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SELLING YOUR
BUSINESS
A REFRESHINGLY
DIFFERENT
APPROACH
DAVID REBBETTES
A refreshingly different approach to selling your business
SELLING YOUR
BUSINESS
A REFRESHINGLY
DIFFERENT
APPROACH
DAVID REBBETTES
No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form by any method,
without the permission of BCMS. For further information regarding
permission write to BCMS at the following address:
Plantagenet House, Kingsclere Business Park, Kingsclere,
Newbury, RG20 4SW, England
Copyright © 2014 BCMS Corporate Ltd
Printed in the UK
i
ii
CONTENTS
Introduction1
by David Rebbettes
Chapter one
It feels like an accounting issue, but it isn’t
7
Chapter two
It is therefore a marketing issue…
17
Chapter three
Always be prepared…
27
Chapter four
Phase 1: Fail to prepare – prepare to fail…
39
Chapter five
Phase 2: Going live to market
47
Chapter six
Phase 3: The art of deal making
53
Chapter seven
Final thoughts
59
iii
iv
INTRODUCTION
by David Rebbettes
This book has been written for owners of private companies to
provide clear, concise and reliable advice on the subject of selling
your business.
There is a great deal of information and instruction on the subject of
selling companies. Unfortunately, much of it is not actually based on
real deal making experience. This makes it very difficult for business
owners to decide how to go about the most important sale that they
are ever likely to face, or understand how to achieve maximum value.
The principles discussed in this book are not just theory. They have
been proven time and again with companies of all shapes and sizes.
At BCMS we are successfully involved in selling companies from
£1million turnover to more than £100million.
It is also worth noting that statistically, 35% of these are manufacturers
and 65% are in the service sector.
I believe the reason why many owners of private companies receive
such ineffective advice and help from other quarters is that they are
ill-equipped to market a business properly.
1
Whether you are a large or a small business, it requires a great deal
of effort to sell a company. In particular it requires a high degree of
sales focus.
Yet traditional approaches to selling companies involve shockingly
low levels of selling activity. Typically, a corporate advisor would
expect you to find a potential purchaser (conveniently relieving them
of the vital responsibility of sales activity) so that they can concentrate
on handling the technicalities of the sale.
It is unsurprising that less than 8% of company sales reach a successful
conclusion using this approach.
Cutting across traditional thinking
The proactive marketing approach, pioneered by BCMS, differs
significantly from the passive methodology employed by the majority
of M&A (mergers and acquisitions) advisors.
To achieve the best possible price and acceptable terms you need
to be dealing with the most appropriate acquirer. This may seem an
obvious statement, but it is the objective of the proactive marketing
approach. It is also something a passive approach completely fails to
do, unless by luck or coincidence.
It is only after this that the focus needs to shift to the technicalities
of the sale. Furthermore, negotiations are far easier when you are
dealing with the most suitable acquirer.
Selling a private company is fundamentally not just an accounting
or legal matter. It is, first and foremost, a sales and marketing matter.
That is a direct challenge to traditional thinking. The lack of success
using traditional methods makes that argument loud and clear.
At BCMS we are involved in the process of taking a wide variety of
2
companies to market every year. Whether you are a service company
or a manufacturer, large or small, the principles here will work for you.
Why sell?
This may seem a strange question, but understanding your motivation
is important from the outset. The deal will need to be constructed in a
way that will achieve your objectives. Therefore your motivation and
objectives must be clear.
Typically, owners choose to sell for one or more of the following
reasons:
Change in lifestyle
After many years in the business, the owner may have reached a
point where they desire to do something different with their life. It is
quite common for people to alter their goals in life every decade, so
don’t be surprised if your objectives are changing too.
Entrepreneurs vs. managers
Owners of private businesses are often entrepreneurs, and by nature
are creative, full of ideas and energetic. For many, starting a business
was the most natural thing in the world!
However, as the business develops they find themselves increasingly
stifled by managerial and administrative responsibilities, such as
employment legislation, personnel issues, health and safety matters
and new EU rules. They feel that the fun has gone from the business.
Selling the business seems to be a logical and sensible way to exit and
start a new chapter in life.
Time
For many business owners it is simply a matter of time – not having
enough of it. The business becomes all-consuming and personal
areas of life begin to suffer.
3
It is not unusual for owners to sell their business to release the time
which they crave, to spend with family, friends or to enjoy other
activities.
Business lifecycle
Sometimes it is more about where the business is on its journey.
There comes a time when a sale is appropriate for the shareholders,
the staff and the company itself.
Figure 1:
Many companies grow quickly in their early years. After the
initial momentum is passed, sales start to plateau (A). It is often
disproportionately difficult and expensive to break out of this
plateau. A significant investment is usually now required; this may
be in increasing exports, new product development or restructuring
the company. If the owner is inclined to make this investment, then
the cycle will repeat itself (B). Without investment the lifecycle has a
tendency to decay (C).
B
A
C
4
For many owners it now becomes a matter of inclination. Whereas
ten years ago they would have unhesitatingly invested, today it may
not be appropriate. Perhaps to start investing in the company, to
borrow heavily, or to plough all profits back in is not an option that
the business owner is prepared to consider.
At this point, both the company and the shareholders usually benefit
from a sale.
Whether your objective is to liberate your time, reinvest in a new
venture, release family wealth or even emigrate, your goals must be
considered carefully if the deal is to be constructed appropriately.
5
who aims
“at Henothing
is
bound to hit it
”
6
CHAPTER ONE
It feels like an accounting issue, but it isn’t
Most BCMS clients have never sold a business before, and those that
have were more than likely approached and have probably only done
this once. This inexperience understandably leads to a perception
that selling your business is some kind of ‘black art’ and is best left to
the professionals. However, this perception isn’t entirely helpful.
BCMS would, of course recommend that you seek professional advice
when selling your business. While it is no ‘black art’ it is a complex,
and often emotional journey. The question is: which professionals are
best placed to advise you?
Initially, selling a business may appear to be an accounting issue.
This feels logical because of the numbers involved. The reality is that
the process of selling a company departs only marginally from the
process of selling any product or service. In which case, the right
professionals to advise you on selling your business are sales and
marketing professionals, not accountants.
