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November 2nd 2011

Having thrown your heart and soul into launching, running and growing your business with the myriad challenges it constantly presents – the decision to sell is undoubtedly one of the toughest that you face as a business owner.

Award-winning boutique dealmakers Strategic Corporate Finance (Strategic), which has completed over 75 transactions since launching in 2000, stresses that meticulous planning is critical when embarking on this route.

According to Strategic managing director Andrew Coates, the turbulent economy of the past three years – coupled with risk-averse potential buyers and banks – has understandably deterred owner managers from selling and exiting their companies.

However, recent changes to entrepreneurs’ relief are resulting in a low, and therefore highly attractive, tax regime for most shareholders selling a small or medium sized company. Many are able to secure a tax rate of just 10 per cent on the first £10 million of their gain which means the majority of business owners will pay tax at only 10% on their entire sale proceeds.

And with over a third of private UK businesses targeting growth through acquisition over 2011-2014, prospects for corporate sales are definitely ‘hotting up’.

Andrew stresses that the economy is only part of the picture as robust planning and timing are key to maximising value. A quick sale may produce quick cash – but maybe not the amount you are seeking. Waiting until the last possible moment can likewise force you to compromise on the figures – or trap you in the wrong deal.

Similarly, it’s wise to start the conversation with advisers at least three or four years prior to the planned exit, since the fundamental actions required to ready the business for sale can take that long to put in place.

Financial health check pays dividends

Your strongest selling point is the financial health of your business. Potential buyers will leave no stone unturned when conducting a due diligence investigation of your financial records.

Your buyers’ accountants will examine accounts for the past three years along with monthly management accounts over the same period, the most recent balance sheet – and financial projections for the next twelve months ahead.

Increased profits – as opposed to flat profits – spell growth potential, which in turn realises the value of the business and boosts its desirability for potential buyers.

A full order book and healthy pipeline will motivate your purchaser and give confidence that the enterprise you have launched, grown and nurtured is in good shape for the future.

Put financial advisors under the microscope

With the exception of serial entrepreneurs, most business owners are inexperienced in selling a company and will only undergo the process once in their lives. Selling a business can be an emotional rollercoaster – but having the right advisers in place to guide you through the process can do much to smooth out the journey.

In the last 12 months alone, Strategic Corporate Finance has completed seven corporate transactions worth a total of £12.5 million and which include the management buyout of niche entertainment business Redtooth Limited, a leading supplier of pub quizzes to the licensed trade and operator of the largest live poker league in the world.

Andrew and the Strategic team have amassed a powerful track record which speaks volumes, and take pride in digging deep to really understand their clients’ companies and managing their clients’ expectations along the route.

Strategist Richard Bosworth facilitates ‘What If’ Forums comprising Yorkshire business leaders with turnovers spanning £4 million – £150 million across wide-ranging sectors. He stresses the importance of commissioning the most experienced advisors.

“When reflecting on the deal, many CEOs and MDs say they were let down by their advisors who they felt did not best represent their interests. My advice is to check out their experience in selling businesses – because you can’t afford to let them learn at your expense. Don’t commission them unless you are confident that they have your interests at heart.”

Andrew Coates emphasises the importance of commissioning advisors who operate in the field full time and have a successful track record in accessing buyers and completing deals.

Maintain confidentiality

The importance of keeping news of an impending sale from customers, employees and competitors until the i’s are dotted and the t’s are crossed – cannot be overemphasised.

It is important to be aware that ensuring minimal disruption will entail additional challenges such as keeping phone calls and meetings private. However this is imperative to avoid employees and clients ‘jumping ship’ because they fear an uncertain future.

Put yourself in the buyer’s shoes

Put yourself in the shoes of a buyer and robustly examine your business through their eyes. These are just some of the multiplicity of questions you may ask?

1. How strong a position does the business command in its market?
2. Is its market booming or declining?
3. Is the business an innovator or a ‘plodder’
4. How strong – and long – is the sales pipeline?
5. Does the company have a strong profile and slick marketing machine?
6. Is the senior management team strong enough to take the business forward?
7. Is the business too reliant on the current owner?
8. Are there any issues/disputes with customers/suppliers/employees?
9. What is the level of customer satisfaction?
10. Are business processes recorded or are they in the current owner’s head?

Establish your purchaser

Ensure you are confident of exactly what you are selling – and to whom. While the prospect of being bought out by a big industry player may be appealing, it may not come to fruition. If you are seeking a trade or a private equity and venture capital sale, establish your rationale for doing so.

Also establish if it’s feasible to do a management buyout (MBO) as selling to your management team can be a preferred option if potential trade purchasers are limited. It may also help to reassure you that you are leaving your “baby” in safe hands.

For an MBO to be successful, you must be willing to sell the business at a realistic price and with a fundable deal structure – which almost always entails vendors agreeing to defer some of the purchase price – referred to as “consideration”.

If an MBO, is the management team up to the job?

The calibre of management teams in buy outs is critical to the company’s sustainability. Funders place great store by the skills, experience, knowledge, contacts and credibility of the buyout team – as well as their vision for taking the business forward.

A strong MBO team is equipped with a well diversified skill set and individual members are experienced in their particular field of expertise. Ideally the management carrying out the buyout may have already been running the business on a day-to-day basis with little or no help or involvement from the owner and maintaining key business relationships with customers and suppliers.

Avoiding the MBO risks

If embarking on this route, beware of the imminent retirement of senior management as well as issues of the business being too dependent on one or two customers, new competitors or new technology – the latter which could threaten the longevity of the business. Such risk factors do not negate the prospect of an MBO, but it is important that they are fully considered at an early stage as funders will only support the transaction if they are satisfied that the business will be viable for many years to come.

The backing of funders is unlikely to be achieved unless risk factors such as those outlined above are minimal or the management team can clearly demonstrate that specific risks can be substantially mitigated.

It may be comforting for prospective buyout teams to know that the success rate of buyouts is, relatively speaking, high because the management team is so familiar with the business – and in many cases is already running it for the owners.

In the words of the ancient proverb that being forewarned is being forearmed, meticulous planning and keeping your nerve is critical – whichever sales path you embark on.

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