Tim Scott, a partner for Knights Professional Services with more than 15 years’ experience in corporate finance and private equity, asks is now the time to sell your business?
How is the current economic climate shaping the corporate finance market? Is it a good time to sell your business?
There is a perception that, given the current economic uncertainty, now is not necessarily a good time to sell a business, but in fact it’s a great time to exit.
Private-equity investors have huge sums of cash to invest and are hungry for acquisitions. Overseas corporates are keen to get a foothold in the UK and are now able to take advantage of the devaluation of the pound putting vendors in a position to command higher prices from buyers.
Entrepreneurs Relief is creating further opportunities for vendors who are able to extract their proceeds at a 10% capital gains tax, creating a ‘Perfect Storm’ for business owners looking to exit. The money to be made from a deal can represent many, many years of profits.
However, vendors should be prepared for deals to take longer than they did pre 2008. The scope of due diligence has increased and is more onerous. But well-run companies should have nothing to fear - as long as they have good systems and management information in place, no outstanding litigation and a great management team, they will be attractive to a variety of parties.
How do vendors prepare for a sale?
If anyone is thinking of selling their business in five years’ time then I strongly recommend vendors start preparing now to factor in time to resolve any potential underlying business issues.
Vendors need become investment ready; this means having a five-year strategic plan in place.
Firstly, owner-managed businesses need to transfer client relationships on to other key members of the team including partners, sales directors and supplementary management.
Vendors need to demonstrate the business won’t fall apart without the managing director which will ultimately allow vendors to maximise proceeds on day one.
In the current climate, deliverability of a deal is becoming increasingly more important than value. Time is money, so it’s important that vendors perform their own due diligence on buyers.
My advice to sellers is to showcase the business’ profitability, and more importantly, its potential profitability. Too many owner managers decide to take higher than market rate salaries and run expensive cars; it’s important to illustrate what actual earnings are and how much profit would there be in a different buyer’s hands.
Vendors who are transparent with their financials and present the business in such a way that buyers understand the financial benefits of any potential investments, in new machinery or senior team members for example, will be a great position to sell.
What are the main questions a family business should address when considering a succession-related deal?
Keeping a business in the family is not always the right thing to do. Family businesses need to ask themselves if the next generation has the skills and experience to run the business and it is hard for parents to make an honest appraisal of this.
If family members don‘t wish to continue running the business, or it is deemed that they aren’t suitable for the role, then non-executive positions can be an ideal way to keep them involved but it’s essential that good management support is in place.
Because of the name and culture often associated with family businesses, there is often more flexibility during a deal in terms of funding if parents are prepared to leave more money in the business.
However, trade sales often achieve a higher price which creates a much stronger financial position for the family.
Who can you sell to?
Interested buyers could be a UK and overseas corporate within the market place, or may be a competitor.
Selling a business to a trade party is likely to maximise shareholder value and is the best option should shareholders wish to exit completely; typically there is a transition period for owner managers.
Value from a trade sale can be enhanced by outlining all additional considerations to achieve future profitability. The purchaser will require strong service contracts for shareholders and directors post completion, with a significant notice period and strong non-compete clauses.
Organic growth is tough, so in order to generate shareholder returns, acquisitions are becoming a key part of growth strategies and at Knights Professional Services we are seeing increasing evidence of this.
Its also worth looking at organisations operating in closely-related industries, it may just be that if they can get access to one of your customers it will open up a whole new channel to cross sell their services.
The second option is to consider a management buy-out.
How healthy is the management buy-out (MBO) market?
Management buy-outs are happening in ernst again – in particular private-equity houses have significant funds that they need to invest, and they currently have an appetite for healthy and profitable trading businesses.
Whilst they can now complete with trade purchasers on price, they can actually be a trusted long-term business partner, sharing risks and rewards as well as a providing valuable funding.
Unless business owners have the complete leadership ‘A’ team, continued participation is vital.
Private equity transactions allow business owners to have two bites of the cherry, taking some cash off the table on day 1 and then benefiting from any uplift created by an investor when the remaining equity is sold.
Also there is an increasing number of high-net worth individuals who have made money in business in the past and are looking to re-invest into businesses, this is always another option to be explored.
Debt-only funded MBOs are also happening more often as banks are really coming back into this market. Knights Professional Services is consistently seeing lending multiples at two times EBITDA in the current market.
The bank-backed MBO is certainly an alternative exit route to get to a decent value, especially for anyone who is prepared to accept some of the consideration on a deferred basis.
What are the main issues facing an MBO?
MBOs are often more complicated than trade sales particularly where private-equity parties are involved.
It is important that there is a credible team in place that can run the business although in the current climate private equity are more willing to work with the exiting team and add individuals where there are skills gaps.
Due diligence is certainly more rigorous than it was in the past and you need to ensure that management are not distracted from running the day-to-day business.
Knights Professional Services advises clients to identify a ‘point man’ from the management team to answer queries and attend meetings so that the whole team is not taken out of the company for large amounts of time.
The worst thing that you can do during an MBO is lose focus and miss your numbers.
What are the benefits of a successful MBO?
The beauty about any MBO is that it preserves the heritage of the business and gives business owners the comfort that employees will be looked after – essentially its business as usual.
There are also scenarios where an MBO provides the best financial result for the vendor and may not have even been a trade buyer.
In cases like this where there isn’t a funder involved, the amount of due diligence required is reduced as the management team is already involved in the company and knows its strengths and weaknesses.
The management team is in a position to make significant returns once the acquisition debt is repaid and it can be really motivating for the management team to put their own stamp on the business and run it their way, implementing their own ideas.
Find out more about Knights Professional Services at www.knights1759.co.uk or join the conversation at @knights1759