However, the assumption that this is an accounting issue leads many
business owners to approach their auditors with the question: ‘Do
you know anyone who can help me sell my business?’
7
The typical, traditional approach taken by an advisor might have four
steps and look something like this:
Step 1: Produce a ‘prospectus’ or ‘sales memorandum’ – typically
70-80 pages of very detailed information
Although this prospectus appears professional and well-constructed,
it is simply the wrong type of document for the task. A typical
prospectus gives far too much information away too early and yet is
usually devoid of benefits to the purchaser.
A good prospectus should never be designed to sell the company.
Instead, it should be produced simply to sell a meeting and nothing
more. It is the meeting where you can really start to sell the business.
Step 2: Mail out the ‘prospectus’ to a number of competitors – this
is usually done by an office junior or perhaps an intern
In the UK, the average number of ‘prospects’ mailed is 12. There are
major problems with this; firstly 12 is not enough. In addition we have
discovered, over many years of selling companies, that competitors
rarely pay a premium price. Yet most company owners and advisors
do not look beyond their competitors for a buyer.
At BCMS, our experience shows that there is a good probability that
the most suitable acquirer will be complementary to your business,
not competitive.
8
Step 3: Pass the prospectus on to various contacts in the hope that
somebody knows someone who is looking to acquire
This kind of ‘hit and hope’ approach is risky because it begins to
relinquish control over who is contacted and when.
Step 4: Finally, advertise the company’s details on a website or
broker’s list
This might actually generate some interest. However, subscribers to
broker’s lists may well be among the least desirable of acquirers. They
are often venture capitalists and business angels looking for a quick
return on their investment.
Or they might be large, aggressively growing public companies that
are trying to sustain their share values by buying a company for as
low a price as possible. One thing is guaranteed – you will have a
fight on your hands to get a fair value for your business from these
guys.
The failures of this sale process are clearly evident. Virtually no enquiry
generation takes place and every selling principle used to sell the
company’s products and services is disregarded. Without doubt,
selling a business is far more a selling and marketing matter than it is
an accounting or legal matter.
Four elements that influence a successful sale
So what should you do to ensure you don’t fall into the same trap?
Well, here are four elements that will have a major influence on a
successful sale.
9
Avoid passivity at all costs
It is worth noting that the most suitable acquirers are often not
considering an acquisition. The only way to find such acquirers is
through an active search.
Venture capitalists and large plcs looking to sustain share values
are always searching for acquisition opportunities, but rarely pay a
premium. Passive selling will only ever locate such buyers. Successfully
selling any product or service requires active enquiry generation.
At BCMS, we have developed a vast, international database of
companies drawn from commercially available data and our own,
proprietary ‘live’ data. Using this unique combination of resources we
actively contact between 100-250 potential acquirers just to locate
two to three strategically motivated and financially capable ones.
A search should, of course, not be restricted to the UK. Overseas
acquirers seeking access to the UK will often acquire small to
medium sized companies and premiums may well be paid for such
internationally strategic acquisitions. The presence of overseas buyers
will also influence the price paid by local buyers.
At BCMS, we have a large team dedicated to this early research and
identification of potential acquirers. With all of this commitment, it
still takes an average of four weeks to complete. There is no short cut.
Failure to locate a large enough number of high-quality potential
acquirers at the beginning will almost certainly result in a failure to
sell.
Here is an example, one of our own projects that illustrates the
benefits of locating a large pool of acquirers and thinking beyond
the obvious:
10
Case study:
The Ladco Group, a manufacturer
of industrial chocolate making
machinery, based in Scotland and
Germany, came to BCMS looking
for an acquirer.
The research identified 151 companies in this case who we thought
may show an interest in a company like this. In the end, 21 companies
signed a Non-Disclosure Agreement.
After further qualification we met with four interested parties,
including the eventual acquirer: PROBAT Group, based in Germany.
PROBAT are a global supplier of coffee roasting machines.
This neatly illustrates three things:
1 – the value of starting with a large number;
2 – the value of looking overseas;
3 – the value of considering complementary,
not competitive businesses.
Success involves a far greater amount of lateral thinking; the question
to ask is this:
What other products and services do your customers use?
These complementary products and services will give you a clue to a
strong list of prospective purchasers.
11
Motives vs. multiples
One of the questions we are asked with great regularity is ‘How
much is my business worth?’ This is perfectly understandable, but
frustratingly difficult to answer. The reason for this lies in flawed
traditional valuation methodology.
There is a very good chance that any valuation will be related to the
historic profitability of the business. There are a number of valuation
models that can be used. However they all follow this basic pattern.
(Please note: this is an approach that we do not advocate whatsoever at
BCMS.)
Sample valuation model:
Hammers and Nails Ltd. is a privately owned UK business with a
turnover of £4.4 million. The company is a distributor of hand tools,
making an operating profit of £475,000 and owning a property worth
£200,000.
Step 1: Make adjustments to the earnings to reveal the true,
underlying profitability of the business
This may include:
The departing shareholder’s costs;
•• A salary of £90,000
•• Significant pension contributions of £25,000
Exceptional costs in the previous accounting year;
•• Exceptional expenses in the last 12 months due to investment
for future growth accounting for £45,000
12
Any perks or whims of the shareholders;
•• This motorcycle-loving Director recently acquired a new Harley
Davidson for £30,000 (purchased ‘by the company’ as a rapid
response vehicle!)
Add these items to the operating profit and you have a new profit
figure of £665,000.
To replace the roles and responsibilities of the departing shareholder
£70,000 needs to be spent on a new general manager.
The profit figure is now £595,000.
Step 2: Apply a multiple to the profit figure to get a valuation
Traditional valuation models use a multiple of profits to arrive at a
value. Depending on the industry and market conditions at the time
a multiple of between 4 and 6 is applied to this profit figure.
If £595,000 is multiplied by 5, this gives a value of £2.97 million. Net
worth of property and surplus cash may now be added to this figure,
but the value of the going concern itself is based on a multiple of
earnings. This means it is all about return on investment (ROI). A
multiple of 4 means the buyer would get their money back quicker
than a multiple of 6.
In fact, ROI is the underlying principle behind almost all traditional
valuations.
