Great to see the Deise Hurlers back to winning ways after the very disappointing 2019 season……..hopefully this will help to balance the Kilkenny / Waterford internal office banter J. It was a long 2019!!!!
The Business Sale
The sale of any business is not something that happens overnight. It is a journey and in some cases it is a journey that starts years in advance of the actual sale. We have been fortunate enough to be involved in a number of such transactions over the years and this blog will deal with what we see as being the typical journey. Having said that, all transactions are unique so one thing you can be certain of, there will be bumps along the road!
The Decision to Sell
Something that the business owner is totally in control of is the decision to sell. Until this decision is made there can be no process and no journey. People will choose to sell for any number of reasons. The most obvious one in the family owned business space is that it has been decided among the family that it is best for everyone if the business does not pass to the the next generation. This could be for financial reasons (the value now is perceived to be the highest it is going to be), practical reasons (next generation don’t have the appropriate skillset or desire), personal reasons (current owners wish to retire, slow down or have other interests). Whatever the reason, the decision has to be made. It should be noted that the timing is separate to the decision. Once the decision is made, then consideration can be given to the best timing
Preparing for Sale
This will be influenced by a number of factors such as:
- Is there any obvious purchaser? That could be a management team, competitor, industry colleagues etc.
- How strong is the management team that is in place – can the business run without you or are the current owners/shareholders critical to the day to day running of the business
- What is the current position with revenue? Is everything up to date? Are there any revenue risk areas that need to be addressed or disclosed?
- What is the current status of the company systems and processes – are they efficient or not?
- Is there a good team of staff in place?
- Is the corporate structure that is in place efficient for you as a seller and attractive to a potential purchaser? Things to consider would be properties or non core assets that the company may own, excess cash or other assets which might be considered “non trading”. There may be an opportunity to restructure things to make them more efficient.
At this stage it is important to do a full review of all of the above. While the above is not an exhaustive list you have to treat selling your business like selling any other asset such as your home or your car. The purchaser will be doing their due diligence so the “cleaner” things are the more attractive and ultimately valuable your business will be. If you were selling you house and there was considerable maintenance work to be done by any potential buyer, or indeed legal issues to sort, it is more than likely the price will have to be reduced. Selling a business is no different.
This “preparing for sale” period may be quite quick or, if you have started planning when you are in control and not under pressure to sell, it could take a number of years (improve processes, development the team etc.)
A full business valuation may be something that you decide to carry out also at this stage. While any sale will ultimately be determined by the amount a willing buyer is prepared to pay and a willing seller is prepared to accept, such a report will give you an indication of expectation. We previously wrote a detailed blog on the company valuation process and that can be found here.
Prepare an Information Memorandum
Assuming you are trying to identify a buyer it will help greatly if you prepare something called an Information Memorandum (IM). The Information Memorandum will contain a significant amount of information which can be given to potential buyers (once you are happy with them) to allow them become more informed before making an offer.
The contents of the IM will depend greatly on the size and complexity of your business and also the type of potential buyers you are going to attract. It is a matter for the seller as to what to include and should be developed along with your advisers. Typical items to be included will be:
- Historically financial performance
- Overview of industry
- Key customers and relationships
- Key suppliers and relationships
- Organisational structure
- Management team
- Overview of Operations
Teaser Letter and Confidentiality Agreement
In order to attract interest from potential buyers your adviser will put together something called a “Teaser letter”. This letter will be short (maybe only a page or two) and will contain some high level information on your business such as:
- Location (region, county, city – a decision for you and your adviser)
What other information to include will be up to you and your adviser. The key thing here is that the document is just to attract interest while maintaining anonymity. Depending on your industry this is a critical stage. You don’t want to cause uncertainty amongst customers, staff or suppliers. In addition, competitors may use any uncertainty created to their advantage.
The teaser document will ask potential interested parties to respond to your adviser with an expression of interest along with a signed confidentiality agreement.
