5 Insider Tips for a Successful Company Sale
Discover key focus from experienced M&A professionals with 5 tips for a successful company sale.
Obtain real insight from a seasoned legal and advisory perspective on what makes a successful company sale. Steele Raymond and TheNonExec list their top 5 insider tips to get your business sale across the line.
This is the fourth episode in our second video series, “M&A Deconstructed”. In today’s video we explore the most important areas to get right during a company sale. We also outline exposure to the deal or price, should they not be properly addressed.
Watch the video below for the in-depth discussion.
Quick find timeline:
00:00 – Introducing 5 tips for a successful company sale
00:42 – Tip #1 Create a buyer profile
01:00 – Different types of buyers in M&A
01:32 – Idea buyer profile should drive growth strategies
02:33 – Tip #2 Housekeeping
04:14 – The positive effect of good housekeeping on a company sale
05:04 – Tip #3 Ensure financial systems are robust
06:33 – Why certain controls are vital within a business that is looking to sell
06:50 – Risk of poor systems for example on stock provisions
08:00 – Tip #4 Draw up good heads of terms
08:57 – Agree time scales, expectations, exclusivity periods up front
09:37 – Tip #5 Instruct good, experienced, professional support
09:50 – Types of professional support required in a company sale
Series 2 – Topics
The conversations in the third more technical series of videos include:
- What is a Sales & Purchase Agreement (SPA)?
- M&A Warranties, Representations & Indemnities
- Getting Paid: Earn-Outs, Deferred Payments & Vendor Loans
- What could Derail a Company Sale?
- How much does it Cost to Sell a Company?
- 5 Insider Tips: A Successful Company Sale
In case you missed our first series you can watch the videos on catch up below:
- Introduction to the M&A Deconstructed series of videos
- What is EBITDA?
- What are Heads of Terms?
- Equity Share vs Asset Sale
- Completion Accounts vs Locked Box
- What is Due Diligence (DD)?
Meet your M&A experts
Nick Davies, Partner | M&A Solicitor, Steele Raymond LLP Solicitors
Nick acts for a wide range of business clients across various sectors, advising on complex corporate transactions including company sales, purchases and mergers. Nick also advises on on mergers, de-mergers and re-organisation.
Justin Levine – Managing Director, The NonExec Limited M&A Boutique
Justin leads a boutique exit advisory firm specialising in manufacturing, technology, IT, digital, healthcare, wholesale and distribution markets. With the support of a 15-strong virtual team of analysts and researchers, he helps private business owners with growth and exit strategies.
Steele Raymond LLP
Richmond Point, 43 Richmond Hill, Bournemouth, BH2 6LR
Contact us here to chat about your business exit.
Transcript for video:
5 Insider Tips for a Successful Company Sale
Justin, hi. Welcome back.
Nice to see you.
We’re continuing our video series, Demystifying M&A, talking about explaining some of the jargon, some of the process. And we thought it might be useful to try and provide some key tips, some sort of insider perspective on what we would recommend people who are thinking of selling a business do. So between us, we’ll cover a number of points. Would you like to start? What would one of your key tips be for someone who’s thinking of selling their business?
Tip #1 Create a buyer profile
Justin Levine (00:42):
I’ve been obviously giving it some thought, given that we’re doing a video about it. And I think I would argue that the first step if you’re thinking of selling a business is to have an idea, (we’re talking now to the seller, the company owners), to have an idea of who you would sell your business to.
Different types of buyers in M&A
Because of course you can sell a company to any entity. You can sell it to a strategic buyer or trade buyer, somebody in your industry. You could sell it to a financial buyer, private equity investor, high net worth, family, office competitor.
And there’s a number of different places you can sell the business and each will have a different impact on the business once you’ve sold it. One will deliver the best price, one might deliver the best future for your employees. But I think the most important thing is having an idea of who that buyer might be.
Idea buyer profile should drive growth strategies
And the reason that I think it’s important is because it will start to dictate the strategies and tactics, if you like, that you are going to execute as a business as you grow and build your business.