Here is the problem with this valuation. It takes no account of the fact
that the company has an enviable blue-chip client base, a reputable
brand name and also generates surplus cash. It assumes there is no
additional value to an overseas acquirer wishing to access the UK
market either. Above all it takes no account of future growth potential.
13
Do these factors have value?
If so how do you value them?
These are valid questions that require an answer. It is the intangible
benefits which have to be exploited. If multiples are used to value a
business then it is fair to ask – multiples of what?
Motives for purchasing a company are diverse. But in our experience,
the primary reason behind the purchase of any company is almost
always potential for future growth.
This motive dominates and overshadows every other motive and will
classically manifest itself in three areas:
1.Diversification. The buyer wants access to the products and
services that you have spent years developing.
2. Client acquisition. It is so expensive and time consuming to
grow organically in a new market; you can see why access to
clients is so valuable.
3. Geographic expansion. An overseas firm trying to get a foothold
in your territory, for example.
Potential for growth completely overshadows every other motive
for purchase. Indeed 66.3% of all acquisition decisions are rooted in
potential for growth.
There are many other motives for buying a company, which include
intellectual property, seasonal balancing, defensive strategies,
operational and financial synergies, and inherent skills in a workforce.
One of the least common reasons why a company is purchased is
short term ROI. This is also the least likely reason why a premium price
is ever paid.
14
Here is our point. Why do we take the least likely reason why a
premium price will ever be forthcoming and make that the basis of
our valuation?
We would never do this with any other product we were selling.
Most advisors now make one of the most fundamental and expensive
errors; they publish this value in the public domain.
At BCMS we are convinced that we are right on this issue. If you put
a value on a business then you seriously risk undervaluing it. And if
you then publish this value, you can virtually guarantee that any offer
you do get will be less.
So while the numbers involved can make it feel like an accounting
issue; treating it as such will almost certainly minimise, rather than
maximise, the potential of getting the right result.
15
Insanity: doing the
“same
thing over again, and
expecting a different result
”
16
CHAPTER TWO
It is therefore a marketing issue…
In the previous chapter we dealt with two elements that influence
a successful sale, and we emphasised that selling your business is
not an accounting issue. In this chapter we will look at the remaining
two elements, which underline that selling your business is actually
a marketing issue.
Choice – the ‘2.5 rule’
One of the most significant observations we have made at BCMS is the
value of choice. It’s not revolutionary, maybe, but in our experience
it is one element that is routinely left to chance. If you negotiate well
with a choice of strategically motivated buyers, then you will almost
certainly receive a diverse range of bids.
The large number of deals that we have completed over many years,
has led us to make the following observation:
The difference between the lowest and highest offers made is generally
2.5 times. As with any rule, there are exceptions, but there is almost always
a considerable difference between highest and lowest bids.
17
As I have already discussed, we approach, on average, between 100
and 250 prospective purchasers for each client we take to market. It
takes us approximately five months to vet and qualify this list until we
are left with five or six seriously interested parties. These prospects are
asked to submit a competitive bid.
Bear in mind that we have been negotiating for many months and
they have been thoroughly screened. It is at this advanced stage that
we generally see this 2.5 times difference between the offers.
Is this because the lowest offer is so derisory that it is easy to be 2.5
times greater? The answer is no, we rarely get derisory offers at this
stage of a sale.
Here’s the point. If prospective purchasers genuinely valued a
business on multiples of adjusted profit, and used the same valuation
calculations, then surely all offers would be relatively similar.
So why is one buyer prepared to pay 2.5 times more than another?
The answer is quite simple; motive – one company is buying for a
very different reason to another.
So if the motives of a purchaser, rather than multiples of historic profit,
ultimately determine value it follows that it is virtually impossible to
value a business.
We can evaluate a walk-away price or even an aspirational price, but
not a sale price. There is no ‘correct price’.
The question then becomes: how do we encourage acquirers to reflect
those motives in their offers? The answer to that, is choice.
Having a choice of interested parties forces those prospects to
account for things like:
18
••
••
••
••
••
How a complementary product or service they offer will benefit
from cross-selling to both sets of clients
The impact of an overseas competitor gaining access to a new
market.
The available savings in production or delivery
The opportunity to eliminate a competitor and release some
downward pressure on price
What benefits the generation of additional cash flow or
guaranteed income streams will bring
Having a choice of acquirers – effectively creating a market – is the
single most important issue that a vendor can address. Not only must
there be a choice of acquirers, but they must also be strategically
motivated and financially capable. Therefore, it is necessary to
contact many potential acquirers as this will dramatically influence
the sale price.
It is essential that this matter is not compromised because it can have
a major impact on three areas of the deal:
1.Speed
Where there is competition, an acquirer must always be mindful
to maintain momentum or risk losing the deal. At BCMS we
work closely with a select number of lawyers. Feedback from
these lawyers shows that deals completed by BCMS (i.e. within
a competitive environment) have a far greater momentum than
a typical sale.
If the buyer knows that you can walk away, and therefore
deadlock is not your enemy, the deal is less likely to stall. This
is more important than most people realise because the more
protracted a deal the more likely it is to fail.
19
2.Price
Of all the factors that will influence price upwardly, the greatest
is ‘creating a competitive environment’. This is not only true of
increasing price but, just as important, of maintaining price. If the
buyer knows you can walk away, they are less likely to reduce the
agreed price – known as “price chipping”. Of course this is true in
any negotiation and yet establishing bidder competition remains
the most compromised element of most traditional sales.
3.Terms
There is always more to a deal than the headline price. Influencing
factors include:
••
••
••
••
Whether the price is paid in cash or shares
What proportion of the price is paid up front
The timing of an exit
The warranties that are demanded
These will all be influenced by choice more than any other factor.
It is fair to say that whoever establishes choice has the greatest control
over the negotiation. Without choice it will nearly always be you
as the vendor who concedes first. Lack of choice means that these
elements of the deal will be dictated to you and stress is increased.
With choice, you have a far greater influence over the deal.
The ability to walk away from a deal and force deadlock can often be
a great asset.
If all of this sounds too idealistic and unachievable, be patient. In the
coming chapters we will look into the process and methods that
make establishing genuine choice entirely achievable.
