Preparing for a change of ownership
Potential vendors need to start trading towards a sale as soon as possible if they are to maximise the value of their business in the eyes of a potential buyer.
Issues that will need careful thought include: grooming the incumbent management if an MBO is an option, bringing the company's gearing under control, and generally ensuring that the company is presented in the most positive light. It may be necessary to do some personal tax planning, such as splitting company shares between husband and wife or setting up offshore structures.
Early involvement of a professional adviser with the appropriate experience can be invaluable in achieving a successful sale and maximising shareholder value. As well as helping companies that have already identified a potential deal, they often carry out research to identify potential purchasers. But be warned: not all lawyers and advisers work on a contingency basis, so if the deal falls through, it can prove costly.
Valuing the company
There are two principal methods for valuing a private limited business. The first, based on a company's net assets, is usually applied where the profit stream has been erratic, where losses have been incurred or, as is often the case with general building contractors, where the future of the business is highly dependent on the owner-manager's personal relationships with providers of work.
In these situations, a price for goodwill is hard to justify.
The second method is based on the expected future profit stream. This is usually applied when the company has a profitable track record and, in the case of a building contractor, the business is of such a size that it is the company name and reputation, rather than that of its owners, which is the main reason it continues to secure new contracts.
Although price is critical, other considerations, such as loss of business independence and the long-term interests of employees, are often just as important to the vendor. Where family businesses are concerned, there may be a number of shareholders involved who have differing requirements.
Possible exit options
The price that a purchaser is prepared to pay can vary significantly. In the past, a sale to a trade buyer has frequently led to the best price being secured for a company. A trade buyer may not be answerable to institutions and can often be flexible in achieving a straightforward deal.
Traditionally, it was difficult to attract funding for MBOs and MBIs in the building and construction sectors. Lending institutions have often been concerned by their overdependence on large contracts, any one of which could have a serious adverse effect on the company if something should go wrong, and by the low entry costs and highly competitive nature of the industry. Now, however, if an opportunity is strong enough, they are becoming more interested in backing good-quality MBO and MBI teams.
The key element of an MBO or MBI is the strength of the team. Making sure that there is a well-balanced team with experience in all areas of the business is critical. MBIs, which involve a team from outside the company, are often more difficult to finance. Good-quality MBI teams can be introduced by venture capitalists and accountants that maintain MBI clubs or syndicates.
The other possible exit option for owner-managers is flotation. However, this has proved extremely difficult in the recent past and will remain so as long as economic confidence remains low.
If it all goes wrong
Deals can fall through for all kinds of reasons. Some of the main problems are: the parties can't agree on a price; lack of experience of the MBO or MBI team; due diligence discovers a risky contract or a hole in the pension fund; or the firm cannot provide warranties or indemnities. This can be a costly business. If you are selling a company worth £10m, the cost of lawyers and financial advisers can be in the region of £150 000-200 000.
How to achieve a successful sale
- Think carefully about the exit route and the advice you need for the deal. Your bank manager or accountant may be able to suggest a corporate finance specialist
- Approach companies that may be looking to buy – advertising in the paper is a last resort
- Protect yourself from phoney buyers digging for trade secrets. Before entering into discussions, secure a confidentiality agreement
- If it’s a business you’ve spent your life building up, you’ll want to see it going to a good home. It is essential to build up trust and a good relationship with the buyer
Philip Travis is a partner at Manchester-based TMG Corporate Finance.