So if you know that company A is going to be the most likely buyer of your business, you might make certain decisions; could be your product policy, it could be your employment policy, it could be the type of people you hire, it could be the geographic domains that you might say we want to expand in London, Kent, and Sussex, because this big company we want to sell doesn’t have a presence there, they’re going to really value it.
So there’s really material things that you might do as a business to make yourself more and more attractive for that type of buyer. It might not necessarily be that that buyer will acquire you, but you are going to have a sense of who is likely to pay best price for example. So that’s the starting point I would say. What about you?
Tip #2 Housekeeping
Yeah, for me, I think the first point is probably presale. And it’s when you’ve reached that decision that you may like to sell at some point in the future, maybe it’s two years, three years, whatever you want to execute your current business plan. And it’s housekeeping, which sounds like an odd term in the M&A world.
By housekeeping I mean; looking at your business, looking under the bonnet, perhaps taking a sample due diligence questionnaire, the type of which a buyer might furnish you with at the point that you found a buyer, and looking at your share capital, looking at your company’s house compliance, looking at your statutory books and records, getting those all in order, looking at your employment contracts, are they up to date? Have you got employment contracts? Do they comply with the legislation? Looking at your key contracts with key customers and key suppliers? Have they expired? Are they valid? Do you even have them?
Looking at your intellectual property. Again, has it expired? Should you have applied for whatever the IP may be that you need, looking at your website, making sure you own the rights to your website not your external developer does, looking at all of these sort of things in an ordered fashion with the help of management internally, and kind of doing a dummy DD process.
And I’ve known some clients who’ve done this and they’ve actually even populated a dummy data room where they take the data room, setup folders and key contracts, insurance, property documents, employment documents, staff handbook, and they’re going away and they’re collating them. And at each stage before they move them into the data room, they’re reviewing them and making sure they’re up to date.
The positive effect of good housekeeping on a company sale
If you do that and you get into the point of sale with a buyer and you’re furnishing them with all of the information they ask for straight away, it’s all up to date, it’s all compliant, you are going to inspire confidence in that buyer. And that buyer is going to think, wow, this is a well run, well governed business, these guys have got their finger on the pulse. And that is going to relax a buyer and it’s going to make the deal easier to do.
So that process will take time. It will perhaps involve some cost if you need to involve legal advisors or accounting advisors to help you with different bits, but it’s money well spent. And even if you end up not selling, what you’ve done is transform your business into a much more organised entity. And I think that, for me, is one of the key points.
Tip #3 Ensure financial systems are robust
Yeah, I think it’s a very good set of points Nick. What I would add to it, it’s a little bit tangential but it’s along the same lines, and that is financial systems.
This is something that comes up for me a lot, is, an SME company owner, small, medium sized company, might for example have very light management systems inside the business, in terms of reporting; profit & loss, income statement, balance sheet, maybe line reporting on product performance, service levels, et cetera.
That information might be produced very likely through the year and the company might rely upon the annual end of year process having the statutory accounts produced. I suppose the onus being put on the external accountancy firm to produce the accounts to a reasonable standard.
And my view is, when you’re selling a business; is the buyer’s going to want to see financial systems in the business that are very robust.
Yes. And they’re producing timely information, they’re producing it accurately, and it lines up to the statutory accounts process at the end of the year. It’s really quite important, because by some miracle of occurrences that a lot of transactions seem to occur at the same sort of time that the statutory accounts period comes up. So of course, if you agreed a deal based on a certain set of values, the management information you’re giving to the buyer has to line up with that end of year process.
So there’s no surprises.
Why certain controls are vital within a business that is looking to sell
I would add onto that, particularly, I’m going to use manufacturing companies, but it’s also applicable to others, is having very robust accountancy, not processes, but controls within the business, particularly over stock and inventory, for example.
Risk of poor systems for example on stock provisions
Many sellers don’t have an obsolescence policy when it comes to managing inventory. Lots of buyers, if not all of them, will have an extremely robust, possibly aggressive approach to writing down slow moving inventory, anything over six months, for example, want to see stock provisions.
And even if a buyer doesn’t, a buyer who’s taking good advice, that advice will be that they should apply some sort of stock policy to a target company stock. So absolutely the sellers have got to get to grips with that.
