Avondale Guide - How To Sell Business At Maximum Value


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Understanding that carefully planning, good timing and an effective approach is critical to how to sell a business successfully. It involves presenting the business in the right light, intelligent research and carefully approaching the right buyers, avoiding technical pitfalls and creating and managing a competitive process. The stages in how to sell your business successfully include:
Selecting an advisory team
Business valuation
Value enhancement strategy
Timing and personal financial review
Positioning your business in its best light
Research and create competitive environment
Negotiate and structure the right deal
Project manage to completion
This guide provides an insight into each step.

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Avondale Guide - How To Sell Business At Maximum Value

  1. 1.       Guide:  Valuations  and  selling  a   Business  at  Maximum  Value           www.avondale.co.uk   Page  1  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.   Contents       The  successful  sale  of  a  business  requires  careful  planning,  good  timing  and  an  effective  approach.  It  involves   presenting  the  business  in  the  right  light,  intelligent  research  and  carefully  approaching  the  right  buyers,   avoiding  technical  pitfalls  and  creating  and  managing  a  competitive  process.  The  steps  are:     1. Selecting  an  advisory  team   2. Business  valuation   3. Value  enhancement  strategy   4. Timing  and  personal  financial  review   5. Positioning  your  business  in  its  best  light   6. Research  and  create  competitive  environment   7. Negotiate  and  structure  the  right  deal   8. Project  manage  to  completion       This  guide  provides  an  insight  into  each  step.           1.  Selecting  an  advisory  team   Undertaking  a  business  sale  is  one  of  the  most  important  financial  decisions  you  will  ever  make.  The  approach   an  advisory  team  take  can  make  a  real  difference  in  maximising  value  and  minimising  distraction.  There  are   many  legal,  tax,  accounting  and  regulatory  issues  to  address.    In  addition,  there  is  the  matter  of  finding  the   most  profitable  buyer  for  your  business  and  then  negotiating  and  structuring  the  most  advantageous  deal,   ideally  in  a  competitive  environment.    Start  by  meeting  several  intermediaries.    Appoint  based  on  track  record,   ability  to  create  highly  strategic  transaction  at  maximum  value,  experience,  personality,  research  resources,   international   approach   and   technical   ‘deal   structure’   knowledge.   Make   sure   fees   are   linked   to   success   deliverables;  avoid  high  non-­‐performance  based  time  fees.  Finally  make  sure  they  take  the  time  to  understand   your  aspirations,  approach  and  business.  A  good  intermediary  will  also  help  you  understand  the  timing  and   value  influencers.       2.  Valuation   Values   are   often   significantly   exceeded   by   creating   competition   with   the   right   strategic   buyer.   A   forecast   valuation  is  helpful  however  as  a  review  of  prospects  for  increase  in  value  both  “quick-­‐win”  and  “long-­‐term”   and  also  to  understand  and  seek  to  realise  aspiration  value  (beyond  the  numbers).        A  valuation  will  seek  to   measure  the  trust  the  market  has  in  a  business  and  in  its  ability  to  create  wealth  (the  goodwill).  Goodwill  is   intangible,  although  the  accounting  definition  is  the  difference  between  the  purchase  price  and  the  company’s   balance  sheet  assets  (net  assets).  There  are  many  different  techniques  for  calculating  the  value  of  a  business,   such  as  industry  specific  formulas,  asset  based  valuations,  discount  cash  flow  forecasts  and  dividend  formulas.     However,  typically  in  unquoted  smaller  businesses,  the  most  usual  method  is  to  use  a  multiple  of  one  year’s   “adjusted”  and  maintainable  profits.  The  chosen  multiple  is  the  number  of  years  it  is  considered  acceptable  to   generate  a  payback  on  the  investment.  This  can  be  expressed  as:       Multiple  x  “Adjusted”  Maintainable  Profit  per  annum  pre  tax  =  Likely  Valuation     Profit  Adjustments     A  sustainable  profit  figure  will  be  assumed,  often  using  last  year’s  net  profit  as  a  base.  It  is  then  normal  to   make  specific  adjustments  to  this  figure  to  obtain  the  net  profit  to  a  buyer,  rather  than  the  one  the  previous  
