Finance directors are often asked to project manage a business
acquisition or disposal with little or no previous
Even before Lehman Brothers collapsed and everything changed,
the crystal ball-gazers were urging business owners to start
preparing their exit in time to catch the coming wave of higher
valuations. Of course, M&A advisers are hard-wired optimists:
we all know that. This article is not another prediction about when
and by how much the M&A market will pick up. Indeed, if I were
to make a prediction about market upturn, it would be more along
the lines of 'if' rather than 'when and 'by how much'. This article
has a more modest and practical objective: if you are thinking
about selling you business, or a part of it, here are some things
you might want to think about. Some practical tips that might
possibly make the whole process run a little more smoothly.
Look at things from the buyer's
Let's start with a tricky question: why would anyone want to buy
your business? What makes it so attractive that someone might want
to pay you a hefty multiple for it? If you can answer these
questions, then you might find the job of finding a buyer a little
easier. Here are some reasons to be cheerful:
- Your business has a predictable revenue stream and dependable
profit margins: perfect for anyone looking for steady income and
- You businesses' enviable market penetration and geographical
strength make it a valuable strategic acquisition.
- Your business is an innovator in a small but growing and
important market….with scale and investment, the future is
These are all great attributes. But the second and third bullet
points will be what attracts purchasers who are primarily motivated
by what they could do with the business, not by what that business
has already achieved. So take a look at where future value can be
generated (intellectual property, marketing and sales know-how, key
contractual tie-ups), because this is what the purchaser will be
looking at. Even better, think about how to best protect these
Understand what the business is worth
There are plenty of different valuation techniques based on
multiples of, say, asset value, cash flow and turnover. But for the
most part valuation will be a multiple of profits. The magic
multiple figure will depend on all sort of factors, but key to the
valuation analysis will be to understand what the business is worth
to a buyer - and this will depend upon the x-factor assets
mentioned in the preceding paragraphs.
Also, think about how value might be driven up through an auction
process. An M&A adviser can earn its corn by creating a
competitive bid situation (see 'Finally, take some advice'
Internal financial reporting
Owners tend to be obsessed with building the business. As
obsessions go, this is a pretty healthy one. However, it will serve
the owner well to instil some discipline and accountability into
the company's internal financial reporting. Any buyer will demand
thorough and regular management accounts: and if they don't get
them, there will be much tut-tutting followed by a price
So ask yourself some basic questions. Are all parts of the
business given realistic financial budgets against which
performance can be measured? Do all parts of the business prepare
dependable financial information to allow performance to be
measured? Is WIP turned into invoices and invoices into cash with
sufficient rigour? Are sensible policies applied for uncertain or
bad debts? If these and other questions can be answered and
financial reporting tightened up, it will give a purchaser less
reason to back away from the deal.
How independent is the management?
If the owner were to take himself out of the picture, how would
the business fair? If the brand and goodwill is still tied up with
the owner's personality then the business might be some distance
away from an exit. The owner's aim should be to hand over the reins
to an able and dependable management team. This may require
management to be incentivised and motivated to keep growing the
business: so some sort of tax efficient option scheme (e.g. an EMI
scheme) might be something to consider.
If sound management is in place already, how likely are
defections? No company can keep its most valued employees if the
employee is determined to walk. But linking the economic interests
of key staff with the success of the company is one way of
mitigating the risk. Please note, whenever a company is thinking
about incentivising employees with shares, options and bonuses,
there are tax traps and helpful exemptions - so get some
Is the business vulnerable to customer
The business may be dependent on a small number of key clients,
whose loyalty or solvency cannot be guaranteed. Are there ways of
reducing this dependency? This is not always an easy proposition as
the company's success may be tied to the fortunes of a few
customers (or indeed suppliers). However, de-risking the business
should be a standing agenda item when corporate strategy is
Doing the housekeeping
Once again, think about how the business will look to the
- Are all the customer, supplier, finance and property contracts
in writing and filed?
- Is the company's insurance cover suitable for its risks?
- Has anyone been promised shares, options or cash payments but
nothing put on paper (or worse, the promise is written down but the
paper lost and forgotten)?
- Are there any disputes on the horizon?
- Is the landlord able to charge large dilapidations costs at the
end of the current lease?
- Are there any key assets used for the benefit of the company
but which are owned (or potentially owned) by a founder or manager
(a classic case is property or intellectual property)?
- Is the company up to date with all its licences, registrations
and filings (and are they in the right name)?
Will there need to be a pre-sale
This question is particularly relevant when a company is selling
off a division.
- Are all the assets in the right place? Or will you need to hive
across, hive out and generally re-jig the assets?
- Will any key players need to consent to a sale (e.g. bank,
- Will you need to provide some transitional services to the
transferring business once it has been sold (e.g. payroll and back
office IT support, property and related services)?
Ask a friendly lawyer for a standard copy of some buyer
information requests (just about all law firm precedents are the
same). This will tell you exactly what a purchaser will ask to
Check your buyer's credentials
Most deals fall apart for two reasons - price or the buyer's
financing. First, price. The buyer spends more time kicking the
tyres and begins to get cold feet. It convinces itself that the
synergies are not perhaps what they might be, the customer margins
are not as elastic as first seemed the case, that it can get the
business for less. The seller stands firm, the buyer loses face,
and the deal gets kicked into touch. To some extent this can be
avoided by being open and transparent with due diligence enquiries,
particularly management accounts.
The second deal wrecker is the buyer's financing. Can the
leveraged buyer really land the bank facility upon which the deal
depends? We hardly need to issue warnings about bank lending to
SMEs here. At the very least insist on seeing the offer letter from
the buyer's bank.
Finally, take some advice
Not all disposals will need an M&A adviser to co-ordinate
the process, but very often they can help identify a purchaser and
maximise the sale value. Their fees will be largely contingent on
the sale completing and they can act as an invaluable conduit
between buyer and seller. Use your contacts and other existing
advisers to suggest some names and then do your due diligence on
them. Test their understanding of your business and its sector. Ask
to see their credentials. Ask them to map out the marketing process
and to indicate the potential buyers. Crucially, have an open and
frank discussion with them about valuation.
If you've reached this far….well done. Most of the suggestions
I've made are rooted in common sense and hardly amount to quantum
physics. Annoyingly, preparing for an exit takes time and
methodical planning: business owners usually have none of the
former and quite often little inclination for the latter. But good
lessons are worth repeating. An investment in time and planning can
make that exit a reality and, at the end of the day, deliver better
This article by Richard Beavan first appeared, Finance
Director - March 2011