Whether you’re a long term business owner planning to sell up or an aspiring manager wanting to take a share in a business you’ve helped build, common mistakes in the transaction process can be costly and affect whether the deal even makes it to completion.
Taking the time to consider your goals and those of the business beforehand and remaining patient and flexible in these objectives throughout negotiation will offer the best chance of success.
Planning the sale
Whether a future sale is a specific aim or not, planning ahead for a change in ownership establishes a clear sense of strategic priorities and an ideal exit point. The aim is to create a valuable, viable business that is attractive to potential buyers.
Convincing a purchaser of the business’s value depends on a clear plan of projected growth and profits. Simply putting the business on the market without considering next steps can come back to haunt, as inconsistencies in the records may be used by the buyer to reduce the asking price.
As a business buyer, the best purchase opportunity will offer the strongest match with your investment goals without introducing too much risk or stretching funding too thinly.
Establishing true business value
In the current economic climate, many businesses are being valued at less than they should be. This presents ambitious business leaders with ample growth opportunity. Investors in Engineering founder, Jonathan Bell, saw his chance to build a group of companies having identified engineering as a solid sector for investment.
Limited interest in what was considered an unfashionable industry, coupled with a supply of family businesses without a successor, provided a unique opportunity to stage a buy-in. However, as the target businesses were often without advisors and had chosen to sell through brokers, asking prices had become largely inflexible.
For entrepreneurs like Jonathan, who eventually found the business he wanted to acquire, a successful buy-in hinges on the seller allowing for some flexibility – whilst working alongside advisors to ensure a fair price for the company’s intellectual property, assets and people.
Management teams conducting a buy-out are also particularly vulnerable at the point of sale. The knowledge and loyalty they feel to the business often places them at a disadvantage, both in negotiating a fair price and securing robust warranty and indemnity protection.
The solution rests in pulling together a strong management team, supported by brand and reputation, able to lead the buyer’s hand in making a more favourable offer. In this environment, a balance can be struck between the needs of the business and those of the seller.
Simplifying the process
To ease the progress of the deal, it helps to think of the process as two discreet transactions – structuring the finance and processing the sale. Nominating heads for these individual elements, especially where there is prior expertise, can help streamline an acquisition by setting clear terms for both the funding and the final purchase agreement.
External expertise can also provide additional support in the tricky post-completion stage by setting the terms between management and sellers.
Many owners put in decades of hard work building their business, only to throw away some of the rewards at the last minute by not properly considering the sale process. Transactions can be long and drawn out with the constant temptation to hurry things through – but patience is vital.
Peter Ewen is managing director at ABN AMRO Commercial Finance.
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