20
Sell the future
We have already said that the potential for future growth is a major
reason why companies are purchased, and why premium prices are
paid. However, if you were to analyse a traditional prospectus you
would find almost no comment on this most crucial of subjects.
The truth is that nobody ever buys a company’s history; they only
ever buy its future.
At BCMS we produce what we call a ‘Synergy Business Plan’ for all
of our clients. This business plan asks the question ‘what will this
business look like, in basic profit and loss terms, in three years under
new ownership’?
When we get down to the last few serious buyers we produce a
separate plan for each purchaser, based on conservative assumptions
agreed by both buyer and seller.
The aim of this business plan is to answer the following questions:
••
••
••
••
What would the business look like when the new owner brings
their clients to your products or services?
What would the business look like with fresh investment?
What would the business look like with fresh energy, ideas and
enthusiasm?
What would the business look like with synergies and cost
savings?
When you sell a company you should never sell what a company
looked like last year under your ownership. You should absolutely
never sell what a company will look like this year under your
ownership. Neither should you sell what a company will look like in
three years under your ownership.
21
When you sell a company you should only sell what a company will
look like in three years under new ownership or management.
One thing we must remember when using this argument is that it is
a completely unreasonable position.
Selling a company on the basis of future growth rather than past
performance seems unreasonable because a buyer might well say:
‘Why should we pay a premium price when it is our actions that
generate this future growth?’
The only thing that turns our position into a reasonable basis for
negotiation is choice. I have already said that having a choice of
buyers is the single most influential issue – and we see it here in full
effect.
If your buyer is not prepared to see value in future growth then
somebody else probably will. In addition, neither party alone brings
the ingredients for this future growth; both contribute and therefore
both buyer and seller should benefit.
Incidentally, when the Managing Director of the acquiring company
wants to sell his/her business they too will have the right to be
unreasonable, if they have choice.
22
An independent observation
Within the M&A (mergers and acquisitions) market there is a highly
respected database named Zephyr which specialises in the analysis
of acquisitions worldwide.
The following graph (fig. 2) is based on the sale of small to medium
sized, privately owned businesses.
The values achieved for these British, privately owned SMEs are
measured on multiples of adjusted earnings (after tax) – they range
from as low as 4 to as high as 24. The distribution graph peaks at
around 7 (5 if measuring pre-tax profit). This means a company with
adjusted after tax earnings of £1m would typically achieve a sale
value of c. £7m.
Figure 2
7
2
4
6
8
10
12
14
16
18
20
22
24
23
Generally speaking, investors are unlikely to pay more than seven
times. Indeed, the only buyers who will pay a premium above the
industry average are strategic purchasers.
Once again, if value was all about multiples of historic earnings
a spread of 4 to 24 would simply not occur. Value is related to the
motives of purchasers and, consequently, you must put yourself in
the acquirer’s position.
What does your company possess that could strategically interest
a buyer? People only buy benefits. If the benefits of a deal are not
apparent, then do not expect a premium price to be paid.
24
The truth is that
“nobody
ever buys a
company’s history; they
only ever buy its future ”
25
26
CHAPTER THREE
Always be prepared…
We established in the previous chapter that a choice of potential
acquirers is the factor that gives greatest control in a negotiation.
Somebody controls every negotiation and if it is not the vendor then
it will be the acquirer.
Another vital factor in controlling the negotiations is being well
prepared for them. At BCMS we lead our clients through a vigorous
preparation process which covers the following areas:
Documentation
At BCMS we guide our clients through the maze of documents and
information that will need to be prepared. These include the brief, the
prospectus (IM) and the business plan, although there is much more
that will be required at the Due Diligence end of the process.
Here is a brief overview of three of the most important documents:
The project brief
At BCMS this document is one of the most essential. It is the
27
cornerstone of the entire process, informing the objective and plan
for all that we do. Here are some of the things the brief should cover:
••
••
••
••
••
••
••
••
••
••
The vendor’s personal objectives
Company history
Company differentiators
Future growth
Company strengths and weaknesses
Financial summary
Potential purchaser profile
Staffing information
Products and services – including benefits
Sales and marketing information
The information memorandum (IM)
I have already mentioned the 70-80 page prospectus that is typically
produced. At BCMS we advocate a very different approach to the
preparation of the sales memorandum or prospectus.
We believe that a traditional prospectus gives away far too much
information far too early. Additionally, they often focus on features
rather than benefits and are not read in detail by prospective
purchasers due to the sheer amount of information contained in the
document.
The aim of a traditional prospectus is to sell a company and yet,
intriguingly, this should not be its objective. A good prospectus should
be designed only to sell a meeting at which it can be considered
whether or not it is appropriate to enter into further negotiations.
For this reason a prospectus should be benefit-rich and relatively
short on detail. Its aim is to generate enquiries rather than assist a
negotiation.
28
The prospectus should be no more than 15-20 pages and should
focus on:
••
••
••
••
••
••
••
••
Company activity, product/service benefits
Competitive advantages
Shareholding/ownership
Sales and marketing information
Key staff
Future potential for growth
Benefits of an acquisition to the buyer
Brief financial overview
Each section should be short, concise and professionally written.
The business plan
In addition to the sales memorandum it is essential that a ‘Synergy
Business Plan’ be professionally produced. We use the term synergy
deliberately in order to differentiate this from a traditional business plan.
The business plan should be dedicated to revealing the true potential
growth of a company under new ownership. What will the company
look like in three years when the new owner brings to bear new
resources, new investment and (above all) new clients to your
products and services?
Nobody buys a company for its past performance, only for its future
potential.
Objectives
In the introduction to this book I spoke about the things that motivate
a company owner to sell. Understanding what is motivating you will
influence the type of acquirer that is approached. Knowing what you
29
want to achieve in terms of price, timescale and in terms of securing
a future for the business and its staff are crucial to constructing the
right deal for you.
Each sale will need to be constructed to meet your objectives, and to
do so in the most tax-efficient way. If your objectives are unclear, then
it follows that planning will be too.
Negotiation training
The first meeting that you have with any prospective acquirer should
not be the first time you face difficult questions or negotiating traps.
