Preparing your company for sale

Transcription

1 Preparing your company for sale A Guest Article by Robin Stevens July 2017

2 How to become investor ready If you decide to sell your house or your car, or some other valuable asset, you would normally make the effort to present the item to buyers in the best possible light and try to remove, improve or replace, where possible, characteristics or features that might detract from its value. Teenage children s bedrooms and garages come to mind, if you re able to tell the difference. This logic should be followed through to the sale of the potentially highest value asset that many people will ever own: shares in a family or owner-managed company. On the assumption that you should only try to sell the same company once (to do otherwise may not be strictly ethical), our advice is to try to maximise this value by considering the following steps, each aimed to enhance either the quantity or the quality of profits within the business. Often buyers are more attracted to the quality of the profits, i.e. how sustainable the profit is and how exposed the business is to risk and uncertainty, rather than the absolute numeric value of results achieved. They will generally set their own valuation of a company accordingly. 1. Build a strong and complete management team Although some new owners will install their own managers, most purchasers would expect the business to run successfully without the need to introduce a fresh management team. If a business can only flourish and grow with the continuing involvement of the founders, then the price that a buyer will be prepared to pay will be lower. Furthermore, the sellers may have to be prepared to stay with the business for an extended period to allow a handover of business relationships and goodwill. 2. Construct a scalable business model, growing organically or by acquisition A business model that has reached the extent of its apparent growth potential is going to limit the price that a buyer will be prepared to pay. A similar situation will arise if the business has shown flat turnover, profits and margins over a period of time. Ideally, a business will show an upward trend of activity and profitability and will be seen to have the scope for future organic and, perhaps, acquisitive growth. 2

3 3. Move to higher value and higher margin products It is sometimes difficult to discontinue or turn away lower margin activities, on the grounds that all profit is welcome and contributes towards covering overheads. While this is often true, a purchaser is very likely to be more interested in a business with higher margins and spare capacity, rather than one where margins are tight and production is at full stretch. As mentioned earlier, often the quality of the profits generated by a business is more important than the absolute amount. 4. Build barriers to entry based on technical excellence, market knowledge or scale Businesses with a clear and sustainable competitive advantage are inherently more valuable than those where price is the main point of differentiation from competitors. Barriers to entry can come in many forms, but technical superiority protected by patents, licences, know-how or other intellectual property will likely have a significant positive effect on the value of a business. Similarly, high profile brands, strong customer relations, an extensive and long-established distribution network and a strong and incentivised workforce can add significant value to the right buyer. 5. Establish robust and reliable accounting and management information systems A business must be able to prepare regular and reliable financial information to enable management to take informed decisions on its future direction and to safeguard its underlying assets. Any evidence that the accounting records are incomplete and the financial statements are inaccurate will deter most potential buyers and will depress the sale price achievable. Private company owners often do not see the benefit of employing an experienced and perhaps more expensive in-house accountant. However, in the context of preparing a company for an eventual sale, failure to properly resource the accounting team can prove to be an expensive economy. 6. Undertake capital restructuring or reorganisation Some private businesses have not been formed into a group ownership structure: rather, they are held separately under common shareholdings. This can work well and provide flexibility for a family or owner-managed 3

4 business. However, most buyers would normally prefer to acquire one holding company rather than a number of perhaps disparate companies operating in a number of different jurisdictions. A formal group structure can also instil a level of control and governance that would be seen positively by most potential buyers. 7. Consider share incentives In some companies, the senior management team have effectively taken over the running of the business from the founding shareholders and they often hold the effective commercial goodwill of the business. In these cases, it is important to ensure that the senior staff have a suitable incentive to be receptive to the sale and to cooperate with the new owners. This might be achieved by a gift or an award of shares prior to the sale, or the establishment of a profit-linked incentive arrangement that will suitably reward senior staff and keep buyers relaxed regarding the sustainability of the business post the sale. 8. Check that you have regulatory approvals Before seeking to market a business to potential buyers or investors, it is vital to ensure that the business has all the regulatory approvals and permissions required in each of the jurisdictions in which it operates. This might seem like a basic point to address, but it is relatively common for companies to stray away from an original business model or operational jurisdiction without necessarily realising that approvals are required from national, state or provincial authorities. For a privately held company there might be no immediate adverse consequence for non-compliance. However, a buyer is likely to assume the ongoing potential exposure from non-compliance, and many would expect the purchase price to reflect this risk, actual or contingent. 9. Dispose of non-core activities and assets Owner-managed or family businesses will often evolve and diversify, and may have a number of activities and product offerings, some much more profitable than others. In some situations, assets will have been acquired for a mixture of business and private use, and costs of a largely personal nature may be incurred within the business. Prior to a sale it is advisable to review and, where possible, to rationalise existing activities, and dispose of non-core assets and less profitable parts of 4

