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Selling A Business


M3 have extensive experience of successfully selling private companies and businesses and have an enviable reputation for achieving the best possible terms and obtaining prices in excess of the vendors' expectations.


We begin the process by carrying out an extensive review of the company and its market. This in-depth analysis provides the foundation of our work. By understanding the company, its business and its market, we are in the best possible position to find an appropriate suitor.


This understanding of the client company and its market also provides a strong negotiating position, allowing us to enhance the offering, adding value and achieving or exceeding price expectations. Once the buyer is found and the deal has been successfully negotiated, we have the resources to complete the sale and conclude the transaction.


All transactions and enquiries are treated with complete confidentiality.
For further information about our services or if you would like us to contact you either telephone 0845 2700345 or use our contact form to request call back.






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A Guide to Selling a Business


Target Audience


This guide provides an overview of the key aspects of the sale process and how to maximise value for the shareholders.


Target audience: Shareholders/Owners of a privately owned company/business
Shareholders/Owners of a venture capital backed business
Shareholders of parent companies looking to divest subsidiaries

Introduction


M3 provides specialist corporate finance advice to shareholders and directors of companies and private equity houses concerning: Exit Strategy and Company Sales, MBOs and MBIs Corporate Acquisitions, Development & Replacement Capital, Corporate Divestments and Restructuring, Recapitalisation, Equity Release ('cash out') and Vendor Roll-over.


The information presented in this guide follows from our professional experience gained over many years in the art of selling businesses. We hope you find the guide of interest and we hope we have managed to provide a good insight into the process. Please do not hesitate to contact us without obligation, and in complete confidence, should you wish to explore matters further.


Getting Started - Your Selling Team


The sale process can be lengthy, typically anywhere from 6 months to 24 months, there will be many matters to consider and a great deal of paperwork to generate. You will appreciate that having the right resources in place at the right time will rely on team work. Therefore it is important to appoint a Selling Team at the outset that has the experience and knowledge to assist you in completing the task.


Your appointed team should consist of all the professionals that are required to manage and execute the sale. Should you have some internal resources to aid you, all well and good, however it is highly likely that you will still need to consider hiring external professionals to cover the areas you cannot.


Managing the project yourself is certainly an option, however it is good practice to have an assistant (internal or external) with whom you can share the burden and who will be able to provide cover when required, especially in the event of illness or other emergencies.


Your ideal team will consist of suitably experienced and qualified professionals, including accountants, solicitors, and finance and business sale marketing specialists, from whom you can draw advice and whom will expedite certain matters on your behalf. M3CF can provide these vital resources.


Define your Objectives


You will probably have some broad objectives for the business sale, but you will need to define them in detail so that your team has a clear idea of the task ahead. Your team will be able to assist you in this process and once completed, you and your team can proceed to devise a suitable strategy for the sale of the business based on those objectives.


Some example objectives:


  • Maximise business sale proceeds (net of tax)
  • Complete the sale as quickly as possible, without damage to the business
  • Protect management and employees' interests as far as possible
  • Tax mitigation
  • Retain certain interests

Sale Strategy


Having defined your Business Sale Objectives, a Sale Strategy can be devised. Key aspects to be considered may include:


  • Agreeing a suitable shortlist of potential purchasers
  • Deciding how many purchasers should be approached
  • Deciding whether financial buyers should be approached
  • Consideration of whether a management buy-out is an option, and if so, at what time discussions with management should take place
  • Preparation of an Information Memorandum
  • Preparation of a Management Presentation
  • Agreeing the precise timing of the sale process
  • Sell to a Management Buy In team
  • Part sale to a Financial Institution to release equity but retain control
  • Buy out a retiring shareholder without selling the company
  • Replace a retiring shareholder without selling the company

After deciding upon your sale strategy or strategies a plan of action will need to be documented and the business sale process augmented.


