Quercus insight into maximising value on a private business sale

February 1, 2021
Andrew Clegg

For many entrepreneurs the sale of a private business is the culmination of a lifetime’s work.

Often it will be a one-off opportunity to generate a life-changing sum of money.  A reward for the initial risk taking and years of hard work.

Given the size of the financial stakes, it is perhaps surprising that many owners expect to realise top prices without putting in the work necessary up front to help the buyer to meet or even exceed their value expectations.

Maximising value on sale starts with planning and preparation. At Quercus we talk to our clients as early as possible in order to understand their sale objectives and to ensure their businesses are fully prepared when the decision to sell is made or an attractive unsolicited offer is received.

In practice this can mean working alongside a client for a considerable period in advance of a sale process. This can be a few months but sometimes it is years.

From our experience the earlier we are engaged ahead of a process the more likely it is that we can help influence the outcome.

Over the past 25 years, we have successfully sold over 250 businesses and in every case effective planning and preparation were key to delivering successful outcomes. Whilst each process throws up unique challenges, some subjects tend to arise in almost all situations, regardless of size or sector.

Here are our top 10 areas to consider if you are preparing your business for sale.

  1. Address succession issues. Many sellers would like to step away when their business is sold. However, buyers don’t generally have spare management teams available to parachute into situations to facilitate a swift exit. The best way to ensure a smooth transition of ownership without a lengthy handover period is to build a credible succession plan and devolve day to day responsibilities well ahead of a process. If you can bear giving up your desk or office and get to a position where it is credible to remove your photo from your website even better. This is not a time for ego! All of this will help give comfort to a buyer that you genuinely have a limited role and your absence will not de-stabilise customers, suppliers or staff. This is very important for buyers who will know if the reality doesn’t match up. For example, if the owner is the only employee quoted in press releases or due diligence reveals that key customers only deal with the owner and don’t know anyone else senior in the business.
  2. Ensure key employees are appropriately incentivised. On the basis that point 1 above has been successfully addressed there will be a need to ensure that key employees are suitably incentivised. Key employees are the senior people who are running the business on a day to day basis – more than likely a group of three to five individuals. They will be instrumental in helping you to grow the business and are also likely to be the people who a buyer will want to keep in post going forward. Some may already be shareholders and therefore motivated by growth in the value of the business but others may not. For these, reward can take many forms including simple bonus schemes linked to performance or more complex equity-based schemes such as EMI options. One size definitely does not fit all and it is important to think about each individual’s motivation and the value they are likely to ascribe to any plan you put forward. For example, the simplicity of a bonus may be valued more than an option scheme where the size and timing of reward can be less certain. The tax treatment of schemes differs too and whilst the tax ‘tail’ should not wag the commercial ‘dog’, it is important to consider the net proceeds in the hands of the recipient to determine if the planned incentive is likely to drive the intended behaviour.
  3. Reduce perceived reliance on customers or suppliers. Buyers are nervous about buying businesses where most of the revenue comes from a small handful of customers or where the business relies on a key supplier. In a buyer’s eyes, the loss of a key account can cause serious harm. A perceived reliance will impact on how much a buyer will pay for a business and may even put some buyers off completely. This is not an area that can be addressed overnight but a concerted effort to shift the tiller over a 12-18 month period can yield impressive results.
  4. Know your competition. One of the reasons a buyer will pay a premium price for a business is if the target in question is an obvious market leader. A low growth, low margin business will not be as valuable as a high growth, high margin business. It is therefore important to understand where you sit in comparison to your peer group and this is where benchmarking can be a powerful tool. Regular review of KPIs (E.g. revenue growth, margins, cash conversion, working capital trends, capex spend) across a range of your competitors will identify where variances exist and enable you to investigate how you close the gap where your performance lags behind. It is always more powerful if you can articulate to a buyer why you sit where you do in your market rather than wait until a buyer identifies a variance that you cannot explain.
  5. Consider the sale of under-utilised or redundant assets. Over the years we have worked with businesses which have owned racehorses, helicopters, residential houses, industrial property rented out to third parties, golf club season tickets, and other exotic assets not used in the business in question. Capital intensive businesses tend to have the odd redundant machine lying around. Buyers are generally happy to consider taking on these surplus or redundant assets (ok, perhaps not the racehorse) but are unlikely to attach much value to them. They will think they are doing you a favour and look to sell on post-sale at a profit. If you can sell or extract under-utilised or redundant assets ahead of time you will increase overall transaction value and simplify the sale process. A ‘clean’ balance sheet also subtly underscores the quality of your business.
  6. Ensure management information is robust. Buyers will want to undertake detailed due diligence and a large proportion of their time will focus on your financial performance. Buyers will be looking for monthly historic P&L, balance sheet and cash flow data for 2-3 years along with KPIs relevant to your business. Your finance team are going to be very busy and it is important to be able to produce accurate and timely responses. It is easier to do this if you have access to high quality data via an up to date well supported MI system. Nothing undermines due diligence as much as financial data that does not reconcile or cannot be substantiated.
  7. Review major contracts. At the heart of most businesses are a number of key relationships. Despite the importance of these relationships our experience suggests that contracts often remain unsigned or are in need of renewal. It is important to review contracts early to identify where remedial action is required as it will form a key area of focus during due diligence and can take time to fix. In particular, working through a ‘change of control’ clause can be disruptive during a sale process. For those relationships which rely on trust and the proverbial handshake and where formal contracts are not possible, you should spend time building a file of documents that you can share with a buyer to underscore the length and quality of the relationship.
  8. Resolve disputes and litigation. Disputes and litigation can by their very nature take a long time to deal with. In practice, this covers a wide range of issues such as litigation, HR disputes, open tax enquiries and insurance claims. In the context of a sale such matters can be a distraction to a buyer who will need to understand the nature and size of the risks they are being asked to accept. Such issues can be difficult to quantify and a buyer is likely to take a risk adverse view when considering an adjustment to price or indemnities. The best way to minimise their impact is to clear up as many outstanding matters as possible
  9. Demonstrate a maintainable earnings profile. Sale processes are much less interested in the profit figures in your statutory or management accounts and much more interested in maintainable earnings (typically EBITDA) which often forms the cornerstone of valuation. As such, it is a good idea to identify exceptional and non-recurring items on an ongoing basis – both income and expenditure – to enable you to present to buyer a detailed picture of the growth and quality of your earnings.
  10. Consult a tax expert on limiting your CGT exposure. The March 2020 Budget saw cuts to entrepreneurs relief as the government shifts its focus away from rewarding current business owners and towards encouraging new entrepreneurial investment.  We think this trend will continue and a glut of deals in the run up to this year's Budget on 3 March reflected a nervousness that more CGT rises are on their way.  Now more than ever it is important that you talk to an experienced M&A tax expert to understand what planning opportunities still exist. The availability of entrepreneur’s relief is still linked to the length of time that shares are held so it is very important you address tax planning early, especially in relation to any schemes you are planning in relation to item 2 above.

Andrew Clegg, Quercus partner, summarises:

"Making a business as attractive as possible to prospective buyers is an ongoing process and every business is different. Our experience constantly reminds us that effective planning and preparation are key to enhancing value and making sale processes smoother.  Failure impacts on value at best and at worst, drives buyers away. We have over 200 years experience of helping entrepreneurs effectively plan and prepare for the sale of their businesses. If you would like to understand how we can help with yours, please get in touch."

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