, shareholder motivations, and your business’ growth prospects. Right now, there is a window of opportunity with benign Capital Gains Tax rates and a recession, which means that slow growth is forcing people to buy to create growth and consolidate. Debt is more expensive which influences deal structures but not necessarily values.
Select the best advisors
Selling a business might be the biggest transaction that you will ever undertake as a business leader. The best advisor will prepare your business for sale, manage competitive bids, project manage the whole process to reduce your distraction, and lead negotiations to maximise value and deal structure. We believe that advisory fees should be linked to ‘step’ delivery as the results will outweigh the costs.
Find the right buyers or investors
A comprehensive research needs to be undertaken. This should be on a global basis where the deal value exceeds £3 million both vertically and horizontally to find acquirers with synergies and economies of scale. Listening to the market is key. During the research process and approaches to potential acquirers, it is vital to understand what is motivating them. The process should be iterative – constantly reviewing and analysing the responses and adapting criteria and approaches. Distracting owners and managers during the sale process is a real risk, therefore key meetings only are the focus. Confidentiality should be carefully managed with potential buyers vetted and assessed in detail.
Create an Auction
Buyers will have different motivations and valuations will vary accordingly. We believe that the best process is to market your business on an “offers” basis, creating a choice of buyers, competition, and bids – an ‘auction’. 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.
Lead the negotiations
There is a significant strategy for negotiations to maximise any sale or purchase. The approach requires a mutual understanding of each other’s motivations, and the ability to ‘walk in their shoes’.
- Strategies: try to be a few steps ahead of the other party.
- Alternatives: if a deal is not right, consider other options.
- Listen: negotiation requires understanding even if you do not agree.
- Charm: being firm but 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.
Craft the deal structure
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. However, increasingly, ‘deferred’ or ‘performance-related payment’ structures are used including:
- Shares – these can provide a good investment going forward as the business grows – but how will they be realised?
- Deferred – lending the acquirer the money to buy your shares – perhaps where bank funding is difficult – but what covenants, security, and interest are on offer?
- Earn-Out – deferred, but subject to performance such as turnover or ongoing profits. It can be a great way to realise the extra value in growth. Careful structuring and seller protections are required to avoid debate and ensure payment.
Due diligence
This is the checking process that a buyer undertakes before finalising a purchase. It will confirm the value and drive post-sale strategy. A good assessment includes:
- What does not work in the business and, as important, what does?
- Review of the financial performance and forecasts.
- What are the structural risks to the business?
- What is the value of Intellectual Property, the process, or threats in market trends?
- Is the business well run and in order, with a professional team?
- What is the potential of the business and what are the value drivers?
- Technology and culture are growing areas of due diligence.
- What is the strategy for integration now that the business is understood better?
If there are negatives, remember that the positives may offset these, alternatively, the course of action might be:
- Manage matters legally in warranties and indemnities.
- Conduct further cross-checks and dig deeper to understand the issues better.
- Renegotiate the deal structure or value – or delay until the negative is corrected.
The legal aspects
The parties will agree to a “Heads of Terms” (HoT) before commencing the full legal process. This sets out the ‘key’ commercial aspects of the transaction, such as price and deal structure but is not legally binding except in relation to exclusivity and confidentiality. It forms the basis for drafting a definitive ‘sale and purchase agreement’ (SPA). The SPA will include all key terms but also warranties and indemnities which re-allocate risk between the seller and the buyer by creating future potential price adjusters. The quality of these protections enhances the current value. Lawyers rightly operate on the basis of a worst-case scenario but both sides should remember that the perfect deal is where both sides feel they have won.
Manage the process firmly
This takes resources and the right advisors. Typically, a deal can be completed within three months from the agreement, but sometimes it can be faster:
- Be clear on roles: the project leader, usually the M&A adviser, needs the trust of the buyer and seller.
- Agree to timeline objectives: run concurrent streams rather than a step-by-step approach. Make sure that everyone has the details of all contacts and is prioritising availability.
- Stick to the schedule: deals with continual negotiations can experience ‘deal fatigue’ and the transaction is less likely to happen.
- Involve and communicate: clear and shared collaborative tools are essential.
- Collaboratively adjust as information flows: make sure this is shared. Any focus points can be highlighted, and issues or challenges addressed at each point.
- Prioritise: high-level reviews can be helpful to highlight red or yellow flags, that is, areas that require further investigation.
In summary, the “perfect” business sale is possible with the right preparation and presentation led by a quality advisor. Securing the right buyer, price, structure and handover for you and your team are all essential ingredients – but, of equal importance is getting your next adventure right after the deal!
Contact Avondale Corporate
Avondale is a leading business advisor that supports driven owners in buying or selling businesses, securing investments, expanding their enterprises, and increasing shareholder value. Our team is composed of skilled and ambitious partners who are committed to delivering your success. For almost 30 years, we have been serving dynamic entrepreneurs and companies both domestically and internationally.
If you are looking for advice or an exploratory discussion without obligation please contact us at +44 (0)1737 240888, our Contact Us page, or email av@avondale.co.uk and together we can examine your opportunities.
