Selling your business: six top tips

Mar 29, 2017
As the Irish economy stabilises, we are likely to see renewed interest in mergers and acquisitions. David Holland shares some advice on how to prepare your company for a successful sale.
 
The last six to seven years were very difficult for many business owners. Revenues and profits and where growth was achieved it was at a low level. With recovery now underway, many business owners are beginning to explore options for a potential sale of their business. The decision to sell may have been deferred by the recession until such time as business valuations improved.
 
The improvement in the economic environment, coupled with a general feeling that valuations are at improved but still realistic levels is likely to result in increased M&A activity in 2015. In addition, the improved availability of credit from banks and alternate lenders, as well as the continued availability of equity capital has created a market more favourable for acquisitions.
 
The pool of potential acquirers has also grown significantly as international companies seek strategic acquisitions of, and investments in Irish businesses which have the potential for scalability and growth. This is particularly evident in the technology sector.

Preparing for a sale

While activity and opportunities are beginning to appear in the market, individuals considering a sale must take the time to plan carefully on order to ensure a successful outcome. The process of selling a business can be complex and in most cases it takes longer now than in the boom years. This is principally due to potential acquirers taking time to properly research acquisition opportunities, to prepare a strong business case for an acquisition, and to undertake more thorough due diligence. The requirements of banks and alternate lenders for the approval of acquisition related finance are also more rigorous than they were historically and complying with these requirements can take some time.
 
Business owners are often unfamiliar with the sale process and unaware of available opportunities and this sometimes leads them to sell to the first acquirer who approaches them, sometimes for a lower value than could be achieved with proper preparation and research.
 
To increase your chances of successfully completing a sale, it is important to choose the right buyer to maximise value. Prepare to be patient and invest time in planning. Once you have made the decision to sell, the following six actions will improve your chances of achieving a successful outcome.

Engage professional advisors

Hiring a professional financial and legal advice is important to ensure that the sales process runs smoothly, achieves the best result for you and that the necessary sales agreements and documentation are correctly prepared.

Research

An open auction is not necessarily the best route for a sale. Work with your advisor to research the most suitable potential acquirers. Be mindful that the most suitable acquirer for your business may already be well known to you, as they are currently working with you to manage the business. There are an increasing number of management teams looking at management buyouts (MBOs) as well as experienced senior executives seeking management buy-in (MBI) opportunities.

Support of management

It is important to ensure that your management team supports your plan and is invested in the sale and the preparation efforts. They must be working with you to maximise the outcome from the process, particularly where they are likely to remain with the business post-sale. Be ready for the sale process to occupy a significant amount of their time, distracting them from running the business. Engaging with your senior management team early and addressing their queries and concerns honestly helps ensure a successful outcome.

Value of the business

At the outset of the sale process, it is important to know the market value of your business. In simple terms, how would a potential acquirer view and value your business? Business owners may have an inflated view of the value of their business compared to what the market might attach to it. Use your advisors to help you understand the market perception of your business and to research sale transactions in your industry sector which may impact the valuation of your business. It is essential to understand the basis on which businesses in your sector are valued, and where the basis used to determine the sales value for your business differs, to be able to explain clearly the reasons for that difference. Depending on your circumstances and the urgency to sell, you may also wish to determine a value below which you will not sell the business.

Sales documents

As part of the sales process your advisor will assist you with the preparation of a ‘Teaser’ document for initial approaches to potential acquirers and an ‘Information Memorandum’ which will be provided to potential acquirers who express an interest in acquiring your business. Remember that these are sales documents and must convey the right messages about your business and demonstrate its value.

Preparation for due diligence/grooming

The acquirer’s due diligence review is a critical element in the sale process. At a minimum, due diligence will cover commercial, financial, taxation and legal matters. Depending on the type of business, due diligence may also include reviews of technical and environmental issues. In most cases potential acquirers will engage professional advisors to perform due diligence, however, in most cases acquirers will also directly review information pertaining to the business, particularly the commercial and market/industry aspects. This may result in some duplication of review work, which although frustrating at times is part of the process.
 
Sellers must also perform sell-side due diligence in order to address possible acquirer issues and to improve the chance of completing the sale. This is an additional cost for a seller but it is important because due diligence by acquirers in the current market is more intensive than in the past and acquirer-identified issues can place a seller in a defensive negotiating position on price and sale terms.
 
In the absence of undertaking sell-side due diligence, your advisor will provide guidance on the information an acquirer will need to be provided with for their due diligence, and assist you with the necessary preparation. Typically, due diligence by the acquirer and their advisors involves a number of discussions with you and your management team. Accordingly, management will need to be briefed in advance about the types of questions that they are likely to be asked.
 
Your auditor and tax advisor will also need to be informed of the potential sale as the potential acquirer will want to review the contents of the audit and tax compliance files.
 
Any cosmetic issues identified in the due diligence preparations should be corrected so as to ensure that a polished picture is presented to the potential acquirers.

Conclusion

Many business owners view their company as part of their family and sometimes the business even carries their name. They want their business to be in the right hands moving forward, while obtaining maximum value from the sale. By investing sufficient time to plan and prepare for a sale you stand the best chance of completing the sale successfully, and achieving the value being sought for your business. 
 
David Holland, FCA is a Senior Manager (Corporate Finance) with RSM Farrell Grant Sparks.

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