Post on 20-Aug-2015
Planning is everything:
How to maximise the potential of buying or selling a business in today’s
economic climate
Thursday 13 September 2012
How to maximise the potential of buying or selling a business in today’s economic climate
Rowan Andrews Team Leader, Shirlaws UK
How to maximise the potential of buying or selling a Business in today’s Economic Climate 13 Sept 2012
Justin Ray Head of Corporate Finance
Critchleys is a trading name of Critchleys LLP
© Critchleys 2012 Content is for information only. No action should be taken without seeking professional advice.
Stages of Selling a Business
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Preparation of Memorandum of Sale
Time (months)
1 2 3 4 5 6 7 8 9
Planning Marketing for Potential Buyers
Negotiating with Serious Buyers
Heads of Agreement
Due Diligence
Completion
Preparing a business for sale
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• what can be done to make it as attractive as possible?• tidy up any skeletons• tax planning• anticipate due diligence, disclosure and warranties!• need to demonstrate independence of business
The Selling Document (Information Memorandum)
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• first impression! • preserves market sensitive information• identifies advantages to purchaser• identifies opportunities for the business• highlights strengths of the business• describes people and business in commercial terms
The Selling Document (Information Memorandum)
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The aim•to ‘sell’ the company to the potential purchaser• to provide enough information to allow a purchaser to provide an indicative bid• to provide a level playing field for all interested parties
key is to look at the business through the buyers eyes……what is driving them to consider your business.
The Process - making approaches
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• depends on circumstances- small market/obvious acquirers – “confidential approaches” - directly by phone - approach the right person!- don’t blanket mail - commercial risk- non disclosure agreement prior to issuing information document
The Process - receipt of offers
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• inevitable flexibility in timetable
• offers will not be formulated in the same way - need to clarify and evaluate
• highest price not automatically best deal
The Process - evaluating offers
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• headline price - parameters on which it is based• deal structure –
cashloan notes / deferred considerationearn out (ie risk!)shares
• fit with bidder? Culture, gut feel etc• internal process - is the price funded, fundable, VC approvals, board approved etc• timetable and due diligence requirements
The Process - moving towards Heads of Terms
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• may be one clear preferred bidder• if not - need to be clear with bidders where process is at?• seek clarification, seek second round bids• keep the playing field level• tax!• get to acceptable offer and then strike heads
The Process – managing due diligence
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• know the likely problems up front
• aim for no surprises – surprises lead to price adjustments!
Valuation and Structure
© Critchleys 2012 Content is for information only. No action should be taken without seeking professional advice.
© Critchleys 2012
Valuation
• earnings basis• assets basis (essentially values the company on a break up basis)• discounted cash flow (used in valuing cashflows from secured
contracts or major projects)• other methods: eg turnover multiples;
Valuation is not a precise science. The value of anything is what someone is willing to pay for it.
© Critchleys 2012
The ‘truth’ about valuationPrice and value are not the same thing….
Price is the amount you pay for a company..Value is what it is actually worth.
The valuation process strikes a balance between the two.
Enterprise Value, Equity Value and Asset Value
Enterprise Value
Value of Debt
Equity Value
Net Book Value of Assets
Goodwill
Net Book Value of Assets
Enterprise Value
Value of excess cash
Equity Value
Goodwill
Or....
Either...
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Earnings based valuations• (maintainable post tax profit) x (applicable multiple)
• what are earnings?
- maintainable
- past, present and future
- ‘cash’ based (e.g. EBITDA multiple)
- post tax profits (e.g. PE ratios)
• what is the multiple?
- industry PE ratios
- multiples paid for comparable companies© Critchleys 2012
Maintainable earnings• Add back
- non-business costs
- exceptional/one off items
- non – competitive remuneration
- any unusual accounting policies?
