Preparing for an exit – a sellers’ guide for SMEs

Selling a company is an exciting, challenging and rewarding task. Preparing a company for sale, so that the value is maximised, can be even more challenging than the actual selling process. To help you rise to that challenge we take a look at; the reasons to sell, the different approaches to selling, how to go about finding a buyer, and some of the main issues you need to consider.

Why sell?

Ready to seek your destiny?

Ready to seek your destiny?

Simplistically, the prime reason to sell is to turn the asset value built up in the company into money and ideally to increase that value. Most companies in the UK are owner managed and so the selling process involves the owner(s) in selling to get some financial return for their efforts invested in the business. For many, it is their pension or at least a contribution to a better and more comfortable life.

For larger and in particular for quoted companies the situation is remarkably similar. In all cases, the company belongs to the shareholders so whether that is one sole owner or thousands of individual shareholders who have no other connection with the business, the reasons to sell must include satisfying the needs of a majority of the shareholders.

Sometimes the reasons to sell are based on negative forces. A common example is that the business’ future looks bleak, so selling before it goes bust probably seems like a good idea.  Another reason to sell is to divest parts of the business that no longer fit because they are in the wrong; geography, technology business, etc.  Beware of making decisions based on moving away from a negative position – selling should be a part of the strategy that you plan and prepare for – when you write a business plan for a new business, build in an exit strategy and ensure you work towards achieving it.

Approaches to selling

The main approaches to selling are:

  • Trade sale – selling all or part of your business to another company in a similar or complementary business to your own
  • Floatation – taking the company public by floating on one of the open markets, also a way to achieve funding, but at cost in terms of control
  • Management Buy Out (MBO) – selling to the existing directors, managers and key staff in the business
  • Management Buy In (MBI) – selling to an external management team who want to take over the business as it stands
  • Sale to investors – their sole interest in the business is as a means of making money so their interests and motivations are different to most other types of buyers

The thing they all have in common is they involve you selling your share of the business.  The approach that you adopt will depend on many factors and the key ones are discussed below.

Key aspects to consider

One of the most important factors to consider is how you feel about the business and the people who have helped you to build it. This could lead you to conclude that selling by MBO would be the right (moral) way to go, but you will need to consider your own position as well. Can the existing staff raise an amount of money comparable to the value you could realise through some other form of sale? Also, if you have been the strong management force in the company, have you been grooming your successor or would you be leaving the very people you like and want to help, without a strong leader at the helm of their new company?

It could well be that a trade sale or MBI would be the best option as it would give you a fair price while protecting the employees by ensuring they remain in jobs in a business that will continue to be run well. Also, if you receive the price you want, you could share some of your gain with the key staff who helped you to build the company. By the way, preparing in advance to share your gain through, for example, the creation of a share option scheme would be a sensible move to make especially in terms of tax liability.

The other key factor to consider is what you want to do post-sale. If you want or are happy to stay in the business after it is sold, you will have a greater range of options available to you. In some cases, such as floatation, you will almost certainly be required to stay for a period of time. If the deal does involve you in staying with the business for a while, you will probably be required to accept an earn-out, where part of the sale consideration is held back and paid to you over time against the achievement of agreed targets and milestones. Earn outs can be risky as you now have less control over events, this is a whole topic in its own right – just be careful not to accept too much commitment.

Preparation

In order to be attractive to a potential buyer, and to reap the true value of the business, it is important to ensure that your business is equipped to do everything the buyer wants it to achieve. In effect this is a two stage process; first you must prove your business can deliver what you claim it can, and secondly you must demonstrate that you can satisfy any growth and expansion expectations agreed with the buyer. One key area is your revenue generation capability which will need to ramp up to meet whatever new challenges the new owner will set. If you will now be selling new products or services you need to ensure the marketing and sales operation has the skills and bandwidth to deliver to the challenge. The same principle will apply to all other business departments which might be affected by an increase in volume of work or a change in direction.

Finding a buyer

If your chosen method is floatation, you will need to employ the professionals who will plan and organise the process for you – you have no choice. In this case, the buyer is all those people and institutional investors who believe in your company and want to buy a part of it.

In all other examples mentioned above, finding a buyer is about knowing where to look. For the MBO, it is easy; it is your current staff. In the case of a trade sale or MBI, the buyer is often known to you in the business community where you operate. In fact, they may approach you, rather than you having to look for them. The disadvantage with this apparent convenient and comfortable situation is that you are looking at a very limited list of options and as a result may not be getting the best deal. My advice would be to employ a professional M&A company who know your sector and who will be able to offer you a range of buyers. By creating a competitive situation, you will ensure you get the best price and overall deal.

