M&A Advice

Misaligned thinking and action at the early stages of considering a sale can account for many failures. Being determined to address the following four issues will have a major influence on success. These are:

1. Avoid Passivity at all Costs

This is a selling issue. It is interesting to note that the best acquirers are often not considering an acquisition. Buying a company may not be on their agenda. The only way to find such buyers is through an active search. On the other hand venture capitalists and large PLCs looking to sustain share values are always on the hunt, but rarely pay a premium. Passive selling will only ever locate such buyers.

Successfully selling products involves active enquiry generation. Why should selling a business be any different? At BCMS Corporate, we have developed a vast database of tens of millions of companies. Using this globally unique resource we actively contact (on average) two or three hundred prospective buyers just to locate two to three good ones. There is no short cut.

Additionally, a search should not be restricted to the UK. Overseas buyers seeking access to the UK will often buy small to medium-sized companies and premiums may well be paid for a strategic acquisition.

At BCMS Corporate we have a large team dedicated to selling your business and to this early research and identification of potential buyers. With all of this commitment it still takes us four weeks to complete this element of a project. There are no short cuts. Failure to find hundreds of good prospects will almost certainly result in 'no sale'. Interestingly, the more companies you approach the luckier you get! Approaching up to 12 competitors by mail is virtually certain to fail. To discover more about these issues download our free booklet.

2. Motives vs. Multiples

If most company owners were to ask their accountants to value their business there is an 85 per cent chance that the valuation would be related to the historic profitability of the business.

This might surprise you but the value of a business is driven by the motive of the buyer and not multiples of profit. If you calculate the value of your business using multiples of past profit and then put that value into the public domain you will be making one of the most expensive mistakes of your life.

Motives for purchasing a company are diverse. It is a fact that the no. 1 reason behind the purchase of companies is not short term return on investment but the quality of that company's client base. This is the greatest reason why anyone buys a company and the greatest reason why a premium price is ever paid.

The second reason why a company is purchased and a premium price is paid is its potential for future growth. If you sell your business, what could the business look like in three years under new ownership, with new clients and fresh investment?

These issues have a far greater influence over value than multiples of historic profit.

Let me validate this with what we have come to call our '2.5 rule'.

If you negotiate well with a choice of strategically motivated buyers, then you will almost certainly receive a diverse range of bids.

At BCMS Corporate we have a unique perspective through the observation of the large number of deals that we have completed. Over many years we have noticed that the difference between the lowest and highest bids is consistently 2.5. That is the highest offer is 2.5 times more than the lowest offer. We get very few exceptions to this. It is a great differential between highest and lowest bids.

At BCMS Corporate, we approach, on average, between 200 and 300 prospective purchasers to sell just one company. It takes us approximately five months to vet and qualify this list down to no more than five or six. These prospects will be asked to submit a competitive bid. Bear in mind that we have been negotiating for many months. They have been thoroughly screened. It is at this advanced stage we consistently find that the difference between the highest and lowest bid will be 2.5 times.

If valuation was truly rooted in multiples of adjusted profit, then all bids would be relatively similar. There would never be such a great differential. All buyers would use similar logic, figures and multiples and the bids would be much closer together. To discover more about these issues download our free booklet

3. Bidder Competition

There is one factor that influences saleability more than any other and that is bidder competition. Having a choice of buyers, in effect 'creating a market', is the single most important issue that a vendor can address.

Not only must you find a choice of acquirers, but they must also be strategically motivated and financially strong. It is essential that this matter is not compromised. Therefore, you will have to contact many potential acquirers and this will dramatically influence the sale. Failure to address this will result in a poor deal for you. At BCMS Corporate we directly contact (by telephone initially) an average of 230 prospective purchasers per vendor.

Bidder competition influences these critical areas:

The Speed of the Deal
Where there is competition an acquirer is less likely to become hung up over minor warranty problems etc. At BCMS Corporate we work closely with around 20 'BCMS Corporate-approved' lawyers around the UK. Feedback from these lawyers shows that deals completed by BCMS Corporate (i.e. with competition) have a far greater momentum than a typical sale. If the buyer knows that you can walk away and that deadlock is not an enemy but an ally the deal is less likely to snag. This is more important than most people realise because the more protracted a deal, the disproportionately more likely it is to fail.

The Price Achieved
Of all the factors that will influence price upwardly, the greatest is 'creating a market of bidders'. Of course this is true in any negotiation; nobody would argue this point and yet establishing bidder competition remains the most compromised element of most traditional sales.

The Terms of the Deal
Whether you sell for cash or shares will be influenced by choice. Whether you receive 100 per cent, 80 per cent or 50 per cent cash up front will be significantly influenced by choice. The timing of your exit and the warranties that are demanded will be influenced by choice more than any other factor. To discover more about these issues download our free booklet

4. Future Potential

We have already said that the no.2 reason why companies are purchased and why premium prices are paid is potential for future growth. However, if you were to analyse a traditional prospectus you will find almost no comment on this most crucial of subjects. The truth is that nobody ever buys a company's history they only ever buy its future.