  2. 2.     Guide:  Valuations  and  selling  a   business  at  maximum  value         www.avondale.co.uk   Page  2  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.   owner  may  have  enjoyed.  This  is  called  calculating  the  adjusted  net  profit.    An  adjusted  EBIT  or  EBITDA  may  be   used  depending  on  sector.  This  is  calculating  the  earnings  before  interest  and  tax  (EBIT)  or  depreciation  and   amortisation  (DA).    This  can  include  items  such  as  salary  or  extraordinary  or  personal  costs.    Adjustments  to   the  net  profit  might  include  ‘add  ons’  such  as  costs  for  placing  the  business  under  management,  additional   premises  cost  if  requiring  relocation  and  investment  required  replacing  old  equipment.     Multiple  influencers     Low  multiple   High  multiple   Volatile   Less  desirable  SME  business   Poor  expansion   Declining  sector  (poorly  perceived)   Lower  profits   Poor  infrastructure   Low  economies     Sustainable   Highly  expandable   Growth  sector     Bigger  profits   Strong  team   Recognised  Brand   Growth  record   Intellectual  Property     Multiple  Range:  Below  is  a  typical  guide  to  the  ‘assumed’  multiple  range  x  the  adjusted  profit.  The  profit  is   usually   expressed   either   PBIT   for   service   companies   or   EBITDA   for   capital   intensive   businesses   such   as   manufacturing.  The  table  assumes  a  debt  free/cash  free  balance  sheet  included  in  a  deal,  excluding  Freeholds.   Aspiration  value  should  always  be  sought  to  secure  transactions  beyond  the  multiple.         3.  Value  enhancement  strategy     Prior  to  sale  owners  should  be  looking  at  strategic  ways  to  increase  the  value,  not  only  through  the  level  of   profits,   however   also   through   addressing   elements   that   will   directly   impact   the   final   valuation.     These   can   include:     • Ensuring  steady,  recurring  and  forecastable  income.     • Eliminating  dependency  on  key  members  of  staff,  clients  and  suppliers.   • Ensuring   solid   systems   are   in   place.     Clean   accounts   and   balance   sheet   with   good   Management   Information  Systems   • Creating   strategic   long-­‐term   growth   plans.   Not   only   will   this   increase   value   but,   being   clear   on   your   alternative  strategy  creates  a  powerful  walk  away  position  to  leverage  negotiations  and  optimise  price.   • Ensure  your  website  represents  your  company  in  its  best  light.   • Consider  geographical  and  sector  diversification.  Businesses  should  aim  to  “own”  a  niche  marketplace.   • Ensure  all  legal,  tax  and  accounting  paperwork  is  in  order        
  3. 3.     Guide:  Valuations  and  selling  a   business  at  maximum  value         www.avondale.co.uk   Page  3  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.   4.  Timing  and  personal  financial  review       The   timing   of   the   deal   should   be   when   the   business   is   in   good   shape   but   ideally   still   growing   and   at   a   time   when   the   shareholders   have  reached  a  personal  cross  road.  It  is  vital  to   be   objective   as   many   a   deal   is   lost   when   the   shareholders’  needs  drive  the  timing  rather  than   what   is   right   for   the   business.   It   is   also   important  to  analyse  the  forecast  net  proceeds   versus   the   net   sale   income   you   will   receive,   versus  the  time  wealth  achieved  from  a  sale.  If   fast  growth  is  envisaged  seek  an  elevator/earn   out   deal   which   working   with   the   buyer   will   maximise  the  proceeds  over  time.     Costs:   Tax   on   any   capital   gain   you   make   will   probably   be   your   biggest   cost.   Currently   “Entrepreneurs’   Relief”,   an   Inland   Revenue   allowance,   allows   the   first   £10m   to   be   at   10%   per   executive   shareholder   owning   more   than   5%  for  more  than  a  year  in  a  qualifying       company.  The  relief  is  given  after  all  other  reliefs  and  allowances.  The  amount  of  the  reduction  depends  on   how  long  you  held  the  asset  (the  qualifying  holding  period),  and  whether  the  asset  was  a  business  asset  or  a   non-­‐business   asset.   Entrepreneurs’   Relief   creates   a   significant   argument   for   entrepreneurs   to   make   money   through   capital   gain   rather   than   through   ongoing   profits.   Sellers   also   need   to   allow   for   professional   costs   including   a   merger   &   acquisitions   advisor,   a   tax   advisor,   accountant   and   a   lawyer.   For   smaller   companies   professional  costs  are  usually  between  5-­‐10%  of  the  proceeds.  Some  of  the  costs  will  be  prior  to  the  sale.       Income   Vs   Capital:   The   diagram   below   further   assists   in   making   the   right   decision   as   to   when   to   sell.     It   highlights  income  vs  capital  considerations.    The  scenario  depicted  is  a  company  valued  at  £1m  based  on  a   multiple  of  4.    