Begin with the end in mind

Oct 01, 2019
There is no active market for the sale and purchase of privately owned businesses. Any belief that there is a constant search by active purchasers is false. The reality is that many businesses – probably half, or more, of medium-sized companies – are likely not saleable. Erratic history, poor profitability, inadequate finances and uncertain prospects are the usual reasons cited for this circumstance. Realistically, the realisable value of a business to its owners may only be in its continuity.

The surprise is that even profitable and well-run businesses are not necessarily saleable. Obviously, this is a disappointment for the owners and an enigma as to why this happens. After an initial flurry of interest in purchasing such a company, the closer assessment takes place. The cooler review by a potential purchaser is guided by the rule that there must be a worthwhile commercial reason to acquire a business, and not simply because it is for sale.

Experience suggests that the principal reasons why one business acquires another are as follows:
  1. The acquired business is complementary to the acquiring business – for example, a light engineering business acquiring a metal fabrication business, or a transport company acquiring a warehouse business;
  2. The businesses share common characteristics that enable synergy and/or joint cost reductions as an added-value benefit to the purchaser;
  3. The acquisition protects and/or enhances an existing advantageous relationship between the two businesses; and
  4. The acquired business has knowledge, expertise, intellectual property or a location that provides added value to the acquiring business.
It follows that the potential for the sale of a ‘standalone’ business (i.e. with none of the above reasons) is limited and only likely in the form of a management buyout.
A further restricting factor, and this is true for acquisitions generally, is financing the purchase. Marketplace experience suggests banking caution on lending for acquisitions. There are many reasons why, not least that the underlying assets in the acquired company are not likely available as security due to company law and tax complications. The ‘asset’ being financed (i.e. the shares in the acquired company) is not tangible security, being no more than an expectation of future profitability.

In any event, it takes time to sell a business. In an ideal world, the decision to sell would be made up to two years beforehand (although this will likely only be known to the owner). It isn’t that the best market conditions for a sale can be confidently predicted that far ahead; instead, there will be a readiness for sale that can be deferred if necessary, or brought forward if the pre-sale planning is in good order. As with most decisions, timing is important and good forward planning gives flexibility.

This planning means not being your own advocate. An experienced corporate finance advisor is essential to a successful sale. Once a sale is contemplated, an informal discussion with an advisor will help you decide whether to sell or not and what will happen subsequently with regard to timing and process. Advance due diligence work means identifying and tidying up awkward circumstances that could derail a sale or adversely affect a sale price. The entire sale and purchase process, when commenced, will likely take between three to six months from start to finish. 

It is the job of the corporate finance advisor to direct, coordinate and manage the process from start to finish. The advisor will operate in parallel with a legal advisor; and the same for the purchaser. The process, and the transaction itself, will generate an amount of legal and related documentation – all of which has to be identified, drafted, negotiated and completed. Third parties such as banks, landlords and regulators may also be involved and could, in turn, require documentation and cause delays.

Properly done, the sale of a business is a backwards process known as ‘begin with the end’. In other words, the thrust at the outset is to identify prospective purchasers or sectors that likely fit one or more of the reasons for an acquisition, as set out above. Then, ensure that the information and sales approach is directed accordingly.

Des Peelo FCA is the author of The Valuation of Businesses and Shares, published by Chartered Accountants Ireland and now in its second edition.