#bfslive

Asset Sale - With this you cherry pick what assets you buy and can leave certain things behind if you choose to do so.

Room for negotiation

If the buyer finds something they don’t like it can provide the buyer with a chance to negotiate.

Plan

You need to plan how you are going to take over the business at completion.

Are the employees used to Christmas bonuses or outings? - it is extremely important that as a new owner, you make sure the employees you are acquiring are happy.

Specific issues

There will be specific issues depending on the sector. For example: environmental checks (property), Intellectual property (IT) - do they own it? Is it licenced to any third parties?

Scope of Due diligence review

Tailored approach

Confidentiality and exclusivity 

Time and cost 

Whats important to you what are the deal-breakers?

Focus your due diligence on these areas:

Exclusivity 

You need to lock the seller in with a reasonable amount of exclusivity - be realistic (3 months is standard).

As a seller ‘think confidentiality’ - the buyer could use the information for their own personal gain.

Top Tip: Restrict access to key employees until you have entered into a non-poaching agreement.

How and where to retain your information?

Due diligence questionnaire - Make sure that it is focused and tailored - time and cost implication.

Statutory books of the company - Share certificates etc - the buyer will want to see these on completion.

Companies House - In the  last few months this service has become has become free - learn about directors if they have a secretary annual accounts and returns of the company.

Accounts - Small businesses are not required to file full audited accounts - balance and profits and losses - so make sure you request management accounts too.

Land registry and local authority services -  Property related business

Intellectual property -Think trademarks, software and products - who owns the trademark? 

If you are outsourcing -  make sure that they assign all ownership over to you.

Next Steps

Review of all information - the due diligence report,

Corporate information, 

Important agreements - sale/supply agreements, employment contracts, finance agreements, intellectual property licences and property leases,

Communication is key - deal breakers .

High profile disasters 

Even high profile companies can get it incredibly wrong.

HP - autonomy - $11 billion 

$5 billion loss

Misleading financial statements 

HP sued by shareholders for negligence  

BMW Rover - $800 million 

Inaccurate sales figures and culture clash $790 million loss 

BMW later sold Rover for $10 million 

Summary for buyers

Exclusivity 

Tailored and focused approach to due diligence 

Communicate with your team and professional advisers 

Think about your deal breakers

Request evidence for any claims 

Summary for Sellers

Get your house in order

Think about employment contracts, customer, supplier, distributors, contracts, cash flow. forecast

Be prepared to evidence any claims

Due diligence is key -  If you do it on your own the deal can end up costing you a lot of money. 

5 main stages - how to minimize risk 

1. Clarity 

2. Select target

3. How to choose your team 

4. Do the deal 

5. Post deal integration

Clarity 

Think about why you are buying a business. 

“The exit and the buying process are the same dance - you know the moves -  mirror the position”  

Be clear on what you want to achieve:

Bulk turnover 

Expanding client base

Do you want their skilled workforce? 

Price vs value - What’s the difference? 

Value is the difference ‘from the sticker price to the price we are willing to pay’.

Before you complete a deal consider whether you are you getting good value for money. 

How will the deal affect the value of your business? -  Don’t bolt anything into your business that drives your business’ value down.

“To increase your value always looking for an equation where 2+2=5″

How much work is involved

How long does it take to do a deal?

On average it takes 9 months to do a deal, however, Phillip’s advice is ‘take however long you think it’s going to take and double it’.

He also warns buyers of deal fatigue, stating that it happens on both sides and you just have to be patient.

What’s is the total cost of the deal?

How much do you think you're going to pay for the company? Make sure you build in the additional / hidden costs.

Staff - You may need to include some of your own staff - managers etc. 

What’s the cost of them not doing their day job because they are spending time working on the deal? - hidden costs.

Professionals  - lawyers and accountants are expensive!

Finance - loan, private equity etc.

TUPE - Moving employees into one company into another (it is advised that you get external help if you choose to do this).