Pre-sale preparations


Before the business is presented to a potential investor or buyer, invariably there will be a degree of pre-sale preparation to undertake, how much will depend on many factors. Of vital importance however will be the correcting of any issues that could affect the value of the business.


After identifying likely purchasers of the business, you can start to address the most important issues that will be of greatest concern to them. These may include:


  • The Management structure and strength of the management team
  • The Presentation of a business plan to show growth beyond the sale of the company
  • Initiatives to address any customer relations and product/service quality problems
  • Demonstrating a track record of improved profitability and sustainability
  • Extracting surplus assets or property
  • Detailing of efficient management of working capital to generate positive cashflow
  • Tax issues
  • Environmental, health and safety issues
  • Regulatory issues
  • Employee benefit issues

With adequate pre-sale preparation, the ability to maximise the achievable value from the transaction will be greatly enhanced.


Identifying Potential Business Buyers & Screening


This is one of the most crucial aspects of the entire sale process. Carried out correctly, the rest of the sale process will should fall in to place. Although many companies may appear to be suitable buyers, upon investigation it is often revealed that they do not have the financial capacity to make the purchase.


Quite often the potential buyers of a business are its competitors; therefore it is vital that the credibility of a potential buyer is assessed before they are made aware that the competing business is for sale.


Where possible it is advantageous to have a short list of potential buyers. However, regardless of whether you have one potential buyer on the list or many, your list should among other considerations, address these key issues:


  • How does your business fit with their strategy?
  • Do they have the financial resources to make the acquisition?
  • What is their acquisition reputation, are they predatory?
  • Has their acquisition criteria been verified?

A professional screening service invariably saves valuable time and money in assessing suitable buyers, and should be considered an essential part of the sales process. M3CF has extensive experience in screening potential business purchasers, and have "vetted out" many unsuitable buyers, which has saved considerable time and expense as a consequence.


Business Valuation


Determining an appropriate price for a private company or business is a subjective process, due primarily to the uniqueness of the circumstances and generally, a business is bought for what it can do for the buyer, rather than for its own sake.


Thus it would be unusual for Buyers and sellers to place the same valuation on a business at first meeting, therefore a compromise must be reached. However, as the seller of the business you will want to be satisfied that you have struck the best deal possible.


An independent valuation of your business would provide a base line figure from which to work. It may also potentially highlight areas of worth previously discounted, or indicate areas that could be enhanced that would add additional value from the buyer's perspective. Whatever the value indicated by the business valuation, you will have a good foundation upon which to base your sale proposition and move forward.


There are also a number of formulae that can be applied to arrive at an estimated valuation price for a business, however, a formulae takes no account of the unique situation being presented and therefore cannot be relied upon. A full business valuation will take many factors into account, including but not exclusively:


  • Growth potential
  • Profitability
  • The business sector
  • Customer base
  • Business mix
  • Strength of the Balance sheet
  • Cash flow
  • Debt roll
  • Margins
  • Licence rights

M3CF have carried out many business valuations across various sectors, and consider the valuation process a key element in preparing the business for sale.


Maximising Business Sale Proceeds


The ability to attain the maximum value from the sale transaction may be influenced by any or all of the following:


  • Selling the business at the right time
  • Identifying potential issues in advance of the sale that could depress the value of the business, and correcting them
  • Identifying the right business buyer that will have a genuine strategic interest in acquiring the business
  • Ensuring that the business purchaser has identified all the key value drivers of the business
  • Introducing competitive tension into the business sale process
  • Removal of any last minute issues that could result in a deal breakers
  • Resisting last minute attempts by the buyer to re-negotiate the business sale price as previously agreed

Marketing


Key aspects of this stage of the process include:


  • Approaching the potential purchasers on the agreed shortlist, firstly to obtain a confidentiality agreement, and then to provide an Information Memorandum
  • Meeting with potential purchasers, providing further information and organising management presentations
  • Assess the value of the deal to the individual potential buyers
  • Control the release of information to potential purchasers as required
  • Invite buyers to present indicative offers

Depending upon circumstances, your business sale can either be marketed at a discreet level or opened to a broader audience. The discreet route would involve identifying likely buyers and conducting the opening gambit under the umbrella of a Non Disclosure Agreement, this will minimise confidentiality risks.