Every BCMS client will go through a dummy run negotiation meeting
that we call the ‘Dry Run’. In this half-day meeting, our experienced
negotiators walk our clients through different scenarios and the most
likely questions and tactics.
It is something our clients find invaluable;
“
The advice, coaching and support
we received from you throughout was
first rate and more importantly very
effective Geoff & Jane Corani, RecommIT
”
30
Removing skeletons from the closet
Although it is rare to find anything in a company’s past that is a
genuine deal breaker, failure to identify and deal with areas of concern
can cause a buyer to become nervous and pull out. Tax planning,
phantom employees, contractors, unresolved litigation and product
warranty concerns can cause issues and affect the price.
At BCMS we ensure we identify and ring fence any issues prior to
taking a company to market, as long as we know about them of
course.
“Grooming” for sale
The principles of grooming a company for sale are much discussed,
and yet many have little or no influence over the matters of saleability
or value.
For example, traditional perceived wisdom may suggest that you
should spend 12 months or so improving your credit control. To return
to our previous example, it may be argued that poor credit control is
costing Hammers & Nails Ltd £10,000 annually. Using a multiple of 6,
this improvement could therefore make a £60,000 difference to the
price achieved.
This argument has a certain logic that is attractive, but is it really
true? The answer may well be yes, to a pure investor, but a strategic
purchaser is less motivated by this factor.
Whether you improve your credit control just before they buy or
whether they improve credit control just after they buy is relatively
inconsequential. Nevertheless, many vendors spend years addressing
issues that will ultimately have little influence over price.
31
Meanwhile, they fail to address issues that will influence saleability
and value. In fact, the ideal scenario to a buyer is often that the
vendor is doing much that is wrong – yet still making money. Such a
company has significant potential for improvement.
Telling your staff you are selling
Protecting confidentiality is something that must be considered
early on in the process. It is understandably a concern for most of
our clients:
When do you tell staff?
What do you say to them?
At BCMS we take this issue very seriously. We plan our communications
with great care. Great consideration is given to communications with
staff, the market and competitors. Because of this, we have virtually
no confidentiality breakdown, despite the fact that on average we
speak to 100-250 potential acquirers per client.
I mention this in order that you do not consider me irresponsible
when I say that confidentiality is a greater perceived problem than
an actual problem.
Firstly, a breach in confidentiality is extremely rare and secondly, on
those unusual occasions when there is a breach, staff or clients very
rarely leave. In other words, the fear of disclosure is usually greater
than the reality of it. Indeed, a new owner could represent a significant
opportunity for existing staff to develop.
What is important, is to consider the terminology used during the
sale process. It would probably be inappropriate to talk about selling
the company; rather, you should talk about resourcing the company
for future growth.
32
Let us assume that your business has begun to plateau. You are now
in the process of selling the business when your senior sales manager
knocks on your door and asks, ‘I’ve heard that there is a business for
sale in our industry. Is it us?’
Your next few sentences are very important. Using the graph (below)
it is possible to clearly explain how the company has reached a
plateau.
Unless this is addressed, the company will inevitably decline.
You will need to explain how you are going about looking for
an investor in order to develop the company, staff and products to
point B.
Your terminology needs to focus on the future of the business and
not the future of the existing shareholders.
B
A
C
33
Here is an example from one of our past clients:
Having received a detailed list of
information requests from us, our client
spent several weeks preparing a 60-page
document for a ‘Dry Run’ meeting at our
office. The night before, the shareholder
used the company’s printer to print the
large document.
After hitting the print button twice the printer failed to perform,
so another computer and printer were used and the document
successfully printed. All the computers were then shut down.
At 6:00am the next day the shareholders began their long journey
south. At 8:30am the staff arrived for work. As usual all computers
and printers were started and immediately two copies of the 60 page
document poured from the buffer memory and printed out.
An 8:45am telephone call from the staff to the shareholders sent them
into a panic and they arrived at our offices in a state of anxiety. Our
advice was quick and simple: get back in the car, meet with the staff
and draw the graph. Talk about investment and future growth.
Four hours later the issue was resolved. Nobody left the company
and, in fact, the staff bought into the idea. The company needed a
face-to-face meeting. And the focus needed to be moved from the
shareholders’ future to the company’s future, and therefore the future
of the staff.
34
Management – the value of succession
A common question we are asked is whether our clients should
recruit a replacement MD or a senior management team?
Traditional wisdom says ‘yes’, but we believe this is questionable. A
good rule of thumb is that you should continue to run the business
as if you were not selling it.
You will need to be cautious if you are considering major decisions
like changes in shareholding, moves in premises and expensive
recruitment of managers. These three major decisions could
potentially have major consequences.
The problem is that you may well be making these decisions on
behalf of new owners or investors. Without knowing their plans for
the business in the future, these decisions may well be contrary to
their purposes. They may have senior managers in place or may at
least wish to be involved in the recruitment process.
Here is your decision. Do you recruit and train new managers now
(that will take at least 18 months) and then sell the business (a further
12 months)?
Or do you sell the business now and commit to assisting the new
owners in the recruitment and training of managers if necessary? It is
usually better to make the decision with them – not for them – and
this may well speed up the sale process.
First impressions
Acquirers have been known to call in with a fictitious enquiry to gain
a feel for the company’s manner and general professionalism.
First impressions can be of major importance. People will assume
(rightly or wrongly) that a tidy operation represents a tidy business.
35
Arguably, this is a minor point, but it is often so easy to put right that
it is worth considering:
••
••
••
••
36
How does the property look to a third party?
When was the floor last swept?
How long have old pallets been leaning against the front of the
building?
Do staff deal with customers and prospects in a polite and
professional manner?
Success depends upon
“previous
preparation, and
without such preparation
there is sure to be failure
”
37
Over the next three chapters,
I will outline the eleven steps
of the unique and highly
successful methodology
used by BCMS. This will
give you an insight into
how BCMS approaches a
company sale, and some
useful tips if you would like
to attempt this for yourself.
38
CHAPTER FOUR
Phase 1: Fail to prepare – prepare to fail…
1. The brief – “understanding your business”
Your first step should be to conduct a ‘brief’, a comprehensive
company review. Its chief purpose is to examine your company’s
benefits – that is, areas of your business that will drive and maximise
value when it comes to a sale.
