Selling a business may be the largest transaction a leader will undertake, and the right approach can make a fundamental difference between success and failure. Mistakes can be costly, so we speak to Marc Labbett at Avondale, an M&A advisor, about how to avoid the most common slip-ups.
Many owners see ‘company value’ simply as a biproduct of earnings. However, other aspects, such as the quality of earnings, can similarly have an impact on value. Volatile cash flow, over-dependence on key staff, weak information and poor governance all increase risk and limit forecast yield, so that even a motivated, strategic buyer will downgrade the value.
Prior to sale, a ‘vendor assist’ exercise – which involves seller due diligence and a business review – will help secure a better price. The process can be delegated, and the preparation detail makes good business sense. The costs are offset by the return and improvements in the business model. A third party ‘check’ also helps with objectivity.
Every business, business model and shareholder team is different in its aspirations, outlooks, and approach so accordingly there is a myriad of sale options. A trade sale might seem easy, but what about private equity, or a sale to all the employees by way of an Employee Ownership Trust?
Research on timing and type of exit is also crucial – it is no good having preconceptions or simply watching the headlines and hoping that will work. The stakes are high - check on both timing, type of transaction and preparation. It is important to be ahead of the game and a key aspect of value is creating a team-driven business model so there is time to understand the right business and shareholder direction.
Many advisors are biased towards certain deal structures and, in some cases, heavy upfront fees. They sell rather than advise, which is fatal and creates misconceptions. While an optimistic advisor is critical to maximising an auction, the offers process itself will secure the best value.
It is vital that advisors give detailed facts and do not simply agree in order to win the mandate. It is also important to select an advisor who can provide advice on the full spectrum of exit options and with a strong track record in the relevant sector. An advisor should take the time to listen carefully to a business owner’s objectives and understand the business model to help deliver the best solution.
Professionalism and strong presentation are important value drivers and the same applies when it comes to presenting the actual business for sale. A crafted confidential information memorandum (CIM) or investment memorandum is vital. This needs to position the opportunity in the best light whilst succinctly communicating the key information. Today, a CIM will also be backed by a high-quality marketing data room.
The goal is to inform the potential acquirer, so that they understand the opportunity, and gauge their level of interest. A "no" saves material time; a "yes" means a business owner can focus on researching the benefits to the right party.
Buyers will be influenced by presentation and accuracy, with the balance of information versus presentation well-honed. Headlines rather than lots of details with good visual impact and aesthetics together with a well-prepared marketing data room have greater impact. Historic, current and forecasted real-time financials and clear breakdowns are essential.
Many sellers make the mistake of being charmed by the first buyer with a decent ‘on paper’ price, only to find that the deal is stretched out and the price later eroded as seller fatigue kicks in. Therefore, it is vital to fully check out the buyer’s covenant, transaction experience, and capability before agreeing to any exclusivity. Ideally, exclusivity will have a ‘subject to reasonable progress’ benchmark written into the contract.
A change of ownership is a change of culture. Buy-side due diligence should also be about forming a clear business plan and sellers need to insist on transparency if they are to retain any involvement. Too often the legacy and the team are adversely affected post-completion due to a lack of a clearly articulated plan from the buyers. Transactions that have earn-outs or equity rollovers can materially affect the value gained in the long term from the sale.
The direct approach may be the best deal, but it also may not be. Buyers will always profess that their offer is the best. They will sell and charm as much as possible to win the bid at every step. Expert advice is therefore critical. A process with a competitive environment is the best way to determine value.
BATNA stands for ‘Best Alternative to a Negotiated Agreement’. When agreeing to a deal, people want them to happen. They become emotionally connected with the outcome and are motivated to find solutions to achieve the goal. There is nothing inherently wrong with this, but it is better to look at and have alternatives if the terms do not work. Understanding all the options, including timing, and having alternatives are critical in case of needing to walk away.
There are so many terms and definitions in mergers and acquisitions, each with a different nuance, that even seasoned operators can miss key points through misinterpretation. As a rule, however, if any aspect is long-winded, or too full of jargon, do not do it - in particular, ‘heads of terms’ need to be in broad layman’s terms with plenty of clarification and worked examples. The ‘heads of terms’ provide the framework and understanding between the parties before the later, definitive terms at completion and a simple robust foundation at this stage of a deal is essential. Each point should be clear, concise, and understandable.
The gift of selling can be something of a curse in mergers and acquisitions and often can make a business owner look too central to its operations. Let the numbers and business model, as well as the opportunity, do the talking. Ask buyers lots of questions and work out how to influence not persuade.
Find out more about Avondale: www.avondale.co.uk
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