Jackie Lee, former owner of the Dolls House Emporium spoke at LeaderFest 2103 at Pinewood Studios and shared these tips based on her own experience of selling her business.
Start with the end in mind
Professionals in the Mergers and acquisitions field (I assume) lay out their plan of when the EBITDA reaches £X will be the right time to sell. Owner-managers are too busy running the company to recognise this moment: are having fun and don’t want to retire: realise too late when profits/sales are no longer optimum.
Are only interested when you fit their criteria, i.e. they will make enough on the sale. You can waste a LOT of time educating them on your business, who the ideal purchaser prospects are etc. but when it comes to them DOING something, they’ve lost interest/fail to deliver/have forgotten everything you’ve told them.
In the meantime, you’ve probably paid them for producing an information memorandum and spent a lot of time re-hashing their standard purchaser list for your sector.
While all this is going on, our ideal purchasers have made other arrangements. However, you can speak to a Corporate Finance House and ask for references from their most recent clients, whom you can also ask for their top tips on the structure of their deal, if they would use their lawyer/accountant again, etc.
Corporate Finance Houses / Boutiques
Don’t have a clue who your ideal buyer is. They will start with your competitors. They cannot understand/intuit a strategic fit. They are accountants, not marketers.
They will start by saying that they will do research and approach potential purchasers personally, but this is (in my view) most unlikely to happen unless they strike lucky with a mail-out to the list and get a response to follow up. Left to their own devices, they will splash the teaser document to their email list and wait for someone to bite.
The Corporate Finance House
will always ask how much you want for the business, before giving you any indication of what you could expect, or doing any valuation. This figure, which you may have plucked out of thin air: based on your required income from the proceeds: based on the company’s assets etc., before you know it, becomes written in stone.
Anything realised above this figure, attracts a much higher percentage for the Corporate Finance House. E.g. you suggest £10m is reasonable, Corporate Finance House fees start at 3% on £10m but quickly rise to 7% on £12m etc.
If you have identified a potential purchaser
who you feel is a good strategic fit, contact them yourself, even if under an assumed identity. The Corporate Finance flunky is not going to get the message across well enough, or answer meaningful questions, even if they get to the decision-maker.
Read Insider magazine
InsiderMedia is regional and covers local M&A activity for an overview of the professional teams handling the deals.
Speak to anyone you know/know of who has sold a business within the last 5 years
and get references on who/who not to use: Corporate Finance boutiques, lawyers, accountants etc. I found fellow business leaders very happy to share their experience.
Be open, honest and transparent
throughout the negotiations with the purchaser, because warranties will be in force and anything which does not turn out as expected for the buyer will come back to bite you.
The disclosure letter
gives additional information on subjects not covered in the agreement, e.g. up to the minute developments on suppliers, customers, staff etc. which may affect the business. (On the other hand, there is no requirement for the purchaser to be open, honest and transparent with you.)
Beware of the prospective purchaser using your team
for their benefit. If the purchaser is saying that they will keep your directors/staff, they may ask the directors to prepare forecasts for post-acquisition P&L, which the directors will be held to, so won’t want to stick their necks out. This enables the purchaser to keep the price down (and exclude any of the potential upside of the acquisition).
Beware of price chipping at the 11th hour
You’ve been negotiating all through on the understanding laid out in the offer, only to find that the purchaser decides they’re going to change the rules, after it has taken many months and considerable expense to get to this stage.
Discuss this possibility with your solicitor at the earliest opportunity, and what you can do to avoid it. If you can elicit the purchaser’s plans for the business and quantify the upside, you will be better placed to argue against accepting a lower-than-expected price.
Beware of purchasers trying to reduce on-going/final payments
if the consideration was not all paid on completion.
In addition to the legal agreement
there’s a lot of work involved in the due diligence and disclosure letter, particularly if you do not have up-to-date records of all your agreements, intellectual property, etc. (see attached contents list from a legal agreement). Preparing this info without alerting your team is an art.
It is normal for the agreement to be secret
until signed/exchanged on the date of completion, i.e. deal is done before your staff know anything about it. (Directors will probably be in on the negotiations.)
However, if the staff are being transferred under TUPE, it is necessary to start these negotiations at least two weeks (bare minimum) before the deal completes, i.e. you could be having TUPE negotiations only for the purchaser to pull out (or price chip at the 11th hour which means you pull out), which would be very detrimental to on-going staff relations.
The other option is to have the legal agreement signed first, say a month before completion, so that you are 99% certain of the deal going through when TUPE takes place.
Do due diligence on the purchasing company
and it’s directors, or the individual purchasers if not directors as well as the financial due diligence of the purchasing company. Umpteen directorships of defunct companies are not good!
Our accountants were not as helpful
as they could have been, given their 15-year knowledge of the company, directors etc. They used the opportunity to print money, to confuse with jargon and did not apply their knowledge of the situation to give pre-emptive, intuitive, actionable advice. You need to know the tax situation etc. before you enter into the sale draft agreement.
was very effective and helpful (without any prior knowledge of the company or directors).
Be prepared for the allegiance of the staff to swap to the buyer.
Directors transferring are in a difficult position of having a foot in both camps