In Summary:

  • Many of the sell and buy issues will be mirror images of one another, so it may also be worth reviewing the buyers’ perspective.  Read more …
  • A decision to sell should not be a knee jerk reaction to a tactical matter – if it is you will probably get only a fraction of the real value of the business.
  • The essence of any deal is the word “fair”. There cannot be a deal without a willing seller and a willing buyer.
  • The buyer will want to do due diligence – make sure your business is clean and ready for this. That includes your systems and processes, and your infrastructure. Thoroughly prepare those who will act as the interface to the due diligence process ensuring they understand the motivations behind the proposed sale so they deliver a consistent message to the buyer’s due diligence team; a deal can easily be killed at this stage.
  • Know what you want from the deal; money, shares, a job, to leave immediately after the sale, … and ensure you get what you want. The final consideration will be a blend of “price” and terms so if you want to leave on day one you will probably get a lower price and the consideration will be biased towards shares rather than cash. Think carefully about accepting any earn out making sure it is reasonable and that you have the means to deliver what is required.
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Growth via acquisition or merger – a buyers’ guide for SMEs

When buying a company you must focus on four main areas; why you are considering buying, how you will fund the acquisition, the process to be used, and the issues to be considered once the deal is done.

Why (not to) buy?

There could be many answers to this question and in the space available I will deal with the most common.

Completing the offering

Completing the offering

  • One category of buyer is the established company that wishes to “expand” its own business. Expansion could be triggered by a desire to accelerate growth in revenue or profit, or perhaps a wish to move into, for example; a new product or service line, a new market, or a new geographic territory. The actual reason is not that important provided it passes the test of having come from a logical strategy which has been thought through to be clearly good for the business. The transaction will take a lot of management time and effort and it will bring its own problems so, please ensure you are clear that an acquisition will do more for the business than an improvement in organic selling techniques.
  • The second main category of buyer is an individual, or a commercial entity, that has money they wish to invest in acquiring a particular business. This is clearly a financially driven strategy and if it is you spending your own money just be certain that you will get the type of returns you need and that you have fully assessed the risks associated with the acquisition.

There are also some classic bad reasons to acquire.

  • One is the idea that your company is performing badly and an acquisition will fix the problems. It could work, but it is more likely that whatever issues you have which are preventing your existing business from performing will still be there after the acquisition and may well be magnified or in some other way made worse.
  • Another bad reason is to wipe out a competitor – it rarely works.

There are other reasons but I am sure you get the point – only do it if it is a good idea that will deliver enough value to your existing business to justify the hassle.

Preparation

Maintaining a steady ship during an acquisition project is important both for seller and buyer but the issue is often more pressing for the buyer. As the buyer you will need to fund the deal and any disruption to the functioning of your business could have a negative impact on funding by damaging revenue and cash flow, reducing the valuation of the business or reducing the value placed on the business by an external funder hence making it harder to raise funds on good terms.

Advanced planning can ensure the key functions of the business are able to operate smoothly in the absence of key players who are seconded to the acquisition team. Succession planning, robust operating procedures and reliable management information all contribute to the ability to continue “business as usual” amongst the distractions of an acquisition project. The robust operating procedures will also make it easier to quantify the post transaction harmonisation impact.

Funding the deal

The two main options are to use cash or shares in your existing business.  In the case of cash it could be free cash that your business has generated or that you may have as a result of selling an earlier business.  A simple rule of thumb is to ensure that the acquisition will give you a better return on your money than other investment options.  In considering the return, you need to balance risk and reward.

An alternative approach to cash is to raise money through some form of loan. You will need to provide collateral which will either be something that you already have (please NOT your home), such as the asset value of your existing business or the collateral could come in the form of shares in the business you acquire going to the lender. If you are going to raise money for what is known as a leveraged buy out, you need to be even more certain that you will get the required return and that you have done a thorough risk analysis.

By funding through shares in your existing company, known as “paper”, you are in effect saying to the target acquisition “take shares in my company in exchange for shares in your own”. So, your company will need to be quite healthy so that the seller will consider shares in your company to be a more attractive proposition than shares in their own.

Executing the process

The biggest tip I can give you is: use a professional organisation that makes its living out of M&A as they are well worth their fees because:

  • A good intermediary will have a full process to manage all aspects of the deal, they will have a network of contacts and above all they have the skill and experience to get you a good deal.
  • They will approach the negotiation without emotion and they will be able to say tough things to people that would be more difficult for you especially if those people are future colleagues following the completion of the deal.
  • A good intermediary will help you to “see sense” – to them this is a deal and they will not suffer your emotional ties to things that do not really matter – they will keep you focused.
  • They will lighten the work load for you, enabling you to keep your current company on track without unnecessary distraction.

