SFA BUSINESS BYTES SERIES 2 BUYING OR SELLING A BUSINESS

Transcription

1 SFA BUSINESS BYTES SERIES 2 BUYING OR SELLING A BUSINESS 1

2 01 MAZARS CORPORATE FINANCE JOHN BOWE 2 Date

3 CONTENTS Introduce Mazars Corporate Finance Buying a business Clear focus on why? Financing Options Deal Structures / Due Diligence Valuations Selling a Business Timing / be prepared Corporate Buyers Private Equity Management BuyOuts Sale Process 3

4 Mazars Corporate Finance Global Network Irish team leverages Global Reach for client benefit 4

5 FULL SERVICE CORPORATE ADVISORY BUSINESS Disposal & Mergers Fundraisings Private & Public Equity Debt Advisory / Capital Restructuring Acquisitions 5 Management BuyOut 6 Valuations We focus on the SME Market 5

6 6 BUYING A BUSINESS

7 Buying a business have clear focus on why? Scale and growth are often the driving factors to engage in M&A Key reasons may include; getting access to a new customer base a new market export opportunity complimentary / new product offering diversification of product or service offerings People fit / company culture is important Having a clear understanding of the type of target from the start will put you on the right footing for a successful Acquisition. Successful Acquisitions work when fit is right 7

8 FUNDING OPTIONS FOR BUYING A BUSINESS Funding Options Pros Cons Retained Earnings Debt Financing Retain full control. It doesn't add to your debt profile or lower your profits with interest payments Retain full control. With appropriate structuring can be a cost effective option to finance business expansion. It can affect your working capital position Funding growth through retained earnings can be slow and you may miss business opportunities while you build up cash. Debt covenants and security arrangements will reduce flexibility Alternative debt providers more expensive but more flexible than traditional Banks. PE Investment Investment to accelerate business growth / acquisition finance Benefit from experience with other portfolio companies. Reduce control shareholders agreement & board makeup. Growth required to deliver 2x 3x return for PE 8

9 CURRENT SENIOR BANK LENDING MARKET New lending to the Irish SME is more accessible but remains challenging AIB, BOI and UB all actively competing for business. Typical lending criteria to the SME market includes: -3-5 year term; -Debt amortises over the term with very little refinance risk on maturity; -Max senior debt c. 3.0x 3.5x EBITDA with interest cover > 3x; and -Senior priced at circa 3.5%+ with arrangement fees. -Likely to include restrictions on Directors remuneration, capital expenditure and acquisitions. Banks all provide Invoice Discounting Facilities which can be a cost effective and less restrictive way to finance your working capital cycle or indeed expansion. Need to position business to get funding 9

10 ALTERNATIVE LENDING MARKET The Alternative Lending Market looking to fill the gap created by the traditional Banks reduction in risk appetite. Typical lending criteria to the SME -5-7 year term; -Debt amortization can be sculpted to facilitate further capital expenditure requirements; -Max debt c. 4.0x 4.5x EBITDA with interest cover > 1.5x; and -Debt pricing varies and can be up to 10%+ with arrangement fees. Alternative Debt Providers tend to impose less onerous financial covenants. Option to use an Alternative Lender in the first instance and then refinance with a traditional bank -With this in mind Alternative Lenders can and do impose early repayment/ exit fees. Alternative Debt providers will make quicker decisions 10

11 ALTERNATIVE DEBT LENDING MARKET Alternative providers active in Irish Market Focus on commercial businesses rather than property Provide between 1m - 20m (plus) in Debt 11 on of 12%-14% payable.

12 OTHER SOURCES OF FINANCE FOR BUSINESS EXPANSION Strategic Banking Corporation of Ireland (SBCI) AIB and BOI have SBCI loan funding Finance Ireland Leasing has a 50m fund available for SBCI leasing/hire Purchase Merrion Fleet is a new fund available for SBCI Fleet Finance Employment Incentive Investment Scheme (EIIS) is a Tax Relief incentive scheme which enables investor to deduct the cost of their investment from their total income for income tax Peer to Peer lending Lenders propose the sums and interest rates they re prepared to loan and borrower ends up paying the average of all successful offers Linked Finance Grid Finance 12

13 DEAL STRUCTURES / DUE DILIGENCE Key to success - retain what makes that company tick: Customers / Contracts Employees Deferred Consideration Structure Deal with a deferred consideration Ensure future earnings are reliable Lock in Key management Look to incentive key staff Share Option scheme Bonus structure Communicate with new staff and customers as early as possible highlighting the benefits to them from this transaction Due Diligence is important Financial, Tax, commercial, Tech 13