Information Memorandum sent to Interested Parties
On receipt of the expressions of interest you will make a decision on which parties you will send the IM to. The purpose of issuing the IM to these parties is to give them more information which will allow them make an informed offer.
When issuing the IM a date for indicative offers will be set.
Indicative Offers Submitted and list reduced
On receipt of the indicative offers a decision will be made internally with your advisers as to which offer may be the best to proceed with (if any). There is some soul searching and decision making to be made if you are lucky enough to arrive at this stage with a few interesting offers. You could proceed with multiple offers and make all parties aware of that fact or you could reduce to your preferred option at this stage.
Heads of Terms
The Heads of Terms (HoT), sometimes referred to as the Heads of Agreement (HoA) is a short document that will be agreed between the seller and the potential purchaser. Legal advisers may or may not be involved in this process. It is basically a summary of what both parties understand as being the deal – what is being sold and bought, the conditions attached, the price and how that is to be paid, as well as any other conditions or requirements.
It is important throughout this process that neither side ties themselves into anything that is legally binding. There are still many things that could go wrong with the process.
If you have an indicative offer that you would be interested in trying to do a deal with and you manage to agreements Heads of terms, the process will more than likely move onto Due Diligence. This is where further and more detailed information is provided to the potential purchaser to allow them “get under the bonnet” of the business. The access given is often referred to as access to a “data room”. This is generally now a secure virtual environment where information is shared. Due Diligence would cover all main areas of the business – financial, tax, legal, HR, operations.
Legal and Agreement
At this stage the legal process will possibly also have started. A good Agreement will be vital to protect both the seller and the purchaser. It is generally the purchaser’s solicitors who draft the initial purchase agreement. Depending on what exactly is being bought this will either be:
- Share Purchase Agreement (SPA) – if you are selling the shares in your company along with the trade and business owned by the company; or
- Asset Purchase Agreement – if you are selling the trade and assets of the business but not the company itself.
For tax reasons the general rule will be that a seller wants to sell the company shares whereas from a commercial and risk perspective it is quite often that the purchaser wants to acquire the assets and trade but not the entire history of the company.
The legal agreement will be drafted based on the agreed Heads of Terms. It is the job of your legal adviser to protect you to ensure you understand what you are signing up to.
A key aspect of the agreement is the warranties that are included. The warranties generally protect the purchaser. An example would be warranties around tax. For example a warranty might be included which states that if a tax bill arises from a future revenue audit the sellers would be liable. This is where there can be great fun and negotiation.
In terms of the deal itself it would be quite common for a portion of any payment/consideration to be deferred and paid as part of an “Earn Out”. This would see the seller get an additional payment in the future based on the future financial performance of the business. There are significant tax considerations to take into account so good advice is essential.
While each legal team has to protect their client, a good broker can be important at this stage to help clarify the concerns of either party. It can often be the case that while everyone trusted each other at the Heads of Terms stage, when the legal speak of the agreement is seen it can be quite emotive. Remember, in the case of the family business you potentially have somebody who is selling an asset that they have built from scratch. They sacrificed greatly to see the business succeed. More than likely major decisions were taken around the kitchen in the family home with all family members. When you consider all of that history it can easily cause emotions to run high.
My view on this stage is always that there has to be two winners. The seller has to walk away genuinely believing the deal was right for them while the buyer has to feel the same. In addition, I think it is important that each party feel it was a good deal for the other. Completing the agreement with this mindset will help greatly with the future success of the business.
Deal Done !
Hopefully this all results in a successful deal for both parties so it will be time to have a well earned meal and glass of champagne!
We have been fortunate enough to have been involved in a number of these types of deals in recent years. They are all unique and have their own characteristics but it is fantastic to be involved in such rewarding work. A good deal is good for everyone!
If you would like to explore any aspect of either valuing or selling your business why not contact us on 051 396703 or on www.comerfordfoley.ie