Should an open approach be required in order to attract as much interest as possible, then a suitable campaign can be mounted, with advertising and press releases being made as well as direct approaches to likely buyers if appropriate.


Buyer Assessment


It is important that all potential buyers are met prior to their submitting an offer as this provides the opportunity to understand the reasons for their interest in acquiring your business. An assessment can also be made as to their level of interest in buying the business.


Meeting with potential buyers is also vital part of the business sale process, as it provides an opportunity to understand what information is important to the buyer, and this ensures that they can be provided with exactly what they require prior to the buyer making an indicative offer to purchase the business.


Once the purchasers have received the required information, and their intent has been verified, the buyer can be invited to present an indicative offer.


Evaluation of Offers


Indicative offers should be submitted in writing and provide the following information:


  • Price offered
  • The means by which the transaction will be funded
  • The form of consideration
  • Full details of any deferred consideration
  • How they wish to carry out due diligence
  • An estimate of the time to completion, with schedule
  • Any conditions attached to the offer

On receiving indicative offers, an assessment can be made as to the merits of the particular offers. It is at this time that the Shareholders requirements can be matched against the offers and the best fit selected. It is at this point that the buyer should be asked to clarify any points in the offer that are not clear.


Due Diligence


Once the offers to buy the business have been evaluated, a shortlist can be drawn up consisting of the buyers that wish to proceed to due diligence. At this time all that is required is a confirmation to proceed to due diligence. This will provide the opportunity to ensure that all the information that could affect the price agreed has been provided to the buyer. In turn this ensures that the actual Due Diligence process goes smoothly and that the process does not raise any issues that could materially affect the deal.


It is often the case that the buyer will use any adverse findings that come out of the due diligence process to try and reduce the value of their offer. With this in mind, it is important to request confirmation of their offer after this process has been completed.


Closing the Deal


Once the terms of the business sale have been agreed, there is still considerable work to be done in order to close the deal; to be considered are such matters as:


  • The terms of the business sale agreement
  • Any issues that may delay the legal process
  • Negotiation of any warranties and indemnities
  • Any disclosures that may be required

It is important to ensure that you use your Selling Team and associated advisors to co-ordinate the entire deal closing process, as there may be a large number of people involved and a lot of information to assimilate and distribute. This is can often be a very demanding part of the transaction and it is vital that your Selling Team are able to identify issues in advance to ensure a smooth conclusion and that your expectations are delivered.


It should also be kept in mind that while all this is happening, you still have to run your business, therefore appointing an experienced Selling Team is very important to the success of the project.


Summary - The Key Ingredients for a Successful Sale


  1. It is essential to be vigilant at all times during the sale process
  2. Generally Buyers to "surprises", especially if they affect the value of the business
  3. Identifying the right buyer will provide the best outcome.
  4. Quality research on your buyer is essential
  5. Confidentiality is paramount to most sale transactions
  6. An enthusiastic willing seller often attracts an enthusiastic and willing buyer
  7. Control the flow of Information to protect the businesses commercial interests
  8. A fully justifiable value proposition on the part of the seller ensures a favourable offer from the buyer

In order to maximise the value of your sale transaction, it is important to appoint an experienced team of corporate finance advisers as early as possible in the project. From an M3 Corporate Finance perspective, we have the resources to manage the entire sale transaction, which means our clients are able to remain focused on running their business, which is obviously vital during any such project, given the often lengthy timescales involved.