You may find that there is an inclination to skip this part of the project.
After all, you already know everything about your business. However,
doing so would be a major mistake. What you write down you will be
inclined to review. It is a healthy and often illuminating process.
Our clients often reveal their surprise after the project brief. We
regularly find that after the brief they place more value on their own
business. For BCMS this document becomes the cornerstone of the
process and is used by all members of the project team.
The brief should look at your business from a potential purchaser’s
point of view. A critical part of the brief is therefore to consider the
profile of the ideal purchaser, their attributes and requirements.
39
Key questions to consider will be:
••
••
••
••
Where will the acquirer be located geographically?
What will the acquirer be selling?
What do their clients look like?
Are they financially strong?
2. Project team – “assembling the right skills”
BCMS has specialist, dedicated professionals in all the core disciplines
of deal making:
••
••
••
••
••
Skilled Research Analysts
Expert Project Managers
Professional Document Writers
Tenacious Account Representatives
Experienced Deal Leaders who have seen every trick of the
trade when it comes to the sale process
If you are going through this process yourself we would highly
recommend consulting with people who have these skill sets. It is
rare that one individual is capable of performing all of these roles to
a high standard; especially while continuing to successfully manage
their business.
3. Pre-Due Diligence healthcheck – “no stone unturned”
No surprise is a good surprise when it comes to selling a company.
As a result, it is wise to adopt an early, rigorous focus on every likely
‘problem’ area. Expert legal advice should be sought here. This will
significantly improve the likelihood of a sale, and also noticeably
reduce the time it takes to complete a deal once an offer has been
accepted.
40
BCMS has selected an experienced panel of lawyers, who undertake
this Pre-Due Diligence work and healthcheck on behalf of our clients.
There are 27 critical areas of the business that will need to be analysed
in depth if you are to be confident of a successful transaction. If you
are doing this on your own you may find a lawyer will expect you to
pay for this service, but it is still well worth considering.
It is also worth considering at this early stage how the Due Diligence
information is likely to be shared with the prospective acquirer.
Physical copying and transmission of documents can be extremely
time consuming and expensive, causing unnecessary and potentially
costly delays to the process. This is why BCMS offers its clients the use
of a highly advanced, totally secure data room.
4. Research – “locating the best buyers”
This is the engine room of the process. All future success will revolve
around what you do now.
The objective at this stage is to locate as many prospective
purchasers as possible. Your research will now need to be intensive
and exhaustive. If you compromise this element, then you will find
that every aspect of the sale process will be compromised until the
day you sell. Research is the cornerstone of the entire project.
We are so convinced about the importance of this stage that we
commit a level of resource to research that is, we believe, unique in
our industry. We have a vast and globally unique proprietary database
of acquirers. In addition we have access to millions of records, and
all industry-standard third-party databases and highly experienced
Research Analysts to mine that resource.
Despite having a large dedicated research team and unique in-house
resources, this stage of the project will still take BCMS around four
41
weeks to complete. If you are undertaking this yourself, you may
find that you are spending weeks on end in libraries gathering and
crosschecking data. You may despair that your time is being wasted.
However, the truth is that there is little better that you could be
spending your time on during this stage of the process. While you’re
in those libraries, don’t forget that this could possibly be the single
largest sale of your life.
Our clients often express scepticism when we tell them that we are
likely to find several hundred prospective purchasers. Many tell us that
they are far too specialised or operate in too much of a niche market
to be able to find so many potential purchasers. These customers are
inevitably surprised with the results of our research.
There are three reasons why the volume of companies generated by
our research is often higher than expected. If you are undertaking
this activity in house, be sure not to overlook any of these three
research ‘keys’.
1. Look beyond the obvious
It is essential that you do not restrict your search to the obvious at
the expense of opportunism. As we have said before, a premium
is more likely to be secured from a complementary company
than from a competitive one.
2. Can they afford to buy you?
Your buyer will also need to have sufficient financial strength. If
they cannot afford to buy you and are forced to borrow heavily,
then it may well be the lender that determines the price paid.
3. Look overseas
You must be sure to look beyond the shores of the UK. The buyer
may well be an overseas company that is seeking to enter the
UK market.
42
After many weeks of intensive research you will now be ready to
review the results. You should review each potential candidate,
analysing their appropriateness and considering areas of research
that you may not have thought of at first.
A note on confidentiality: It is far easier to consider which candidates
you do not want to approach after you have completed the research.
You may conclude that there are a few companies that you are not
comfortable with contacting.
These companies will now need to be ‘ring-fenced’ in order that they
can be avoided or introduced into the process at a later stage. Be
careful here, our experience shows that sales are frequently made to
prospects that were originally ‘ring-fenced’. Never say ‘never’.
5. Documents and plans – “the most important information you
will ever read...”
Capturing the scale of opportunity that your business represents
is a challenge. Doing so in a document that is accessible, accurate,
informative, and is designed to capture an acquirer’s attention is
quite a skill.
I have already mentioned the difference between our approach to
documentation and a traditional one. It is important to remember
that the purpose of the information memorandum should be to
bring the prospective acquirer into the negotiation process, and not
to sell the business itself.
Your documentation should also feature a profit plan, a sustainable
projection of the future financial direction of your business, supported
by clear, accurate evidence.
43
Nobody buys a company’s history, only its future – and potential for
future growth is the biggest influencer over price.
It is the greatest motive for a buyer. It is what drives a deal.
6. The Dry Run – “your dress rehearsal”
Acquirers generally have experience of acquiring. Experienced sellers,
however, are rare.
However you choose to approach the sale of your business I cannot
recommend strongly enough that you get some good negotiation
training. After all, there is no second chance once meetings with
prospective acquirers start. And you may often be sitting opposite
the most appropriate buyer first time around!
An unavoidable experience for our clients is the ‘Dry Run’ meeting.
One of our experienced Deal Leaders, experts in coaching clients
in the art of negotiation, steers our clients through the pitfalls,
negotiator’s ploys, what to say and what not to say.
44
Plan for perfection, be
“prepared
for imperfection,
and don’t be surprised when
you succeed
”
45
46
CHAPTER FIVE
Phase 2: Going live to market
Once you have adequately prepared in all of those areas, it is time to
approach the market.