It is and it can be material. If you’re a business with £5 million worth of stock and you don’t have an obsolescence policy and the buyer comes in, does their due diligence and says, you’ve got 20% slow moving stock. That’s £1 million price chip potentially on the deal, it’s a substantial number. So getting those numbers [is vital]. But it also applies to any, it could be a bricks and mortar retail, e-commerce, anything that involves movement of inventory, high value assets, having robust [accountancy]. Often as not bringing in outside specialist help to look at this before you go to market. So having those financial controls in place before you go to market, in my view, is really important.
Tip #4 Draw up good heads of terms
Next point for me, I think after housekeeping, getting your business ship-shape. I think the next, most important point is the heads of terms. I think that a good heads of terms can save so much time, so much money, so much negotiating, because it sets out the framework for the deal.
It sets out or should set out timelines, keeps everybody focused on when the deal’s got to be delivered. It may even have some milestones, we need to complete DD by this date, we need to have the first draft of the SPA by this date. So I think the heads of terms are invaluable.
I think poor heads of terms, which are full of ambiguity, create great difficulty down the line, and you end up with extended negotiations, which are unhelpful and can be an uncomfortable position for both buyer and seller. So for me, point two, heads of terms.
Agree time scales, expectations, exclusivity periods up front
Yes. And I think that, for me, I picked just one element of that and is often heard that time is the enemy of a deal. And in my experience that is true. So as you said, the heads sets out the notion of time scales, expectations, exclusivity periods. And so having that agreed at the upfront, at that point in the deal, to me is critical.
We talk about deal drift.
You want to avoid deal drift. The longer a deal takes to do, in my experience, the more it will cost. You want fixed timeframes, which are reasonable, which are achievable, which everybody agrees to, which everybody buys into, and you want to deliver the deal on those timeframes.
Tip #5 Instruct good, experienced, professional support
Agreed. So I think the final point from my side, and I’m mindful of the fact that the piece of advice might sound biased, and that is get good quality help.
Types of professional support required in a company sale
There’s a number of advisory positions. If you’re selling a company, having a good corporate finance or M&A lead, having a good legal team, a good corporate legal team supporting you is, to me, mandatory.
I mean, I’ve worked both sides of the fence, both as a manager of businesses, leading businesses and taking businesses to an exit, and also then managing exits on behalf of other people. And there is a difference in the level of capabilities of outside support you can get. It’s not true to say that all law firms are the same. It is not true to say all corporate finance firms are the same.
We are human beings with different experience levels, and I’m not saying that we would fit all projects either. But hiring the right level of expertise, not only can [it] save you a lot of money in the process, it can also make you a lot more money in the process.
I think that’s absolutely right. And my third point would simply be take advice. It’s the same point, you’ve got to get the right people in on the deal, but a good CF, a good M&A legal advisor, should be able to spot value in the deal and should be able to add value back into the deal.
I’ve said it on previous videos, most people will do this once, get the best advice. And I echo your comments, we will not be the right firm, I will not be the right individual for everybody. You do have to have personalities which match and get along.
Our key area is in the SME space, we’re not going to start doing deals with ICI, listed city work, that’s not our space. We’re very comfortable with that, we’re SME focused, that’s where our experience lies. And it’s that experience that you are buying really.
You want someone, when an issue crops up, someone or someone in the team can say, yeah, we’ve seen that before, we can deal with it. Not someone who’s having their first rodeo, so to speak, who also, as well as the client, is unsettled and thinks, oh gosh, what do we do now? So get advice, get good, experienced advice, and invest in it. And it will make your deal easier to do and produce a better outcome. So that’s it for me.
Yeah. So I think some good tips there, helping people along their way.
And I think it’s been a good experience overall, putting the videos together.
I’ve enjoyed it.
Hopefully we have added a little bit of value in our own small way.
If we can help one person and demystify something, then it’s been worth doing.
Job done, I’m sure.
I’ll speak for you as well when we say that, anyone we can help, it’s easier to find our profiles online.
Give us a buzz, give us an email and we’ll get involved.
Exactly. Thanks Nick.