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Exit Right - the ideal sales strategy for your business

Finance directors are often asked to project manage a business acquisition or disposal with little or no previous experience. 

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 perspective

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 capital growth.
  • 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 bright.

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 prize assets.

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' below).

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 chip.

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 advice.

Is the business vulnerable to customer defections?

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 discussed.

Doing the housekeeping

Once again, think about how the business will look to the purchaser.

  • 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 reorganisation?

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, customers)?
  • 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 see.

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 value.

This article was written by Richard Beavan, a Partner in the Corporate team. To view more recent articles, click here or visit our Twitter page

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