• Deduct
- non-maintainable contractual terms, e.g rent
- non-competitive remuneration
- replacements for existing shareholders© Critchleys 2012
Maintainable earnings
• past, present, future or a mix of the three
• growth profile of the company
• structure of consideration
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Multiples - Comparable companies• similarity of operations
• asset base
• gearing
• flexibility of workforce
• tax
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Multiples - Comparable companies• for listed companies a discount to the adjusted PE is required to take account of the following in particular
- marketability of shares
- size of organisation
• discount 40-60% depending on quality of company
•.....but can your company attract a premium due to key USP’s or competitive advantage.
• P/E arbitrage
© Critchleys 2012
Multiples - Comparable transactions• information is collated by a number of organisations that reports on completed and rumoured transactions.
• but.....very few will actually disclosed the value paid or deal structure.where a value is disclosed it is often ‘inflated’ as would included
the full earn out amount, excess cash and freehold properties.the databases would use unadjusted historical reported profit
(where available).• therefore (high number) divided by (low number) = very high multiple
© Critchleys 2012
Current benchmark multiples
P/E multiple
Occ
urre
nce
• UK 200 Group SME Valuation Index Nov 2011 6.0 times P/E (Nov 2009 6.8 times P/E)
• EBITDA multiples on the same basis and over the same time frame has increased from 4.6 to 4.9 times
• what can you do to increase the multiple?© Critchleys 2012
•USPs•competitive tension / auction process•positioning
Maximising value
© Critchleys 2012
• preparing for due diligence - no surprises
• tax planning
• independence (risk on business post vendor ‘leaving’)
• management teams
• consultancy / employment (effective handover)
• deal sweeteners – earn outs / shares (sharing risk)
• competitive tension
Planning is everything:
How to maximise the potential of buying or selling a business in today’s economic
climate
Edward LeeHead of Corporate Finance
edward.lee@bllaw.co.ukT: 01865 254222
Who is the buyer likely to be and why?
Private Equity– Very active?– What excites them?– Scaleability?
Trade Buyer– How has your sector faired?– Market noise?– Exit strategy?
MBO– Known entity?– Lower price = less risk?– Funding?
Who is the buyer likely to be and why?
Consolidator– The cycle– The “King maker”
Overseas interest– What are we seeing?– Why are we seeing it?
First impressions count!
Legal audit– It’s like buying a house– Good and bad seen in context
How do you make a good first impression?– Pre sale grooming– Tidy up!– Review contracts
2nd tier management– How good are they?– Why is it important?
Documents
Confidentiality and Exclusivity Agreements– Confidentiality
How to keep a secret?At what stage?
– ExclusivityOnly game in town or auctionTimetabling and get out of jail free cards
Heads– A summary– A moral stick– Time well spent?
Documents
SPA– Shares v assets– Narrative– Warranties/Disclosure– Tax Deed
Disclosure Letter– The more the merrier– Detail is everything
RiskDD– There is always a risk– Information is the key– Start process early
Warranty Insurance– What is it?– How much?– Why use it?
Limitations on warranties– All sellers?– Whole of price?– How long?– Cap, collars and floors
Buyer tactics
Paper overload– Adding pressure– Bodies required
Divide and conquer– Questioning quality of advice– The wedge
Non lawyer heads– Experienced buyer tactic– Importance of early involvement of lawyers
Buyer tactics
Tight timetables– More pressure– Late nights
Good cop bad cop– Letting the lawyers take the blame– Prophets of doom!
Industry specific tactics
Multiple4.0 Scale2.0 Brand – Brand Architecture1.5 Channel Extension1.4 Product Extension1.3 Product Innovation1.2 Systems & Infrastructure1.1 Culture & Talent1.0 Industry Benchmark0.9 Costs
0.8 Revenues0.7 Assets0.6 Liabilities
0.5 Management Team0.4 External Factors
• Business cycle – Know where you are in the cycle – take the Stages test: http://www.shirlawscoaching.co.uk/stages
• Timing – Invest in your business now and plan to exit ahead of the market!
• Valuation = profit x multiple. Work on both to build value.
Summary