  • A good reputation
  • A successful track record
  • Strong management skills
  • Highly experienced individuals
  • Commitment to see the deal through
  • Quality research capabilities
  • Market awareness
  • Extensive connections to find potential buyers

Costs


When appointing an agent/broker or an independent team such as M3CF, fees are usually structured such that a large proportion of the fee is contingent on a successful sale. However, there are other fees and disbursements to consider but these will depend upon the type and scale of the transaction. Should you wish to find out more about the costs that may be applicable to your particular project, please do not hesitate to contact M3CF for further details. All such contact is treated in the strictest confidence and without obligation on your part.


M3 Corporate Finance is an ideal partner to take owners through the initial business sale planning and preparation exercises that ultimately lead to a successful sale. Our costs for a formal Business Sale Strategy are agreed in advance and fixed. We work alongside many clients as they seek to prepare their businesses for sale, providing just some or all of the resources they require.

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Exit Strategy


M3 Corporate Finance


M3 Corporate Finance is an independent corporate finance house focused exclusively on mid-market transactions. M3 Corporate Finance offers specialist corporate finance advice to shareholders and directors of companies and private equity houses concerning:


  • Exit Strategy and Company Sales
  • MBOs and MBIs Corporate Acquisitions
  • Development & Replacement Capital
  • Corporate Divestments and Restructuring
  • Recapitalisation Equity Release ('cash out')
  • Vendor Roll-over

Our services are always led by an owner partner guaranteeing our commitment to your deal.


Target Audience


This guide has been written for all owners of businesses - entrepreneurs who have spent their lives building successful owner managed businesses, management teams and their equity partners who have bought their own businesses with a view to selling them on for a capital gain, and corporate owners of businesses looking to divest particular subsidiaries.


Introduction


With regard to exiting a business, invariably all owners of businesses have the same objective - they want to make sure they get the best deal. Getting the best deal involves planning for the final exit and presenting the business in the best possible light.


Exiting businesses should not be seen as a game of chance. Planning allows the business owner to remain in control of any process, and focuses the business on the most important, value enhancing strategies prior to an exit. M3 Corporate Finance recommends that all business owners that wish to exit their business at some point in the future should formulate an Exit Strategy.


The Exit Strategy should document the following:


  • Current value of the business and the key value drivers
  • Evaluate the possible exit options available at that time
  • Market information including which types of buyers may be interested in buying the business and why (including details of recent transactions)
  • What may be unattractive about the business today and what may restrict the exit options and/or have a detrimental effect on exit values, potentially allowing the owner time to put these things right before exit.

What is an Exit Strategy


Establishing an Exit Strategy can start at any time, but the sooner the better. For most owner managers, exit planning can often be left very late, though increasingly owner managers are becoming much more aware of the benefits of early planning.


For MBO teams and their private equity partners, formulating a credible Exit Strategy takes place before they invest their money.


One key benefit of formulating an Exit Strategy some 12-24 months prior to an exit is the time it allows an owner to "Groom" the business for sale by focusing on improving areas in the business that are key value drivers to a buyer.


Generally speaking, the longer an owner has to groom the business, the greater the benefit. But one thing is for sure - by identifying and implementing a Grooming Strategy, the final exit will be improved.


Some of the key areas to consider when formulating an Exit Strategy are set out below:


  • What are the exit alternatives
  • When should an exit strategy be formulated
  • What are the future prospects for the business and what are the threats to a successful exit
  • What does the business need to look like to be attractive to a trade buyer, an institutional investor or would the business appeal to the existing management team
  • What is the current value of the business and how does this compare with the owner's price expectations. Is there a gap?
  • What are the opportunities for improving the value of the business and how is this achieved
  • How will the exit strategy be implemented?

Formulating an Exit Strategy


There are many reasons why owners of businesses start to think about seeking an exit:


  • the owner may be seeking retirement;
  • for an MBO or MBI the exit is part of the original investment plan;
  • the business may require significant investment and hence a sale of all or part of the business is appropriate to mitigate an owner's risk;
  • the owner may feel the market is as good as it is going to get, or even worse, they may feel it could deteriorate;
  • key employees may be seeking to retire within a couple of years and would be difficult to replace;
  • for large corporations, particular subsidiaries may become non-core through changes in group strategy, or there may be a need for additional cash.