7. Prospect generation – “approaching acquirers”
Having identified perhaps several hundred prospects, careful
attention must now be given to the way that these companies are
approached.
We have already covered the inadequacy of the traditional approach
which relies on contacting too few companies by mail. Many buyers
are not expecting contact; they may even have firewalls to keep out
blanket mailshots.
At BCMS we have found that the only successful option available is
to pick up the telephone and speak to the chief executive of each
prospective purchaser, because an unrequested letter or email is
never enough.
The objective of this call should be to verbally place the idea in the
mind of the potential acquirer that the acquisition of your business
could be a valuable opportunity.
47
Benefits must be used to establish interest and the potential acquirer
should be made aware that there are a large number of other
potential acquirers.
Only now should written documentation be introduced and a twopage summary drafted. Your company name, of course, should not
be disclosed and the content of this brief summary must be well
thought out, establish credibility and must clearly state the benefits.
It is important to ensure that the proposal is professionally written. At
BCMS we have professional business writers who specialise in writing
these proposals. Unprofessional communication will work against
you. Use a professional business writer; it will be money well spent.
8. Listen, learn, act – “understanding market intelligence”
Being proactive is the key to a successful sale – BCMS’ 500+ successful
completions over the last decade are testament to that.
Our rule is clear: we seek to understand and capture from the first
phone call precisely what acquirers are telling us.
Assessing, questioning, responding and adapting to the market is
essential. This could mean adjusting or tailoring your approach, or
taking a different angle. Be open to what the market is telling you,
and be prepared to adjust in accordance with it.
9. Meeting prospects – “from potential buyer, to actual bidder...”
We will now have made our first contact – by telephone – with each
potential acquirer. It is now very easy to hand over the initiative to
them. Resist this and ensure that you stay in control.
Most vendors we represent tend to be entrepreneurial in their
personalities; interestingly, more often than not the top person in
48
the acquiring company is entrepreneurial as well. This is noteworthy
because most entrepreneurs tend to be driven by the ‘feel’ of a deal.
Could we work with these people?
What good reason is there not to proceed?
Is the buyer excited about the potential of the acquisition?
It is critical that the buyer feels good about the deal. Our objectives
need to be considered because the ‘flavour’ of the meeting has a
profound impact on the outcome of it.
Here’s an example from our experience of what not to do:
I was in a meeting at which the buyer asked the seller “what’s your staff
turnover?”
The seller replied, “very low, just 5% – which is just as well because
recruitment’s a nightmare!”
This response affected the feel of the meeting and left the prospective
acquirer with a serious concern. What the vendor should have said is
‘We enjoy a very low staff turnover of just 5% so it is not an issue’.
At this stage, you can often glean valuable information that will help
you assess the true value of your business to a buyer, which can be
used in later negotiations.
Discussions at this stage should focus on issues like:
••
••
••
••
The nature of the fit
Commonality of client base
Financial strength
Strategic intent
49
••
••
••
Applicable benefits
Motives for purchase
Sharing of resources
We know competition maximises value. So these remaining prospects
should now be encouraged to put in competitive bids within a tight
timetable – all based on the same level of information, so no single
bidder is ‘preferred’.
Your preparation, research, contact and meetings should all contribute
to maximising value. This helps generate the ‘BCMS Effect’ – the wide
spread of bids we see for our clients’ businesses. The highest offer
we generate for our clients is, on average, 2.5 times higher than the
lowest offer received, and it’s a statistical demonstration of what we
say from the outset.
The real value in your business lies not in a financial calculation, but
in the future opportunity your company represents to someone else.
50
BCMS case study:
Sector: Engineering and Manufacturing
Activity: A make-to-print supplier of aluminium sand castings
for general industrial use.
Prospects researched: NDAs signed: Meetings: Offers received: 247
27
10
6
Lowest offer: £3.9m
Highest offer: £10m
Buyer rationale: Geographic expansion, new market penetration
and enlargement of service base.
51
The best plans are
“often
the most flexible
– if you are too rigid,
how can you react when
opportunities present
themselves? ”
52
CHAPTER SIX
Phase 3: The art of deal making
Getting offers on the table is not the end of the job, in fact it is
just the beginning. Getting the best out of the offers and ensuring
momentum is maintained is where the art comes into the process.
10. From offer to final offer – “the art of negotiation”
Assuming that you have a choice of potential acquirers, here is the
bidding strategy that we would advocate.
Each prospect should be told they are one of several companies you
are in discussions with; therefore their bid will need to be competitive.
1. Be open-minded regarding the eventual deal structure. Generally
speaking, the more flexible a vendor is, the more the business
will sell for. Reducing the buyer’s perception of risk in the deal
could result in a considerable increase in the overall price offered.
2. It is important to write a ‘Synergy Business Plan’ for each potential
acquirer which will factor in all of the various ‘economies of scale’
and ‘added value’.
53
3. Always retain choice. Only by retaining a choice will you ensure a
change in mind-set from:
‘How little can I get away with paying for this company?’ to
‘Why am I really buying this company?’
You are now ready to move into the closing stages of negotiation, so
here are some thoughts on negotiation:
Don’t discuss value too early – Traditional routes to market involve
publishing a traditionally calculated valuation. This is a bit like
advertising a car for sale for ‘£2,000 or nearest offer’. Guess which offer
you won’t receive?
Be professional, credible and confident – Good preparation is vital;
it makes your negotiating position look serious and committed.
Know your buyer – Investigate potential acquirers thoroughly. Their
motive for purchase will determine the price that they are prepared
to pay.
Think benefits – If the benefits of a deal are unclear, do not expect a
premium to be paid. Benefits are the only reason premium prices are
ever paid for any product.
Use choice – Ensure that the buyer knows that you have credible
options. Remember that choice will ensure that you not only sell for
the right price, but on the right terms.
Trade concessions – Although seemingly obvious, it is an often
overlooked fact that negotiating will mean you may have to make
concessions. But never give them away.
‘Win-Win’ – Remember that every successfully concluded negotiation
must be perceived as a ‘win-win’ by both parties.
