RSS feedsWith a relatively robust economy and a seemingly endless supply of finance, there has rarely been a better time to consider selling a private company.
Currently private companies are attracting high valuations 14.8 times earnings, according to Private Company Price Index figures for the first quarter of 2007. Listed companies are attracting a price to earnings ratio of 15.8 only slightly higher.
Cut your costs
But to get the best price for their business, owners may need to take tough decisions on costs, even cutting their own salary.
Apart from the obvious matters of tidying up the balance sheet by removing yachts and houses abroad, the best move is to ensure sustainable profits are coming from the company, bearing in mind the effective rate of tax on a sale of shares is nearly always 10% about a fifth of taxation on income.
Nearly all private companies are sold on a multiple of earnings, so maximising them is all important. If the business owner’s salary is paid mainly in return for being a shareholder, it may be worthwhile reducing it. This would allow real, sustainable profits to be used as the basis for a purchaser’s valuation.
It may also be worth giving incentives to key managers, particularly if the sale is to let the main shareholders exit the business. Small loyalty bonuses can go a long way to ensuring a strong management team remains in place under the new owners.
As for the sale process itself, finding the best possible purchaser inevitably involves a filtering process. It is crucial to give all possible purchasers access to the process.
First, draw up a list of potential purchasers, including suppliers, customers or people within the sector that owners of the company already know.
This list can be supplemented with names identified by professional advisers. Then think about potential purchasers that neither the owners nor their advisers will be aware of. Placing an advertisement on a no-names basis in the general financial press or specific industry papers is strongly recommended.
A simple one page teaser document can then be sent to those on the target list, along with non-disclosure agreements. This process should be handled by professional advisers.Ideally, the three most appropriate offers will be taken forward to second-round negotiations. When a preferred purchaser is identified, non-contractual heads of agreement can be drawn up. It is difficult to move forward with more than one potential purchaser at this stage, although it may be engineered in some circumstances.
Due diligence
Once you have a preferred purchaser and heads of agreement, due diligence can begin. This represents a considerable expense for the buyer but is necessary from a legal point of view and a requirement to complete the transaction.
In the private sector and certainly for deals under £25m, the use of document rooms or offsite due diligence is limited. But sellers can help by setting up these facilities and putting together well-ordered files of due diligence material. This works better than the traditional and often shambolic arrival at the company’s premises of an army of reporting accountants and lawyers.
Once the transaction is under way, sellers would be well advised to let their legal team take matters forward. The sale and purchase agreement and legal documentation are better handled directly lawyer to lawyer, with principals becoming involved only with key decisions on detailed matters that may arise as the process progresses.
Top Tips
- Groom the business
Ensure you have a strategy in place that will retain key staff up to and after any sale. Ask yourself what might put buyers off or reduce the price they are willing to pay.
- Identify reasons for buying
Have a concept of the ideal buyer. Confirm ‘core’ income and growth prospects. Draw attention to your business’s less obvious attractions to niche buyers.
- Have a confidentiality policy ready
Potential buyers can then sign up immediately. And have a plan B, in case the purchaser pulls out.
- Price in the buyer
Weigh up a buyer’s ability to reduce overheads or improve margins through economies of scale or cross-selling opportunities and price these factors in.
- Consider the tax objectives
Are you taking proper advantage of taper relief for the disposal of all the business’s assets?
Chris Lowry is a partner at UHY Hacker Young
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