5 Top Tips on How to Sell a Business

A globally uncertain backdrop, Brexit plus a faltering German economy casting a cloud over the EU have all contributed to a dip in global M&A activity.

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Total mergers and acquisitions activity has fallen by 11% this year. However, there are still pockets of strength. For instance, inbound M&A in the UK, whereby an overseas company acquires a UK firm, rose in value to £18.4bn between April and June this year, climbing from £10.8bn in the same quarter last year.

Given this mixed background, Angus Grierson, Managing Director of LGB Corporate Finance, says management teams and business owners must work hard on deal planning and preparation. They must ensure that they have identified appropriate buyers, understand the acquisition rationale and be ready to undertake an extensive due diligence process if they are to achieve a smooth exit at the best possible valuation.

1. Avoid being overwhelmed by the process

It is vital that management teams do not get so caught up in the exit process that they neglect the underlying business. With all the preparatory work that needs to be done ahead of a sale, getting a company’s assets in shape, liaising with financial and legal advisers and responding to requests for information that have not been anticipated, the workload and emotional ups and downs can easily distract senior management. Potential buyers though are looking for consistent performance so if the business begins to falter, they could seek to reduce the price the first offered or even pull out altogether. The best approach is to establish a deal team comprising key members of the management, who have the appropriate backgrounds and authority to negotiate a transaction. This group can report to the board and stakeholders on a regular basis.

2. Choose the right potential buyer

Selecting the right potential buyer is crucial. Trade and financial buyers work with different valuation metrics and deal structures that reflect their particular agendas. Trade buyers look for acquisitions that offer specific business merits such as technology, customers, market share and margin enhancement through synergies and savings. Vendors and their advisers should undertake a landscaping exercise to identify acquirers lacking what the target company offers. In contrast financial buyers look to identify private companies with strong growth that could result in a trade sale or IPO at a higher valuation in the future. For them a financial return over a target investment period is the motivation, and their deals can be more complicated in structure including the use of debt in companies to boost returns.

The vendors’ requirements shape the choice of counterparty. The most important factor is whether a management team wishes to continue or cash out. Trade buyers can be flexible and may actually want to bring in new management, but VC and PE firms generally back continuing management teams.

The vendors’ requirements shape the choice of counterparty.

Once the right profile of buyer has been identified, it is important to make the business as attractive as possible to this cohort. For example, if a trade buyer is being targeted, a company needs to demonstrate how it can produce synergies or offer diversification, whichever is relevant. With a financial buyer, the emphasis can be more on demonstrating the financial strength, growth and strategy for expansion.

3. Have a compelling narrative

Central to an effective sale is a compelling narrative that encapsulates the vision that management has for a business. Achieving a successful exit can be compared to running for elected office; there needs to be a strong narrative that sets out why a buyer should acquire the business. Many management teams believe their vision for their company is clear, but they should check whether it is succinct, memorable and relevant to catch the attention of acquirers.

A company should articulate short and long-term goals and contain a roadmap showing how these will be achieved. It should be precise about near-term actions and the future outcomes to be achieved. Potential buyers will watch the performance of the business, will expect to see it hit key milestones and will want to see how the business will achieve the rate of growth suggested by the vendors – which is often the key factor for the valuation of most businesses.

4. Be exit ready

As management teams move from planning to implementation, the crucial point is to be exit ready. Stakeholders must be aligned so that the board can negotiate and deliver a deal. Every contract to which the company is a party should be reviewed and amended if necessary. The status of any IP and the freedom to operate in relevant jurisdictions should be confirmed. Operational procedures, roles and responsibilities should be strengthened to ensure that the business is genuinely transferable. Above all, ensure that every discussion and negotiation can be supported by data on the business.

Stakeholders must be aligned so that the board can negotiate and deliver a deal.

5. Mitigating execution risks

A major cause of buyers pulling out of acquisitions is the seller’s failure to respond adequately to a robust due diligence procedure and in particular a detailed investigation of the company’s accounts and financial model. It is a false economy to enter into an exit process without adequate preparation. Management teams and their advisors should undertake due diligence of their own (vendor due diligence) to check for issues in advance and expedite the real process.

It is critical to have a trusted advisor on board from well before a transaction process.

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