Exit Strategy Route


There are an increasing number of ways for owners to exit their businesses:


Trade sale - whereby the business is sold to an existing trade purchaser either in the same markets or a buyer who wishes to enter the target's markets or products;

Institutional purchase - whereby a private equity house (venture capitalist) or bank purchase the business, usually backing existing (MBO) or new (MBI) management, with a view to selling the business on in a 3-5 year period;

Cash Out or Recapitalisation - whereby the owner takes out part of their equity but retains an ongoing stake in the business, often alongside management, for a second, future pay day, funded by a bank or private equity house;

Flotation - whereby some or all of an owner's value is floated on a UK or overseas public market.


In deciding on the best exit strategy for a particular owner the starting point is to identify the shareholders objectives. For instance, a weak management team may restrict opportunities to do an MBO, but may be less problematic to a competitor who has their own management, or a private equity house that have their own external MBI candidate.
Therefore the first step in formulating an exit strategy is to decide the realistic exit options open to you.


Timeframe


Any owner looking to divest within 2 - 3 years should start to formulate their Exit Strategy now. Assuming 6 months to complete the sale process and 6 - 12 months of employment with the purchaser to facilitate an orderly handover of the business, in most cases this will only leave 6 - 18 months to get the business into shape.


For any manager considering putting money into an MBO or MBI, they will need a clear view of how an exit could be achieved, prior to the deal completing. By necessity this will of course evolve through the life of the MBO/MBI. However, it is important to learn as soon as possible what the credible exit options are, and which options are acceptable to both management and their financial backers.


For many owners it is the threat that the business's performance may deteriorate that starts them thinking about an exit. If this is the case then the exit may come too late to get the best price.


The Business


Very often, businesses have no real competitive advantage in the market place but exist either through long-term personally built relationships or a degree of price competitiveness linked to hard work in servicing the customer base.


During the grooming process, you should seek to develop some unique selling points that are sustainable. These might include better trained managers who are then multi-functional, an increase in product development, re-branding or even a series of partnership relationships that enable a wider, differentiated and more guaranteed market penetration.


When exiting a business it is always important to sell some upside to the new owners, so that they can see continued growth once they have control of the business. An important part of the Exit Strategy, therefore, is to identify the immediate and medium term prospects of the business and to be able to sell them as benefits.
These may include, for example, the following:


  • exploiting a new product range;
  • new geographical markets;
  • new legislation supporting growth in a company's products or services.

It may be beneficial for a company to display some upside in these areas by the time of the exit so they can put some substance behind the claims of growth. Again this may take time to accomplish which emphasises the need to start the planning process early.


Stumbling Blocks


It is not just the upsides that owners need to consider when planning an exit from the business, but the possible threats to their business that may impact on the attractiveness and therefore the value of the business, for example:


  • new and competing technology in a company's markets;
  • an adverse change in legislation;
  • consolidation of its customers.

Some of these threats may not be defendable, though many will be. Again, the defence strategy may take time to implement and come to fruition, for example making an acquisition prior to exit to acquire a desirable technology.


Where a defence strategy is too risky or too costly, the answer may be to bring the exit forward before the threat becomes more visible to possible acquirers / investors.


Nothing turns a prospective purchaser away from a business more than inaccurate, incomplete or delays in receiving information. Consider the information you would wish to see if you were purchasing a business and ensure that this has been recorded for at least two years prior to the sale. This should include: robust monthly management accounts; customer and product concentration details; margin analysis etc; all reconciled through to the statutory accounts.


The structure of a business should be as tidy as possible to prevent complications and additional costs arising. The area is complex both commercially and tax wise and ideally should be addressed with your advisor as far in advance of the sale as possible. Areas that sometimes cause problems are: minority shareholdings held by potentially problematical parties; over complicated group structures; inter-company or related party trading; and underlying results not visible from statutory or management accounts.