5 the business. This should simplify the sale process and may increase the value of the underlying business. 10. Identify strategic acquisitions and mergers Where a business has the management capacity to undertake the task, it is often helpful to undertake and integrate successfully a strategic or opportunistic acquisition. This may not be relevant in cases where a business can grow consistently organically. However, the ability to successfully manage and particularly integrate an acquisition could add significant value to a business and its management team. 11. Adopt International Financial Reporting Standards (IFRS) or local equivalent In the context of a potential sale of all or part of a business, it is important that the company s historical financial information has been prepared using accounting standards that are standard within the industry. This is particularly important in the case of policies adopted for the recognition of income, the treatment of any development expenditure and the valuation of intangible assets. These and other policies should be reviewed at an early stage to ensure that they are not going to have an impact on the company s valuation. 12. Comply with international audit standards In many jurisdictions, there is no requirement for an external audit of the historical financial information. However, most buyers will require that at least the latest financial statements have been subject to independent audit. We would therefore recommend that this audit is carried out well in advance of a planned sale, to ensure that the financial information will stand up to external scrutiny during the purchaser s or purchasers due diligence process, and to avoid potential delays in the overall transaction. While this does not mean that further issues won t be identified by a purchaser during due diligence, it does reduce the risk that any such issues will be material to the transaction or the valuation. 13. Conduct a review of tax compliance and planning issues Most private companies are not run with the intention of maximising taxable profits and, as such, there may be a risk that historic tax compliance has not been complete. Again, to avoid potentially destabilising delays during a sale 5

6 transaction, it is advisable to deal with any historical tax non-compliance issues before the sale process begins. Tax planning can also be important for the vendors to ensure, where possible, that the sale is structured in the most efficient lawful way particularly in the case of an international group, perhaps with shareholders residing in different jurisdictions. Early stage tax planning is essential. 14. Reduce dependence on particular customers, products, suppliers or staff De-risking the business goes to the core of the pre-sale or indeed a pre- IPO planning process. Buyers and investors will normally attribute a much lower earnings multiple to businesses that are dependent on a small number of transient high-value customers, have a limited number of products or a restricted supply chain, are over-reliant on potentially mobile senior employees, or where the ownership of the main technology is uncertain. In many cases a business could not be sold with one or more of these issues in place. It is therefore important to reduce, where possible, any dependencies within a business that may adversely affect the company valuation, or which in the extreme could restrict or prevent a sale. 15. Review terms of trade and strengthen credit management Most companies get into financial difficulty or ultimately fail from a shortage of cash rather than from a loss of profits, and therefore the management of cash and the control of a company s terms of trade with customers and suppliers is crucial. It will not matter how profitable the products are: if suppliers are paid within 30 days and customers take 90 days to settle the invoice, conversion will be poor and, as the business grows, it will require an increasing and probably unsustainable level of cash. Accordingly, balanced terms of trade with customers and suppliers, combined with an effective credit management process, should significantly increase the attractiveness and the value of the business to a purchaser or investor. 16. Appoint experienced advisers Selling a business is normally a once-in-a-lifetime action and it is therefore vital that the shareholders receive informed, objective and independent 6

7 advice, both before and during the sale process. Planning is a key element in the success of a project that might take more than a year to complete, and shareholders need the comfort of knowing that they have support from suitable experienced legal, financial, taxation and commercial advisers, increasingly with cross-border capabilities. 17. Decide which route to take The route to an eventual sale may not be straightforward, and in certain cases a significantly higher value may be achieved by first undertaking an IPO to raise funds to finance growth and to raise profile with customers, suppliers, investors and future potential buyers. The IPO process should introduce systems and controls that will make the business attractive to a wider range of acquirors. Summary The preparation issues discussed above are general in nature. Every company should be assessed separately as part of a specific pre-sale or pre-investment action plan. While it will not be possible to completely re-engineer a business, it should be possible to address obvious issues that might detract from a company s attractiveness, enhance those attributes that should create value, and reduce the risk of unexpected delays or issues arising during the sale process. I have purposely referred to valuation in comparative terms rather than the specific process, as, again, every company is different and every purchaser is likely to have a different perception of a business and the future value it expects to achieve from the purchase. However, if you can minimise the risks and maximise the potential synergies, the impact on the ultimate valuation is going to be positive. Robin Stevens Head of Capital Markets Crowe Clark Whitehill LLP Disclaimer of liability: Nothing in this article constitutes legal advice. Always consult a suitably qualified lawyer on a specific legal problem or matter. The writer, Crowe Clark Whitehill LLP and TCii Strategic and Management Consultants assume no responsibility for information contained in this article and disclaim all liability in respect of such information. If you would like more information on any of the points covered in this Guest Article, please contact TCii on