Opportunity cost - What is the value of doing the next best thing? Weigh up your options. 

Don’t forget 

One thing to bear in mind is that you are not committed to completing the deal until you sign the contract.

Select the target

Where do you find the company to buy?

Online 

Papers

Companies that SELL businesses 

Your own networks - your lawyer - your partner - your friends 

(Plenty of houses get sold before they even reach the estate agent) keep this in mind when thinking about buying a business.

Choose your team 

Accountants lawyers 

Bankers and corporate finance

Company sales agents 

Experience required 

Fixed fee 

Do the deal 

If you have a professional team behind you they will do most of the ‘heavy lifting’.

The definition of a good deal? - no right or wrong answer.

A deal is like a see-saw the chances of the buyer and seller having the same weight is very unlikely - but you do need to find a balance. 

Phillip’s view: 

“one where both sides hurt the same”

Top Tips: Don’t try and have the last word - if both sides think they could have done better they will both come together to make it work 

Build a relationship - it is human nature for people to want to work with people they like - a bit of flattery goes a long way!

Naturally if they like you they will be keen to do a deal and get to heads of terms as soon as possible. 

Don’t ‘diss’ the seller - The buyers will be rude about your company - if you put the other persons back up it can be difficult to get out of that.

3 preferred thinking styles 

Try and get you to think about the thinking style of the person you’re talking to - matching and mirroring their style. Talk to them in that way.

Visual - 65% of the world are visual thinkers 

Auditory - 30% 

Kinesthetic - feelings - 5% 

Tricks of the trade - who is in the room?

Establish early on who has the authority - demand that the shareholder is in the room.

Be Prepared to walk away

Crucial to the buying process - work out what your limit is and be prepared to walk away - you may have lost time but it will be worth it in the long run.

Earn outs 

Ask yourself how long you want the old owner to be in place (management role etc) - you don’t want the old owners disillusionment to ruin your business as it can be a double edged sword.

Dos & Don’ts

Listen

Ask open ended questions

Never start a question with the word Why? - “take yourself back to your childhood - how did you feel when your mum or dad asked you ‘why did you do that?”

The problem is - immediately that the word ‘why’ gets the other person thinking ‘what have I done wrong?’ - it is a challenge. The moment you ask why, the seller will become instantly defensive. 

Don’t be stingy - Make sure you’re getting value for money but don’t be stingy.

Be dispassionate - For the seller this is an emotional decision - time money and love have been put into this business.

Be aware of the other side - For you it’s a business decision for them it’s an emotional decision.

Document everything

We immediately hear what we want to hear 

 “If I asked you to record what you agreed with (as a buyer)  and then asked the seller to write down what they agreed on you can guarantee they wont all be the same”.

Post-deal integration 

Crucial to remember that if you're not happy walk away.

If you've got to the post-deal integration stage it needs to be planned -  Think about what it is you are you going to merge.

- Back office 

- Offices, factories, plants 

- People - negotiation, TUPE, redundancies 

- Company culture - You must spend time getting them to understand and buy into the companies culture. 

Top tip: Find the most senior person and convince them - tell them why you wanted to buy the business in the first place.

Desired outcomes 

Think about economies of scale - you need to understand the desired outcomes when negotiating post-deal.

3 deadly sins

Fail to plan 

Fail to prepare

If you are buying a business for the first time (i.e. you're buying an existing company rather than starting one from scratch), I'd suggest picking a sector that you know with 100% certainty you are going to enjoy working in. If you don't you'll be a slave to your own venture and will not enjoy it.

If you are looking to bolt another company onto your existing one, it boils down to whether you are looking to grow in your own sector or whether you want to move into a complementary sector to expand.

Clearly the internet is your friend initially, as are your accountant, lawyer, friends etc. But once you have your long list of potential targets, your research should be around the financials and trading history, i.e. try to find out what their client base looks like, how fast have they grown (difficult to assess for small companies but the debt/equity ratio, debtors and cash on the balance sheet trends will give you a feel). If they are not growing, can you identify either why, or have you got another way of turning it around?