Valuation


The Exit Strategy will highlight many important aspects of the exit decision, for instance:


  • is there an optimum time to exit?
  • what is the current estimated exit value?
  • does the business currently look attractive to new investors?
  • will the business exit on a rising level of profitability?

If it is apparent that the owners wish to sell as soon as possible and the current market is strong, it may be attractive to market the business sooner rather than later.


For many other owners the exit decision is more complicated, and involves balancing up competing objectives.


Quite often these revolve around the current valuation, in particular being less than what the owner would like to achieve. In many ways this can act as a catalyst to the grooming process as an owner looks to pursue a strategy to improve the exit valuation.


As we have stated the conclusions of the Exit Strategy can potentially influence both the timing and likelihood of any exit. It will also, importantly, identify any gap between the current valuation of the business and the value sought by the vendor.


For the vast majority of business valuations the following formula is used:


Earnings Before Interest and Tax (EBIT) x Price Multiple


Determining an appropriate Price Multiple for a private company is a subjective process. Price multiples are only readily available for quoted companies. However, EBIT multiples can be calculated for comparable quoted companies and then a discount applied. It is important to use the normalised earnings of a business. This calculation gives an 'enterprise value'. Deducting any debt from the enterprise value and you have the value of the equity in a business.


Certain types of businesses need significant amounts of capital to operate efficiently. This may be in the form of capital equipment or working capital. This will affect the price multiple (both positively and negatively), but in all cases it is important that the business is as efficient as possible with its resources compared with similar companies.


Increasing the value of a business can be achieved by either increasing the profits, enhancing the value of the price multiple and/or resource use improvements.


Some examples of these various methods are detailed below. Obviously the lists on each could be very long and would need tailoring to specific businesses:


Profit Improvement


  • Increase turnover e.g. small bolt-on acquisitions
  • Review of selling prices e.g. start to lose less profitable work
  • Review of margins / overheads e.g. increase or decrease level of sub-contract

Profit Improvement


  • Reduce reliance on key customers /suppliers
  • Prove the business has growth opportunities in new markets or products
  • Legally tie in key employees, intellectual property rights, etc

Profit Improvement


  • Reduce working capital to free up cash for the owners at no cost to the buyer
  • In the short term (only) delay capital expenditure and increase return on capital
  • Generate cash from the sale and lease back of major assets

Each grooming opportunity has a timescale and therefore one of the key things to consider at this point is the desired exit horizon of the owners. It may be impractical to consider a bolt-on acquisition, for example, if the business does not have time to fully merge the two businesses to gain the synergies of the merger.


Essentially, an owner is left with a list of what they believe to be achievable targets that becomes the Exit Strategy of the business prior to exit. Without proper implementation of course, the likelihood of any significant change (and consequently of any benefit) is small.


The Exit Strategy


The Exit Strategy needs the full support of those allocated the responsibility of delivering the targets set. This may be restricted to the owners of a business, but very often involves non-shareholding management. Most owners prefer not to disclose their intentions of exit, whilst others may be more forthcoming. The pro's and con's of disclosure need to be weighed up and potentially incentive arrangements put in place to tie management in, but all of these aspects should be discussed with an adviser first.


Implementation is not a one-off process, and the Exit Strategy needs to be reviewed on an ongoing basis to ensure value benefits are been delivered. In the main this is an internal process, though in our experience the process can be significantly improved by involving an external adviser or appointing a suitable non-executive to the board to bring their experience and external point of view to the business.


Corporate Finance Advisers


Your advisor needs to be an experienced corporate finance adviser with wide experience in advising owners on exit strategies and a proven record in selling businesses in all sectors to all types of investors.


M3 Corporate Finance are an ideal partner to take owners through the initial exit planning and grooming exercise that ultimately leads to a successful exit. Our costs for a formal Exit Strategy will be agreed in advance and fixed. We work alongside many of clients as they seek to groom their businesses for exit.