At BCMS Corporate we produce what we call a 'Synergy Business Plan' for all of our clients. This business plan asks the question 'what will this business look like in three years under new ownership?'

When we get down to the last 4-6 serious buyers we produce a separate plan for each potential acquirer, based on conservative assumptions agreed by both acquirer and vendor. This business plan asks:

• What the business would look like when the new owner brings their clients to your products or services?
• What would the business look like when the new owner applies fresh investment?
• What would the business look like when the new owner brings fresh energy and enthusiasm?
• What would the business look like when the new owner brings synergies, cost savings, ideas, etc?

When you are selling a business you should never sell what a business looked like last year under your ownership. You should absolutely never sell what a business will look like this year under your ownership. Neither should you sell what a business will look like in three years under your ownership. When you are selling your business you should only sell what a business will look like in three years under new ownership.

The purchase agreement for your business is one of the most important legal documents you'll ever sign. After all, many years of hard work will culminate in this single transaction. You don't want to have problems collecting the money due you or to have legal problems haunting you into the future, and a carefully constructed purchase agreement can be your best insurance policy for preventing such catastrophes.

Customarily, the buyer's lawyer provides the initial draft of the purchase agreement for a business. This makes sense, since the buyer has to live and work with the company while you will walk away into the sunset with the cash (theoretically, at least). However, we suggest that your lawyer should draft the sections that are most important to you. In most cases, that means the clauses containing representations and warranties about the business. Ideally, you should try to avoid or limit the making of any warranties or guarantees for which you can be held legally accountable. You may also negotiate closely with the buyer as to which liabilities he or she is assuming, and which will remain with you.

Here's where a good lawyer can pay dividends. Make sure that you maintain on-going liability insurance for any liabilities that will remain with you - for example, product liability insurance on products that were sold during your tenure as owner.

Indemnity provisions, in which you promise that you will reimburse the buyer for certain types of expenses if they occur, are often a hotly disputed area of the contract.

The purchase agreement is likely to be a lengthy, complicated document. For some of the more elaborate deals, the contract plus attachments can run into hundreds of pages. You should go through it carefully with your lawyer and make sure that you understand the implications of whatever is in there.

Once both parties have agreed on the language of the purchase agreement, it will be signed by both parties. The contract will state the date at which the final transfer of ownership and possession of the business will occur, and when the seller will get the money. With a signed purchase agreement in hand, the buyer can finalise any financing arrangements with outside lenders in anticipation of the closing.

If you've used an accountant regularly to prepare your tax returns and draw up financial statements, he or she will be very well acquainted with the financial shape of your business. This knowledge may be helpful during the due diligence process.

Your accountant will also be essential in drawing up the historical and projected financial statements and other data required to place a benchmark value on your business, and in gathering and organising financial data that will be requested by the buyer during the due diligence phase of negotiations.

If you haven't been in the habit of getting audited financial statements, we strongly suggest that you do so now.

It is absolutely essential that at least one of the members of your team be an expert in dealing with the tax aspects of business sales and acquisitions. This person may be your accountant, your lawyer, or you may also decide to hire a specialist solely for this purpose.

Depending on how the deal is structured by the lawyers, you may face an enormous tax bill upon the sale of your business, or next to none. There are a lot of opportunities to save money here.

Taking advantage of tax-saving opportunities requires planning in advance of signing the sales documents. We suggest that you start talking to such an adviser 4-6 months before a deal is expected.

Another difficult question. Many shareholders never manage to sell their companies, others take many years. The main reason for this is a passive selling process.

No enquiry generation means that you rely on a buyer finding you. Not only can this take many years but leaves you in a poor negotiating position.

Using the BCMS process our clients have an aspiration of ten to twelve months. Sometimes it can be less sometimes a little longer.

From the brief to received bids is consistently 5/6 months. The Due Diligence and Legal processes are more difficult to guarantee.

Along with your accountant, your lawyer needs to play a key role in your plans to sell your business, and in drawing up the legal documents that will carry out those plans.

It may be that the lawyers that you use for general commercial activities are not experienced in the mergers and acquisitions field. If this is true then find another practice.

It may also be worth considering that your present lawyer has a built-in incentive to dislike any deal you may propose: if you sell your business, he or she will probably lose a client! Consequently, whether they realise it or not, some lawyers who represent small businesses may tend to "pick apart" a deal by finding so many roadblocks that your deal falls to pieces, or drags on so long that the other party loses interest.

It is also true to say that it is unlikely to be necessary that you need to employ a big city practice whose fees can be exorbitant. There are a good number of experienced regional practices that will do an excellent job. Among these you will find the BCMS approved lawyers who have been through a screening programme with BCMS.

It should be noted that there is no commercial link or gain to BCMS in these partnerships.