M&A – Is your company ‘sale ready’? How to prepare for a sale or an exit

In most cases financial or commercial reasons are the key motivations behind selling a business or planning an exit. That said, in a private limited company / owner managed business scenario, there are likely to be other important non-commercial considerations, such as retirement, desire for new ventures or even ill-health, which can be relevant in a sale or exit decision. The underlying reason for a sale can have a significant impact on the negotiation process and it is therefore key to seek professional advice at the earliest possible stage.

Getting ready for the sale of a business

Appoint transaction ‘project team’

Experienced professional advisers should be appointed to undertake a review of the business and to assess whether a sale is feasible. This process may include accountants/tax advisors, lawyers and corporate finance advisers. It is important for any chosen advisers to understand the seller’s rationale for selling the business, and to identify the seller’s key commercial objectives. These advisors will form the transaction ‘project team’ and will support you throughout the sale process.

Establish marketability

The initial review process is a useful opportunity to identify and highlight areas of the business which may prevent a sale or prove to be unattractive to a buyer. One of the best ways to do this is to undertake a rehearsal due diligence process, where you evaluate your business from a buyer’s perspective, this can help identify and mitigate potential issues. Once identified, remedial action can be taken pre-sale to ensure that the business is marketed in its most attractive form.

Valuation

In assessing the potential sale price of the business, lead financial advisers will usually base the price on a multiple of the earnings of the business or a net asset valuation. They will then use their experience and knowledge of the market / sector to adjust the base price upwards or downwards to reflect various matters, from potential cost savings, to the benefits available through market customer synergies. As part of this process, the financial advisors can assess the business’ financial records to ensure that they are up-to-date and accurate which will be attractive to potential buyers, and which will in turn promote confidence in the deal.

Sale strategy and structure

It is important to formulate a sale strategy at an early stage. The key elements of the sales strategy are the method of sale (such as private negotiation or by auction) and the structure of the sale (i.e. sale of shares or sale of assets).

Key considerations that are likely to influence whether the sale is to be structured as a share sale or an asset sale are issues such as liabilities, tax and third party approvals.

A share sale involves the buyer acquiring the shares of the company that owns the target business or assets. The company continues to operate the business and it is only the owners of the shares that will change. The alternative approach is to sell each of the individual assets that make up the target business.

A share sale and an asset sale are two fundamentally different structures. If shares in a company are sold, all its assets, liabilities and obligations are acquired. If assets are sold, only the identified assets and liabilities that the buyer agrees to purchase are acquired.

A share sale is likely to be more tax advantageous to a seller. Conversely, an asset sale with often be more tax efficient for a buyer.

Prepare pre-transaction documents

Once a buyer has been found, a confidentiality agreement (also referred to as a non-disclosure agreement) should be drawn up and entered into as soon as possible. This is in a seller’s interest, as it imposes a duty of confidentiality on the buyer in respect of confidential information concerning the business, prior to information being made available to the buyer as part of the due diligence stage and pending formal conclusion of the acquisition agreement.

It is also common for the key terms of a transaction to be set out in Heads of Terms, or sometimes referred to as a Letter of Intent. Heads of terms are usually signed at an early stage of a deal before detailed due diligence is undertaken by the buyer. Heads of Terms can be useful to flush out key commercial and financial issues relating to the parties and the target business.

The importance of seeking professional advice early when selling a business

Preparing your business or company for sale is an important step to ensuring a smooth and successful transaction. The key is to seek professional advice at the earliest possible stage. This will enable the seller and advisers to plan the sale process fully and identify any issues in advance. This proactive approach should be rewarded in terms of both a smooth sale process and a better deal overall.

Our Corporate M&A team has extensive experience of acting in business sales. Please get in touch for more information.