This seminar discussed how to maximize value when exiting a business. It covered planning early for exit, grooming the business to attract purchasers, finding a strategic purchaser, optimizing timing, using the right legal process, minimizing taxes, and preventing value leakage. Attendees were advised to start planning years in advance, get financial and legal affairs in order, and take appropriate advice to sell at the optimal time and price.

1. SEMINAR – FRIDAY 11 JUNE 2010 HOW TO SELL YOUR BUSINESS FOR ITS MAXIMUM VALUE

2. Agenda Presenters The disposal process How do you maximise value on exit? Questions & answers

3. Presenters Dave Wilson Corporate Finance, Booth Ainsworth LLP 0161 475 3911 [email_address] Paul McKay Taxation, Booth Ainsworth LLP 0161 475 1559 [email_address] Jeremy Orrell Corporate Lawyer, SAS Daniels LLP 0844 391 5829 jeremy.orrell@sasdaniels.co.uk

4. The disposal process Understand shareholder objectives Valuation Define likely exit routes Timetable Planning & Grooming Research & Preparation Marketing Negotiating Due Diligence Completing the deal Exit strategy & tactics Ready to market Appetite tested Exclusivity granted Detailed negotiation Sale completed Address value drivers Purchaser research Prepare sales memorandum Refine exit strategy Make contact and assess interest Distribute sales memorandum Initial meetings Receipt of indicative offers Select short-list Further information provision Meetings Second round bids Preferred bidder selected Detailed investigation Financial Legal Commercial Legal documentation Final negotiations

5. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

6. 1. Planning for exit Often a once in lifetimes opportunity Exiting is not a game of chance Planning and grooming is often necessary Significantly impact price achieved by careful planning Iterative process Three stage exit strategy review Adviser will use findings to determine the strategy and tactics to adopt

7. 1. Planning for exit . . . contd 2. Will my business be attractive to purchasers? 3. How much is my business worth? 1. What are the possible exit routes?

8. 1. Planning for exit . . . contd High level review Trade sale Financial Management Equity release Flotation 1. What are the possible exit routes?

9. 1. Planning for exit . . . contd 2. Will my business be attractive to purchasers? 1. What are the possible exit routes? Assess business through eyes of a purchaser Pre-sale due diligence Not just a financial review People Contracts Customers Value drivers Forecasting accuracy etc etc etc

10. 1. Planning for exit . . . contd 2. Will my business be attractive to purchasers? 3. How much is my business worth? 1. What are the possible exit routes? Desk top valuation Typically earnings multiple Balance sheet considerations Future vs historic Gives a range of likely values Sets a base expectation . . . but key is to find the right strategic buyer Low and high - can be 2x – 3x gap CASE STUDY – Engineering Plastics Does value meet requirements? Current climate

11. 1. Planning for exit . . . contd 2. Will my business be attractive to purchasers? 3. How much is my business worth? 1. What are the possible exit routes? CONCLUSION Clarity on likely exit routes Identified factors which need addressing prior to exit Understand likely value of business Determine deal tactics and approach

12. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

13. 2. Grooming your business Is any grooming required? Two typical triggers Current value not meeting owners aspirations Exit strategy identified a number of potential pitfalls which may deter a purchaser Timing can vary widely Games developer – 2 years!! Print management - immediately

14. 2. Grooming your business . . . contd Profit enhancement Increase turnover Review margins Overhead reductions Earnings multiple enhancement Quality of earnings Build key value drivers Reduce reliance on key customers and suppliers Prove business has growth opportunities Tie in key employees, customers, suppliers etc

15. 2. Grooming your business . . . contd Balance sheet improvements Reduce working capital Timing of capital expenditure Sale & leaseback of major assets? Address potential deal breakers Quality and reliability of financial information Budgets realistic and support price expectations Onerous contracts Clean up contingencies General good housekeeping – records, regulation, health & safety etc

16. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

17. 3. Find the strategic purchaser Get pro-active Your knowledge Desk-top research Trade sale Competitors Overseas Don’t forget your NOB’s

18. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

19. 4. Optimise timing Maximum shareholder value near top of the curve Best time = an art not a science Internal timing – you can influence External timing – monitor and react Current climate Time X X Exit towards top of value curve Value Value drivers

20. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

21. 5. Adopt the right process & tactics One size doesn’t fit all Tight process vs flexibility Current environment Adviser should ascertain the right tactics CASE STUDY Accident Repair Haulage

22. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

23. 6. Minimise your tax bill Background – Tax Rates Personal Capital gains tax – 18%, but attractive rates for disposal of business assets Entrepreneur’s Relief 10% on life time gains of £2m Government have indicated that the rates for the sale of business assets will remain attractive Income tax 40% on incomes of £37,400 to £150,000 but note 60% band 50% on incomes over £150,000 Corporate 21% on profits up to £300,000 29.75% on profits between £300,000 and £1.5m 28% on profits over £1.5m

