This article was first published in the April 2014 Ireland edition of Accounting and Business magazine.
In recent years a number of transactions have been as a result of insolvency procedures. However, we are now seeing a discernible increase in the number of transactions as a result of trade sales, MBOs, MBIs and so on.
Early indicators would suggest that we are going to see the Irish mergers and acquisitions (M&A) market grow significantly in terms of value and volume, as stability and confidence return to the country’s finances.
At this early stage of national recovery, it is a good time for those with one eye on selling their business to consider the process and put in place the strategy and measures to achieve a successful outcome in line with their personal goals.
There are a number of reasons why shareholders may wish to sell their business – including, but not limited to, retirement of owner shareholders; the failure to identify appropriate future management talent within the organisation; the need to raise funds to develop the existing or new business; to encourage and reward key employees; or a breakdown in relations between existing shareholders.
Whatever the reasons and motives, a professionally managed and carefully thought-out sale process will have a more successful outcome than one that is haphazardly entered into.
Selling a business can be a long, complex and arduous process. It is important that businesses in Ireland have vendors who have experienced advisers, who can add value to the process, in both quantitative and qualitative terms.
One of the key areas where an adviser can help, is helping to ‘groom’ the business. The first, and in many ways the most important, is preparing a company for sale.
Anyone thinking of selling their company should consider the following when assessing whether it is ready to be marketed:
- Do you have a strong market position?
- Does the business have a strong management team (excluding vendors)?
- Is the company heavily reliant on the vendor’s personal goodwill?
- Does the company have a broad customer base (not reliant on a small number of customers)?
- Are sales figures not distorted by large one-off sales?
- Does the company have a history of profit growth (between three and five years)?
- Are current trading results improving on previous years?
- Do the company’s pre-tax profits and sales margins exceed industry average?
- Does the business have scalability?
- Are financial accountants and company filings up to date?
- Does the company have a simple share structure?
Depending on the answers to these questions it may be that the company is not in a position to be sold now and medium-term action is required to enhance the value proposition. Alternatively, the company may be highly saleable, however the likelihood is that the company will have grooming issues that need addressing.
A good adviser will undertake a detailed review of the business and its operations looking at both the macro and micro environments in order to identify specific issues and to then help address those issues. This preparation for sale or grooming may involve financial restructuring; demonstrating growth potential; highlighting synergies and other qualitative benefits for potential purchasers; assessing capital expenditure requirements; and preparing indicative valuations of the business based on maintainable earnings.
Key advice will be in the form of tax planning and structuring to ensure that the sale transaction is tax effective. This may involve detailed planning and restructuring during the grooming period.
Driving the sale process
Whilst it may sound obvious, the more attractive the business is from an investment perspective, the easier it will be to develop competitive tensions amongst competing parties leading to a higher price.
Generally speaking, at the outset a marketing document, generally referred to as an information memorandum, is prepared. This document is an introduction to the company, its products, its markets, facilities, and its financial performance. Fundamentally, the information document should show the scalability of the business and the broad benefits that this potential investment may yield.
It is important then to identify and target potential buyers. Potential purchasers can be sourced from trade competitors, MBOs, MBIs, private equity firms, private individual investors, or even by way of an initial public offering (IPO). However, experience has shown that owners who are managing the sale process themselves tend to look at their immediate competitive environment, focusing on a small number of potential purchasers.
Professional advisers who bring a more structured and target approach based on experience, knowledge of the market place and a known investor base in many cases are the appropriate people to lead the sales and marketing effort. The advisers will identify a broad range of potential purchasers, in many cases unknown to the current management, before narrowing the field down and contacting them.
A scattergun approach of widely circulating the memorandum may bring notice of the potential sale of the business to a wide variety of potential parties, but it could also be commercially damaging.
The advisers will manage the process by asking potential purchasers to confirm interest before entering into broad discussion with a small number of parties to ascertain the level of interest, the motivations for their interest, and the financial level of their interest, before narrowing the field further.
A small number of interested parties will then enter into detailed negotiations, which may include limited due diligence and site visits. This will hopefully lead to developing the competitive tension required to maximise the sales price and will result in the parties entering into a period of exclusivity.
A key advantage of allowing the professional advisers to manage the process is that it allows the owner manager to continue to run their business successfully during the sales process. The sales process can be a lengthy one with management getting distracted by it. If one loses focus on the day-to-day operations, it may have a significant impact on the bottom line of the business and ultimately affect the consideration achieved.
A professional adviser can also act as a buffer between vendor and purchaser. This is important where personal relationships may be involved such as in an MBO. It helps ensure that such personal relationships are not affected by commercial decisions, nor indeed are commercial decisions hindered by personal relationships.
An experienced professional adviser can help bring clarity to the decision making process. In some cases the vendor may be tempted to accept the highest bid, without considering other issues such as the ability of the bidder to complete, and timing and structure of the payment of consideration may not be considered. An experienced adviser will also be able to give guidance on any issues that arise during the negotiation process and in particular advise on issues that may result in warranties and indemnities. Indeed, the experienced adviser may be able to head these off at the pass during the grooming phase.
It is important that the advisers ensure that the representations and warranties and indemnities, given as part of the purchase and sales agreement, are worded in a way that fairly shares the risks involved and does not unfairly prejudice either party.
In summary, in order to achieve the best price possible when selling a business, it is important to assemble an experienced team. This will allow you to prepare a company for sale as early as possible and give yourself the best chance to achieve a fair sales price.
Tom Murray FCCA is a partner with Friel Stafford, Dublin