2. What are the key considerations when targeting a specific business for sale?

How good is the fit? For me with it, and for it with me. This is a cultural thing as much as anything else. Other than that, it will entirely depend on what your plans are as this will dictate how you evaluate your target(s).

3. Once negotiations have opened, what is the correct procedure for reaching an agreed sale price and what role should financial and legal professionals play?

I'd suggest always leaving this bit to your professional advisers be they accountants, lawyers or company brokers. By and large they have more experience at this and they are not emotional. If you've set your heart on a particular acquisition (and believe me it does happen) you can end up over-paying - how many times have you, or someone you know, overpaid for something on an online auction?

4. What should be included in the Heads of Agreement?

This is completely deal dependent. There is no "one size fits all" answer. At the least it should be an agreed price subject to variation downwards once due diligence is complete and the time frame to do the deal or walk away. The latter is important as it concentrates everyone's minds especially the professional advisers.

5. Why is having an envisaged exit strategy important before purchasing a business?

I'm not sure that it is. I've always behaved that way, but I bought businesses specifically to enhance my exit after only a few years. Many people want to buy a business to work at it and give them a livelihood for several years. There is nothing wrong with having a lifestyle business - many people I know have grown rich from it. It really depends on your personal drivers.

New government initiatives and increased awareness have resulted in alternative finance becoming increasingly popular among potential business buyers. In our experience, peer-to-peer lending remain the most popular alternative source of funds, and this notion is supported by data from AltFi that show over £1bn borrowed by UK businesses this year. An interesting space that has developed significantly this year is that of the challenger banks, which also provide a popular option. Compared to peer-to-peer lending, capital from challenger banks is generally more inexpensive, and their processes are shorter, and therefore favourable for potential business buyers.

2. What types of lenders do you work with at Credit Square?

With the exception of the High street banks, we at CreditSquare work with the full spectrum of lenders: peer-to-peer platforms, challenger banks, foreign banks, credit funds, as well as pension and insurance capital. The specific character of the transaction dictates which type of lender we reach out to.

What is your opinion of crowd funding as a means to financing a business purchase?

It's great that crowd funding exists as an option, and depending on the situation, crowd funding can be the most appropriate solution for the transaction. When considering acquiring a business, the borrower needs to look at all lending options available to them, and choose the best solution in the context of the particular situation.

3. How can a buyer leverage debt to buy a business – what are the options? What are the potential pitfalls of this method?

There are many options available.

Firstly, the buyer needs to think about what type of debt is right for the transaction. Options include fixed asset finance, receivables finance, cash flow loan, specialised asset based lending, and subordinated/ mezzanine debt.

Secondly, the buyer needs to think around how to structure the acquisition. What is the optimal split between equity and debt? Is the vendor open to defer part of the purchase consideration?

The most common pitfall when leveraging a transaction with debt is to not include enough equity into the transactional structure. To have 'skin in the game' is key for any lender. With so many options available, it can be useful to seek professional advice for this.

Typically, it takes 10 months from the initial sale instruction to completion of the transaction. So calculate the full timescale, you need to work back from there. Every business reaches a point where it needs further investment to secure growth – that could be for new equipment, more staff and more training or to employ higher calibre staff to drive the expected growth.  If you know that your business will reach that stage in 12 months time, for example, you are looking at approximately 20 months.

Generally speaking, I would say allow 18 – 24 months; that will also allow time to plan tax structures post-sale in order to minimise IHT exposure and to make any other necessary adjustments.

2.What are the essentials in making a business ‘market ready’?

It’s essential to have 3 years statutory accounts, together with a 3 year growth plan. A seller must be able to demonstrate business potential and be able to evidence this with financial information.

Make sure the business has a robust system of financial reporting, i.e. management accounts produced monthly.