54
‘Triple think’ – Do not simply consider what the potential acquirer
wants out of this negotiation, but also consider what they believe
that you want out of it.
Develop trust – Negotiation is always smoother when the other
party has developed a trust in you.
Listen and observe non-verbal communications – Develop the
ability to listen and understand the meaning behind what is being said.
When the deal feels right – Once you agree on price and terms it
is vital to maintain momentum. A clear timetable should be put in
place.
11. Due Diligence and completion – “the endgame”
Even at this advanced stage we need to be careful not to neglect
the value of choice and competition. The final candidate needs to
be aware that you have not rejected the other prospects. Although
you will not be entering any due process with them, you will retain a
relationship with them.
The reason for this is simple. Both parties may be convinced that
a deal is likely, but what happens if the buyer’s parent company
suddenly calls off any group investment? This is beyond anyone’s
control, and is not infrequent. What you are saying to the buyer is
that you absolutely intend to sell to them, but you would be unwise
to lose relationship with the others at this early stage.
The one that retains choice will dictate terms. Choice retained during
this element of the process will significantly influence:
••
••
••
The speed of the sale
The price secured
The terms that you sell for
55
It is tempting at this stage to ‘leave it to the lawyers’ to finalise details;
however this can seriously damage momentum in a deal. Instead you
should seek to maintain momentum and communication; ensuring
that you receive regular updates from all sides.
Here are some things you will need to consider during the final
stages of the deal:
Confidentiality – Specific confidentiality agreements must be
signed as part of the ‘Heads of Terms’. These agreements identify what
information is regarded as confidential and how both parties (and
their advisors) will handle such sensitive information. This document
usually also includes enforceable undertakings restricting a potential
acquirer from, for example, talking to staff or clients.
Due Diligence – The potential acquirer will now need to validate
the information you have provided thus far, before completing the
acquisition. Sometimes these investigations can be concluded over
dinner; on other occasions it may involve a sealed room and two or
three days’ work.
Heads of Terms – This document outlines the terms of the deal that
have been agreed verbally by the vendor and acquirer. At BCMS, we
prefer to draft the ‘Heads of Terms’ ourselves because we can have
preferable terms of reference. Heads of Terms will normally include:
••
••
••
••
••
56
Confirmation that they are non-binding
Accurate confirmation on what is being bought
Confirmation of the price agreed and payment terms
Conditions ‘precedent’ – matters to be resolved by the vendor
or the purchaser prior to completion
Any restrictive covenants that the purchaser may require, such
as competition clauses
••
••
••
••
Warranties or indemnities
An approximate timetable of events
Pension schemes and how they will be dealt with
Any agreed period of exclusivity
Sale and Purchase Agreement – This will be the final agreement
upon which the business will be sold (or bought). Both the vendor
and the acquirer will have a slightly different perspective.
The acquirer will want to define what they are buying and reduce
risk as much as possible. They will want to ensure that they know
about any major issues that may arise in the business and, if possible,
warrant against these so that they remain the liability of the vendor.
The vendor will also be looking to clearly define the elements of the
sale and ensure that warranties are minimal or non-existent. It is also
important that the deal is constructed in the most tax-efficient way
possible.
This agreement is usually drafted by the acquirer’s lawyers and then
amended by the vendor’s lawyers until agreement is reached. It is
important to ensure the lawyers seek to resolve any issues raised and
do not unnecessarily prolong the deal.
Completion – This may involve board meetings of both parties to
sign off the transaction. Share transfers will be signed and handed
over and a variety of documents will also be required to be handed
over to both acquirer and vendor. For BCMS clients our recommended
lawyers are available during these stages to ensure this final stage of
the transaction runs as smoothly as possible.
57
Successful deal making
“today
requires greater
technical expertise and
demand on resource
than ever before
”
58
CHAPTER SEVEN
Final thoughts
In closing I would like to reiterate that the principles outlined in this
book have been proven time and time again to ensure a maximised
sale price for our clients.
This success demonstrates that the traditional method of selling
businesses – using valuation methods and passive sales techniques
– should be consigned to the history books.
Active sales and marketing combined with competing, financially
capable and strategically motivated acquirers has been proven to be
a more successful method of selling privately owned businesses for
their maximum value than any other.
It doesn’t have to be difficult to sell a company, but most people
don’t bother to sell. They hope that enquiries will somehow come to
them. However you go about it, be active in your marketing.
Don’t forget that the best buyer may well not be looking to purchase.
They will not be scouring the brokers’ lists looking for bargains.
Instead, they are likely to be successful and profitable without you.
59
An acquisition of a company like yours is quite likely not to be on
their agenda.
People buy for many motives, and ultimately it is the motive of the
purchaser not multiples of profit that will determine price.
The single most influential factor over saleability and price is the
creation of a market of strategically motivated, financially strong
buyers.
If you compromise anything, don’t compromise this. Don’t even
consider entering a negotiation without choice.
Choice is not a luxury, and could be worth millions to you.
60
61
62
Published and distributed by
BCMS Corporate, Kingsclere Park, Kingsclere, Newbury, Berkshire, RG20 4SW
T: +44 (0)1635 299 616 www.bcmscorporate.com
DAVID REBBETTES FRSA
Author
David is a founding Director of BCMS, a
UK market leader in its chosen area of
expertise. BCMS now sells more companies
than any other comparable advisor in the
UK, and has offices across five continents.
BCMS is a UK-based family business, and
a past winner of the ‘Coutts Bank Family
Business of the Year’.
Over the past two decades, David’s company
has challenged – and changed – traditional
assumptions about the sale of privately
owned businesses. Drawing on his vast
commercial experience, David’s thinking has
inspired business owners and shareholders
at industry events across the globe.
BCMS CORPORATE LIMITED
South: Coldridge House, Kingsclere Park, Kingsclere, Newbury, Berkshire, RG20 4SW
North West: Link 665 Business Centre, Todd Hall Road, Haslingden, Rossendale, BB4 5HU
North East: Redheugh House, Thornaby Place, Thornaby on Tees, TS17 6SG
Tel: 01635 299616 | Email: [email protected] | www.bcmscorporate.com
Europe | America | Asia | Africa | Australasia

Search | www.bcms.co.il

Transcription

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