Due diligence;

  • DO NOT skimp on this process of investigation and discovery that helps you to know in advance exactly what you are buying.  Traditionally due diligence has looked mainly at legal and financial matters. These are of course very important but so are many other things including; staff satisfaction and stability, supplier relationships, customer relationships, the effectiveness of the sales and marketing operation, and many other things that make the business work on a day-to-day basis.
  • Don’t get too emotionally tied to a particular acquisition. Be prepared to walk away from a deal if unexpected skeletons appear during due diligence.
  • On the positive side, due diligence provides you with the opportunity to collect information that will help you prepare for the all important process of integrating the new business with your existing business, so don’t ignore the details such as infrastructure, systems and processes, staffing and culture which could add substantial time and costs to the subsequent harmonisation. The devil is often in the detail.

Communication: consider your stakeholders and their likely reactions – try to avoid giving them any sudden, nasty surprises.

Prepare a draft integration/harmonisation plan and factor this into the overall transaction cost.  Be prepared to cherry pick the best of both organisations so long as it doesn’t result in a disjointed system.

After the deal is done

You have inked the deal. You have drunk the champagne and enjoyed the feeling of euphoria that comes from pulling off a deal. Now it is the next morning and you still have a job to do plus a new job of merging the new and existing business. The Champagne celebration may have marked the end of the acquisition process but it also marks the beginning of the next phase of your business life.

At an early stage when you were deciding that you wanted to buy a business, you should also have created the plan to take over, merge and assimilate that new business as quickly as possible. It is scary how quickly the perceived value in an acquisition can turn to dust if you do not hit the ground running with the newly combined or acquired business. You will need to deal with issues relating to; staff, customers, suppliers, banks and many other interested parties. To help with this, you will have gained a good view of the business through the due diligence process and so you should have a detailed plan in place before the deal is finally done.

Summary

  • A decision to acquire should not be a knee jerk reaction to a tactical matter. This could result in a huge waste of your time and worse still could do potentially long term damage to the business
  • The essence of any deal is the word “fair”. There cannot be a deal without a willing seller and a willing buyer and if they are VERY willing to sell be suspicious. Equally do not be tempted to take unfair advantage of people who may soon be your new colleagues.
  • If they are very keen to sell, be cautious and ask is this a distressed sale? You do not want to find that their distress becomes yours.
  • Do not skimp on due diligence; look at the business both deep and wide.
  • Remember the combined entity will be a bigger business that will require a more effective selling engine to feed it. A key area for due diligence is to look at the other party’s sales and marketing operation to see whether when combined with your own it will be able to deliver the required increase in volume.
  • For any deal to make sense there must be a resultant synergy; “two heads being better than one” provided they are not banging against each other.
  • Make sure you have a good process and I recommend that you use a professional, not your bank or your accountant but an M&A specialist.
  • Plan from the beginning of the process how you will integrate the acquisition once you have it.
  • If you are thinking of a leveraged buyout please be very certain that you will generate enough profit to pay off the debt as and when required otherwise they might just take your whole business away from you.
  • Don’t be scared – if you do it right it could be very beneficial – just plan and take care.

Finally, remember, you may have bought a business, but you still have to win the hearts and minds.

FireBelly Creative

The Outcome:

A successful sale of the business to a larger company in the same industry sector.

“Performative drove the process throughout, without which support either the business would have suffered or the deal would never have completed.  Since completion Performative have continued to support us through the early stages of integration.

I am extremely happy with the result they have obtained for us.”    Guy Meyer, MD, Firebelly Creative

The Challenge

Firebelly Creative is a successful cross platform strategic launch marketing agency using traditional & new media with AV, Digital, Print and PR capabilities.  The shareholders were looking to realise a return on the investment they had made in growing the company over the previous 2 decades by finding new owners for the business thus freeing them to focus on the activities in the business which they enjoyed most.

Performative were invited to identify potential buyers for the business and were awarded the Sale Mandate.

The Performative Solution

Performative executed a Sale Mandate which incorporated the complete management of every aspect of the transaction:

  • strategic guidance to the Board including valuation and deal structure;
  • creation of the marketing documents;
  • finding and contacting potential acquirers, conducting initial evaluation meetings and for suitable prospects orchestrating meetings with the owners;
  • working with the chosen acquirer to structure a deal that worked for all interested parties;
  • managing all aspects of the negotiation through to final agreement on the offer value and structure;
  • introduction to qualified professional services and coordination of all professional relationships;
  • review and completion of all contractual documents on behalf of the business and its owners;
  • post-transaction support to ensure the early days of the transition went smoothly.

The activity commenced in 2010 but was suspended for commercial reasons in 2011.  It was revived in May 2012 and completed at the beginning of October 2012.

Performative’s involvement enabled the owners of the company to continue to focus on their operational roles in the confident knowledge that their interests were being protected throughout the marketing and negotiating stages of the transaction and that a harmonious relationship would be maintained with the purchaser going forward.