Selling a company is a major part of a corporate finance advisor’s role.
The more experienced your advisors, the better chance you have of negotiating not only a sale price that you’re happy with but overcoming the many obstacles that stand in the way of completion due to the intricate and precise nature of the processes involved in selling and purchasing a business.
In our review of 2017, Head of Corporate Finance, Susannah Adams, describes five situations this year where her and her team’s experience and intervention have helped steer our clients to their desired outcomes.
Debt-free and cash-free
For even experienced shareholding directors of limited companies, there is often a failure to distinguish between personal cash and company cash.
One such seller we worked with, the owner of a professional practice, had built up a large debt to his company, and his company to HMRC.
Once a price is agreed between a buyer and a seller, the price is often adjusted at the last minute by the working capital or “net asset value” of a business, and without specialist advice the implications often are not understood until completion (the day on which ownership changes hands) is imminent, and significant costs have been incurred getting there. A number of items, in particular debt, can have a significant impact on value received by the shareholder. Debt includes loans made from the company, overdrawn directors’ accounts, finance facilities, bank overdrafts, and so on.
Given our seller’s debt to the company and the company’s debt to the taxman (both of which are normally settled upon completion by subtracting the amounts from the purchase price), he was left in a position where he would have had to pay his buyer to take the company off his hands.
Upon this realisation, we were called in by the seller and successfully re-negotiated the purchase price so that he would realise a significant capital gain upon disposal.
New product, new opportunity, greater price
One client, a specialist manufacturer, had agreed a price with their buyers and was undergoing the process of due diligence. Due diligence is the process by which a buyer’s professional advisers check every aspect of the target business. Once a deal is agreed, many request a period of three months to finalise this process although this does vary. With this client, given the complexity of their trade, due diligence was scheduled to last six to nine months.
As due diligence was proceeding, the seller had begun receiving a sizeable number of enquiries from a new product that had been developed over years. The future potential of this new product was clear for all, including the buyer, to see.
Our team successfully negotiated an additional premium on top of the originally agreed price to reflect the financial consequences of the commercial exploitation of the seller’s new product.
Dealing with awkward questions
Another client, in the highly-regulated education sector, agreed Heads of Terms with a buyer who retained one of the UK’s largest law firms to undertake due diligence. Early on during the process of due diligence, we understood the relevance of this seemingly innocuous question and the danger it presented to successful completion of the process.
The question itself was tax related and we drew together our firm’s in-house specialists to consider every potential ramification of the buyer’s solicitors’ query. We considered all potential outcomes and prepared an educated and researched assessment document detailing the likelihood of each outcome occurring and the related consequences. This research minimised the impact of the matter significantly.
Getting full shareholder agreement
The Enterprise Management Incentive (EMI) Scheme is the main UK scheme offering share options to companies keen to retain hard-to-recruit, specialist staff essential for product or service development and delivery. For many involved in such schemes, an expectation for a management buyout of the firm in which they are a shareholder may be set.
Anyone owning less than 10 per cent of a company’s capital have no control over a business or way of stopping a business being sold.
A buyer approached one of our clients with an EMI share scheme in place. Upon discovering the EMI, the buyer got cold feet as they’d had a bad experience trying to buy out another firm with an EMI where there was significant resistance from the employees holding granted share options.
Working with the seller, the buyer, and the share option holders, we unblocked the path towards a successful sale by putting in place an agreed timetable, process and mechanism under which the sub-10 per cent shareholders’ desires and goals were accommodated.
Sale of a component business
We acted for one of the shareholders, no longer working in the company who had received what was clearly a derisory offer for his shares from the other shareholders, less than a quarter of their market value. Despite attempts to negotiate in good faith our client was rebuffed with threats of the other shareholders running the business “into the ground”. Worse, acceptable offers were made, agreed and then withdrawn by the other parties without good reason.
We advised our client to withdraw from discussions and “sit tight” – his rights as a shareholder gave him a degree of “negative control” which left the other shareholders unable to draw dividends or take certain strategic decisions without his knowledge/consent. The age profile of the other owners, lack of obvious succession and recent consolidation in the industry all pointed to a likely imminent sale.
Sure enough, they were forced to break cover after a few months, and our client got fair value for his shares.
I noticed an amusing notice in a mechanic’s office which offered
- a £40 per hour rate for their work if they were the first person to work on it;
- which increased to £80 per hour if the customer had had a go first;
- which increased again to £120 per hour if the customer had had a mate in looking at it; and
- ended up a whacking £200 per hour if the customer had Googled the job and it looked easy.
Getting someone in who knows what they are doing is real economy in all walks of life, none more so than selling your life’s work.
Selling your company – talk to Milsted Langdon
Interested in selling your business? Want to ready yourself for the market? Already received an offer?