The  end  result  that  the  owner(s)  would  have  to  run  the  company  for  5.859  years  on  the  same   profit  levels  to  achieve  the  same  income  as  they  would  by  selling  the  company.    You  should  also  consider  the   fact  that  Capital  is  certain  whereas  future  income  is  uncertain.    A  certain  (capital)  £0.90  today  is  worth  more   than  an  uncertain  (income)  £1.00  tomorrow.     Income    (uncertain) Capital  (  certain)    Assumes  all  profit  stripped £250,000 £1,000,000    Assumes  multiple  of  4    -­‐  Corp  tax  @20% -­‐£50,000 -­‐£70,000    -­‐  Estimate  legal  &  brokers  costs    -­‐  Dividend  after  corp  tax@  25% -­‐£50,000 -­‐£93,000    -­‐  Assuming  Entrepreneurs’  Relief  at  10%     +£41,850    Interest  at  5%  for  1  year    Total  net £150,000 £878,850  Total  Net      No  of  years  earnings 5.859      Assumes  full  profit  strip  each  year          
  4. 4.     Guide:  Valuations  and  selling  a   business  at  maximum  value         www.avondale.co.uk   Page  4  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.     5.  Position  business  in  best  light   A  carefully  crafted  information  pack  will  drive  value  by  highlighting  opportunities  and  potential  synergies.    It   ensures  that  your  advisor  fully  understands  your  business  and  is  thereby  able  to  position  unique  benefits  to   each  interested  party.    A  good  data  pack  will  not  only  contain  current  and  historic  company  information  but   also  forecasts  and  financial  modelling  around  potential  synergies.    An  effective  data  pack  will  not  only  ensure   optimum  positioning  of  the  business  but,  as  all  information  is  prepared  in  advanced,  will  also  accelerate  the   entire  process.       6.  Research  and  create  competitive  environment   In  order  to  value  a  business  and  to  then  seek  to  exceed  this  it  is  essential  to  secure  the  right  buyers  in  order  to   create  competitive  bids.  In  depth  research  should  be  conducted  to  identify  these  potential  purchasers  using  a   combination  of  global  intelligence  tools  and  a  database  of  active  financial  and  trade  buyers.    A  business  in  an   auction  can  sell  for  more  than  200%  of  financial  forecasts.       Through  synergies  and  economies  of  scale  available,  the  business  will  be  worth  differing  amounts  to  buyers.     The  optimal  purchaser  is  one  who  has  a  ‘we  want,  we  need’  motivation  who  drives  their  own  shareholder   value  via  an  acquisition.  A  good  advisor  will  carefully  position  synergies  to  multiple,  interested  parties  utilising   financial   modelling   and   future   visioning   to   demonstrate   the   benefits   of   the   acquisition   on   an   international   basis.     7.  Negotiate  and  structure  the  right  Deal     Agreeing   an   aspiration   value   deal   requires   brinkmanship.   This   takes   understanding   of   the   other   side’s   motivators,  and  the  ability  to  “walk  in  their  shoes”.  A  good  lead  advisor  will  ideally  create  an  auction  to  drive   value   but   also   be   able   to   analyse   which   big   points   to   win   and   which   smaller   ones   can   be   lost   to   secure   optimum  terms.  This  is  best  achieved  in  a  non  adversarial  environment,  where  listening  creates  understanding,   but  with  very  clear  presentation  of  the  alternatives  and  key  selling  points.  Your  advisor,  ideally  who  will  have   been  involved  from  the  very  start  of  the  project,    will  lead  the  strategy  and  map  out  how  best  to  leverage  best   advantage  in  negotiations,  offsetting  weaknesses  and  playing  to  strengths.  Timing  and  effective  delivery  are   critical  to  create  a  win/win.       At   the   same   time   there   are   increasingly   complex   deal   structures   with   earn   outs   and   deferred   payments.   Considering  how  best  to  protect  these  positions  is  also  critical.  Your  lead  advisor  will  also  consider  the  tax   position   and   create   a   detailed   heads   of   terms   that   creates   clarity   between   the   parties   increasingly   the   likelihood  and  speed  of  a  completion  once  agreed.     8.  Project  manage  to  completion   A  good  advisor  will  orchestrate  all  the  parties,  create  a  timetable  and  manage  the  project  to  completion.  They   will  also  anticipate  and  circumnavigate  issues.  Deal  fatigue  or  worse  failure,  can  result  if  a  poor  dialogue  occurs   once  terms  are  agreed.  The  parties  need  to  continue  to  listen  and  aim  at  a  win/win  transaction.  Your  advisor   will  facilitate  this,  liaising  with  all  other  advisors  (legal,  tax,  financial)  through  to  successful  deal  completion.