Also ensure that all commercial and employment contracts are in place and up to date.

If there is more than one shareholder, make sure there is a shareholder agreement in place.

Make sure there is a successor in place – otherwise you are likely to have to stay on after completion!

Limit supplier and client dependency by ensuring that no supplier or client represents more than 15% of revenue.

3.How should a seller approach the Due Diligence process?

With energy!  It does require considerable resources to put together all the information that will be needed by your Due Diligence advisors.

Make sure that you have disclosed all material information before an offer is made to avoid any surprises for the potential buyer.

If something proves not to be as described, a seller should be flexible in dealing with the matter – keep an open mind in terms of re-negotiation.

4.What are the key considerations for a seller when negotiating price?

Always disclose relevant information upfront and make sure it’s accurate and can be evidenced.

Use a professional negotiator, who will not be emotionally involved, who has experience of getting deals over the line.

If you plan to stay on in the business for a transitionary period, this should not be given away free; negotiate a value as part of the deal.

Negotiate the maximum amount as the upfront consideration to be paid on completion.

5.What, in your experience, are the most common reasons for a sale falling through?

In our experience it’s invariably seller related issues not buyer related issues that lead to deals falling through.

Mainly the problems start with the business not achieving its financial forecasts; this could be because the forecast was over-optimistic and unachievable. Sellers must recognise that this will reduce the offer price.

Finally, deals fail because of what I call “Seller’s Remorse”.  This is where a seller receives an acceptable offer and a good deal structure but backs out at the last minute.  This has nothing to do with money – this is the emotional side of selling a business and its something sellers absolutely must prepare for. Essentially, they fear a loss of purpose and significance.  

Holidays in the sun and days on the golf course are fine for a while, but that doesn't hold up when you’re within days of transferring your business to someone else.

There can be a number of reasons for this. The most common reason is that sellers have not prepared their business properly for a sale and are not prepared for just how intensive the due diligence process can be.

A buyer with a deal savvy team of advisors will probe every aspect of the business from commercial agreements with customers and suppliers to employment contracts and policies. Incomplete or inaccurate documentation has the potential to put a buyer off for good.

2. What are the main things a buyer should looking for when scrutinizing a business for sale?

This will of course depend on the industry and sector the business is operating in. In general a buyer will undertake three main types of due diligence: legal, financial and commercial.

The legal aspect will include focusing on ensuring that the business has appropriate contracts in place with customers, suppliers and employees and that there are no major unforeseen liabilities.

The financial due diligence will look at how the business is performing and whether there are any items in the accounts which are distorting the profits of the business.

Lastly, the commercial due diligence will look at how the business is placed in its sector and who its competitors are for example.

3. What type of professional help should a buyer employ to aid their research?

In order to undertake the three main strands of due diligence mentioned above, a buyer will need a competent team of professional advisors. These should include solicitors, accountants and even members of the buyer’s own management team for the commercial due diligence.

4. A seller will want to protect some aspects of their business – particularly any confidential information – to what extent should a buyer respect this?

This should be something which is raised between the parties at a very early stage in the negotiations. The last thing a seller wants is to give the buyer a whole host of confidential information only for the buyer to pull out of the transaction and use it to his advantage.

The seller should also protect his employees from being poached, particularly if they are critical to the business. One way to achieve this is to enter into a Heads of Terms before negotiations start. These are usually non-binding statements of intent however certain clauses are binding and enforceable such as confidentiality and non-solicitation provisions.

5. What, in your experience, are the most common reasons for deal failure?

Unfortunately, the main reason for deal failure in my experience is seller being unprepared for just how intensive a sale can be.

It is almost a full time job; you cannot dip in and out of it once a week for example.

Sellers need to help themselves by instructing a professional and experienced deal team who can coordinate the due diligence process and take the pressure off. They should be able to filter out any irrelevant information and only feed back to the seller what is essential.