14 14 VALUATION METHODS

15 Valuation methods Most common valuation methods use multiple approach Revenue Multiples Earning Multiples Quoted trading Multiples vary by Sector Precedent transaction multiples are used to sense check Private company discounts apply Use enterprise-value multiples PE multiples are affected by capital structures Adjust EV and EBITDA for non-operating items What s a Business worth what someone is prepared to pay for it 15

16 Valuation Factors Business Driver Customer Relationships Revenues / Profits Growth Potential Management Team Leverage Combined Business Synergies - Costs Synergies - Revenues New Sales Channel / Product New Markets / Reach Competitive Process Create competitive tension Position business for target buyer Stick to process Competitive tension to maximise value 15

17 17 SELLING A BUSINESS

18 Timing todays backdrop Economic growth - GDP forecasts 6% and 4% in 2015 & 2016 USD + GBP exchange rates extremely favourable Positive for Exporters / Acquirers of Euro Assets Corporate Balance Sheets Strong return cash or drive growth? Private Equity under invested Will target growth potential Low interest rates / Leveraged deals are coming back Succession / retirement issues in privately held family businesses MBO / Trade Sale Timing - Environment good to consider options 18

19 You only sell once so prepare Have a business plan with 3 year forecasts - present strong financial information / KPIs / competition Look at client concentration - Have you over-reliance on key customer Manage operations efficiently - Improve bottom line Retention of Key Employees - Incentivise to stay with business post a sale Management of Succession - Is business too dependant on founders 19

20 Corporate Buyers Positives: Actively looking for growth through acquisition No finance risk as Corporate balance sheets are strong Synergies - so should pay higher multiples However can slow down in due diligence and time kills deals Other considerations: Valuation may depend on future earnings deferred considerations Escrow Provisions Significant amount of management time during process 20

21 Private Equity Type Solutions Growth Capital Deleverage Roll-over from key management Shareholder Organisation Acquisitions 21

22 Characteristics of SMEs attractive to Private equity Cash Generation 500K + Strong Management Team Growth opportunities in your sector Organic or Acquisition Exporter or opportunity to export Irish market small If Domestic only - be a top player in your sector Companies with the above will be attractive to PE 22

23 Private Equity Irish Operators Funds above have c. 600m + of equity Pick partner which is a fit for you and can add value not just cash 23

24 Management Buy Out ( MBO ) be prepared Establish Feasibility - Management should not pursue unless they can establish at the outset that there is a strong probability of successfully concluding a transaction Before making any approach to the Vendor need to know: 1. Likelihood of achieving financial backing 2. Maximum purchase price likely to be fundable 3. Outline structure of the deal Prepare a detailed company valuation and compare to Vendor s price expectation Prepare outline Business Plan for transmission to prospective funders Identify the Exit plays funders will not invest unless they can get out Good Advisor needed for MBO to succeed 23

25 Sale process 5-6 Months Phase 1: Pre Sale Initiatives 4 weeks Prepare a qualified list of suitable prospective purchasers. Prepare a teaser document. Assess acquisition appetite. Preparation of Information Memorandum. Phase 2: Execution 8 weeks Formal approach to prospective purchasers. Ensure all potential prospective buyers are contacted with teaser and in turn, Information Memorandum. Maintain a strict offer deadline to generate competitive tension. Evaluate first round offers received. Phase 3: Execution continued 4 weeks Choose short list of preferred purchasers. Organize management presentations. Add additional information to the online data-room. Receive second round offers. Choose preferred purchaser, awarding a very short exclusivity period. Keeping two under-bidders warm in the background. Phase 4: Manage to completion 4 weeks Co-ordinate conclusion of due diligence by preferred purchaser. Negotiation of terms consideration, earn-outs, reps and warranties. Completion of relevant legal documentation Share Sale Agreement. 25

26 Conclusion Preparation - Whether buying or selling a business be prepared Finance is available for right business but plan your approach to financiers Private Equity can be an option for MBO, Shareholder reorganise or funding growth / acquisitions 25

27 02 OVERVIEW OF TAXES GERRY VAHEY 27 Date

28 Taxation - Selling DISPOSAL SUBJECT TO CGT / 20% / 33% TAX MITIGATION RETIREMENT RELIEF - 500,000, 750,000 SPOUSE WORKING IN BUSINESS 28

29 Taxation - Selling HOLDING COMPANY PARTICIPATION EXEMPTION TAX FREE MANAGEMENT INVOLVEMENT - Free or discounted shares - Taxation implications - Clog Schemes 29