24. 6. Minimise your tax bill . . . contd Tax Rates – The Implications Sell the company – capital gain – tax rate 10% / 18% Company sell the assets – corporation tax at 21% / 29.75% / 28% But then… how do you extract the post tax “profits” Dividends, tax costs 25% (40%) 36.11% (50%) Giving an effective overall tax rate of 40.75% - 54.00% Liquidate the company, giving rise to a capital gain, tax cost 10% / 18% Giving an effective overall tax rate of 29% - 37%

25. 6. Minimise your tax bill . . . contd Sell The Company / Sell The Trade And Assets Tension between the needs of the purchaser / vendor Typically purchaser will want to buy the assets Enhanced capital allowances Tax relief for acquired goodwill No history Vendor will want to sell the company Result A “horse-trade” but need to understand the issues

26. 6. Minimise your tax bill . . . contd Deferred Consideration (Share Sale) If a fixed part of the consideration is deferred the final amount is taxed (capital gains) in the year the contract is finalised Same rule applies if the consideration is conditional upon a specific event Cash flow issues Computation only adjusted if part of the consideration becomes irrecoverable

27. 6. Minimise your tax bill . . . contd Earn Outs Typical structure Fixed sum on completion Further sum based on a formula e.g. share of profits for next three years Continue as an employee for next three years Tax treatment of the earn out element Unquantifiable further sum regarded as a chose in action Value of the chose in action treated as part of the consideration for the share sale Gain qualifies for Entrepreneur's Relief Further gain when receive deferred consideration But no Entrepreneur’s Relief Care needs to be taken to avoid characterising the deferred element as some form of bonus, since HMRC may seek to tax as employment income

28. 6. Minimise your tax bill . . . contd Consideration In Shares Share for share rules means that the capital gain on the disposal can usually be deferred New shares treated as being acquired at the same time, and same amount as the old shares Election can be made to opt out of the share exchange rates This means that the benefit of Entrepreneur's Relief can be ‘banked” When part cash, part shares, consideration pro-rated But consider the cash flow issue

29. 6. Minimise your tax bill . . . contd Consideration in Loan Notes Overview Where the purchaser satisfies part of the consideration by issuing loan notes, an appropriate part of the vendor’s gain is deferred until the loan note is redeemed. Qualifying Corporate Bond Capital gains based on the seemed disposal of the shares at the time of the exchange is held over Will become payable when the QCB is paid or redeemed ER is deducted in arriving at the gain held over Potential problem if QCB not redeemed in full Non Qualifying Corporate Bond Treated as a share reorganisation (share for share) NQCB inherit history of original shares May not obtain ER on redemption However, can “bank” benefit of ER by relevant election

30. 6. Minimise your tax bill . . . contd Pre sale due diligence Will look at the company’s tax affairs for the last 6 years: Corporation Tax VAT PAYE /NIC Benefit of “good housekeeping” Warranties & indemnities

31. How do you maximise value on exit? Planning for exit Grooming your business Find the strategic purchaser Optimise timing Adopt the right process & tactics Minimise your tax bill Minimise value leakage through legal process

32. 7. Legal process - minimise value leakage 1 - What Is The Legal Process? Not just tick boxing Heads – the “road map” – exclusivity & confidentiality Due Diligence Identify any issues Is it worth proceeding? Sale Documentation “ War and Peace” C. 40 documents

33. 7. Legal process - minimise value leakage 2 – How Can This Affect Value? “ Warts and all?” Warranties and indemnities: Retentions Price reductions Claims Delay: Price chipping Goes off 3 – How Can Value Leakage Be Avoided? Pre sale due diligence Get your “house in order”.

34. 7. Legal process - minimise value leakage 4 – Get House In Order: Statutory Books: Where are they? Are they accurate? Share Certificates: Where are they? Have they been issued? Properties: Leasehold or freehold Term – break provisions Conditions Rent - reviews

35. 7. Legal process - minimise value leakage Employment: Are there any contracts/terms? Any issues – grievances, disciplinary, claims? Contracts: Collate Sort out any Issues Continuation/transfer Licenses and Consents: Collate Sort out any issues Continuation/transfer

36. 7. Legal process - minimise value leakage 5 – Address Potential “Showstoppers”: Change of control restrictions - obtain Key employees: Compete – introduce restrictive covenants? Notice periods - extend? Claims – settle? Tax problems – settle Lease – survey Contracts – document Poor Quality due diligence – spend time on this

37. 7. Legal process - minimise value leakage 6 – Objective: Legal Process is Completed Quickly Without Issues Which Could Derail The Transaction or Reduce Value

38. Summary Focused on key areas that help to maximise value Make sure you properly plan and prepare Get your house in order Strategic purchaser Optimise timing Process & tactics Minimise tax bill Prevent value leakage Selling is not a game of chance Start early & take appropriate advice

39. Questions and Answers