You are in your office on a Monday morning when the phone rings from one of your biggest clients. “I’ve had an approach to sell from X, one of our biggest customers, and they would really like to buy our business. They would like me to stay on in the business or I can leave immediately, whatever I want to do.” The client is very flattered as he had not been looking for a buyer and didn’t think anyone would be willing to acquire it.
You arrange to meet to discuss but you need to assess what is the best course of action for the client.
We have prepared the attached checklist to help figure out whether or not the client is ready to sell. The questionnaire should help identify the client’s readiness to sell. Possibly, with some preparatory work, you can improve the client’s score and increase the likelihood of a sale.
Generally we find companies aren’t prepared for unsolicited offers, and owners need to prepare for a sale two to three years in advance to be ready.
A sale may be possible, but the consideration is likely to be linked to future performance and weighted in the buyer’s favour.
We have used the checklist with clients to help them identify improvements they can make to the business to add value and over two to three years they have improved their prospects of an exit.
You also have to consider how to value the business in question. While valuations normally are linked to the profitability of the business, you need to consider future capital expenditure demands, dependency on key customers or suppliers, strategic position and what is the maintainable profit of the business taking a market rate salary into account for the shareholders in the company who may underpay or overpay themselves depending on their personal circumstances.
You should also consider whether the buyer’s plan to employ the shareholder/manager or facilitate their departure is most appropriate in the circumstances. For example, if the buyer happens to be a private equity firm, is there sufficient experienced personnel within the business who are capable of running it without the owner, or will the equity firm struggle to cope? If the consideration is linked to their performance post acquisition, then this is a concern. Similarly if the owner/manager will struggle to fit into a Corporate environment then seeking a buyer who can facilitate an exit is best.
Assuming your client wants to pursue the interest, you need to consider how best to approach it. Below we have compiled a checklist which will help you figure out some of the most important questions that will need to be answered.
Checklist - Are you ready to sell?
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Question
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Score |
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1
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Is the owners remuneration for the business at market rate? If not you need to calculate an adjusted profit figure to show what the maintainable levels of profit are. Other non-recurring items should also be adjusted for. |
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2 |
Is there financial information available to calculate the maintainable levels of profit to appraise an offer or value the business. |
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3 |
How consistent has performance been over last 3 years and can maintainable profits be identified? |
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4 |
What is expected performance for next 12 months like? |
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5 |
Are there any supplier or customer dependencies in the company? |
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6 |
How appealing is the company to potential buyers? |
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7 |
Can the management team run the business without the owner? |
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8 |
Has the company clear title to all business assets and security of tenure in its premises |
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9 |
Can the cashflow needs of the business and surplus cash be identified? |
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10 |
Will the owner be able to maintain their lifestyle using pensions and consideration for the foreseeable future? |
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Give the company marks from 1 to 10 with 1 – Very Poor, 5 – Reasonable and 10 – Excellent
Owners should look at means to improve their score in each of the 10 categories.
Download the PDF Checklist here.
While many entrepreneurs feel they can handle any issues themselves, it is best to have somebody accompany them in the sales process to ensure both you and the client have a full understanding of what the potential buyer is proposing. The client may want a portion of the consideration to be paid upfront but the right questions need to be asked to ensure what exactly is proposed and assess whether the buyer has the funds and capability of doing the transaction. Is the buyer just engaging in a tyre kicking process and are they likely to stick to the price or re-negotiate after Due Diligence.
While logic suggests that an unsolicited offer undervalues a business, it is often possible to structure such an approach to minimise the risk of the sale falling through and facilitate a smoother sales process which actually result in a higher price than a competitive sale would obtain. In a larger practice, general practitioners are expected to bring in a Partner with M&A experience when a client receives an offer. General Practitioners often don’t have such a Partner available to them and its worth considering whether to seek assistance from somebody who does have that experience to assist in the process.
If you require assistance in preparing a business for sale you should contact me at http://www.cantwellcf.ie/