30 Taxation Consequences Disposal DUE DILIGENCE WARRANTIES INDEMNITIES DISCLOSURE 30

31 Taxation - Acquisition FUNDING HOLDING COMPANY Hold Company DEBT Trading Company 100% Dividends FUND ACQUISITION OUT OF PRE-TAXABLE PROFITS 31

32 Capital Gains Tax Retirement relief Relief applies where the disposal is made: - By an individual who is - Aged 55 years or more at the time of the disposal or - Revenue may extend the relief to someone under the age of 55 who is terminally ill And the disposal is: - Of a qualifying asset which is - Owned by that individual for the qualifying period. Companies and trusts do not qualify for the relief. Relief applies automatically where the conditions are met No requirement to actually retire!! Watch single member companies & husband / wife scenarios 32

33 Disposal of shares in a Family company 33 Qualifying family company Individual must hold either: a) A minimum of 25% of the voting rights, or b) A minimum of 10% of the voting rights where the family own 75% of the voting rights Family company must be a trading, farming or holding company of a trading group (does not include investment companies or rental investment companies) Family is the individuals spouse/civil partner, relatives of the individual and relatives of the individual s spouse/civil partner Relative is a brother, sister, ancestor or lineal descendant Qualifying shares Individual must have owned for at least 10 years Individual has been a working director for at least 10 years and A full time director working director for at least 5 of those years

34 Disposal of business or a farm (to a child) Full relief for intra-family transfer of certain business and farming assets where the individual making the transfer is aged 55 to 65. Individual aged 66 or over makes a transfer an upper limit of 3 million on the relief will be imposed. The value of disposals made by such individuals will be aggregated for the purpose of the 3 million limit. Relief is withdrawn if child disposes of the business or farming assets within 6 years of receipt.

35 Disposal of a business or a farm to a third party Transfer between non-family members where the individual making the transfer is aged 55 to 65 is subject to the existing exempt limit of 750,000. Individual aged 66 or over is subject to a reduced exempt limit of 500,000. If consideration is in excess of the above thresholds, marginal relief may apply. 35

36 Case study retirement relief Sean is 55 years of age and has worked as a full time director for 15 years of ABC Limited. He owns all the shares in the company and he sells them to a 3rd party for 1,000,000. The sales proceeds are above his 750,000 threshold and therefore he will only be able to claim marginal relief in respect of this sale. Alternative If his wife, Sinead, had owned 50% of the shares and has attained the age of 55 and has also worked as a full time director for the company for more than 10 years, no CGT would have been payable as each would have received proceeds of 500,000, which is below their individual thresholds. 36

37 Case study retirement relief John is 55 years of age and has worked as a full time director for 15 years of ABC Limited. He owns all the shares in the company and he agrees to sell them to a 3rd party. However the third party is unable to pay for all the shares upfront and therefore John enters in the following share sale arrangement: Share sale 1 50% of the shares for 350,000 Share sale 2 26% of the shares for 182,000 Share sale 3 24% of the shares for 168,000 Do the above transactions qualify for retirement relief? Share sale 1 Yes, as John owns 100% of the shares Share sale 2 Yes, as John owns 50% of the shares Share sale 3 No, as John owns only 24% of the shares 37

38 Business Relief Taxable value of relevant business property can potentially be reduced by 90% Differing categories of property may qualify as relevant business property: Unquoted shares or securities of an incorporated company carrying on a business.. Certain Land, machinery or plant used by a trading company for the purpose of the business, provided the company was controlled by the disponer. Quoted shares or securities of a company carrying on a business subject to certain conditions being satisfied. 38

39 Business relief Minimum period of ownership 5 years for a gift and 2 years for an inheritance Ownership by the disponer's spouse will count for the purposes of satisfying this requirement Quick Succession Relief Clawback of relief: Period of six years after the valuation date. Reinvested in replacement business assets within a period of one year. Development land No requirement that the relevant business property be carried on wholly or mainly in the State 39

40 Capital Gains Tax Entrepreneur Relief Applies from 1 January 2016 Reduced CGT rate of 20% of gains up to EUR1m. Balance of gain is taxed at 33%. Applies to trading assets, shares in a trading company or shares in a holding company which holds 100% of a trading company. Shareholder must hold at least 15% of the ordinary shares for at least 3 years ending on the date of the disposal. Must be a full time working director for at least 3 years ending on the date of the disposal Relief is to be welcomed however: - UK Entrepreneur Relief still far more beneficial. GBP10m at UK CGT of 10%. - Is 15% shareholding requirement too prohibitive for start ups? 5% shareholding requirement in the UK. 40

41 41 Client Experience

42 46 Q&A