When auctioneers know a property is likely to be of interest to a number of parties, they seek to sell the property by auction in order to get all parties bidding in a competitive process. The winning bidder is committed to paying over a 10% deposit and runs the risk of losing that deposit if they fail to complete the sale. This also frontends the due diligence process and means the seller will do all they can to complete.
In a typical sale of a business by either the sale of shares in a company or an asset sale, a buyer can withdraw from the sales process at any time until the contract is signed and the consideration is paid over. Similarly the consideration is often linked to the future performance of the company and the seller runs the risk that either targets aren’t achieved or the purchaser disputes or fails to honour the earn-out fully. The sales process and the post-sale integration itself can also be a distraction from the running of the business and can impact on the achievement of the earn-out.
A trading company can’t be sold by auction, but, in order to mitigate against these factors, there are a number of steps the seller can take to ensure the consideration is maximised.
Steps a seller should consider
1. Make sure the business is ready for sale. A big concern for any buyer is assessing if the business will continue to function at the same level without the selling shareholder. We would recommend ensuring that the business has a strong management team capable of running the business without the owners involvement before the sale takes place. This also means that the management team itself is capable of buying the business with appropriate financial backing and gives an extra option for the sale.
2. Have a clear understanding of the market value of the business before you sell. Your advisors should be able to advise on the level of funding a buyer would need to fund the purchase which will determine what price is attainable for the business.
3. Engaging a Corporate Finance Advisor to run a structured sales process targeting a small number of buyers who are the best fit and who are most likely to value the business. This involves keeping a number of interested parties involved for as long as possible to help maximise price.
(a). The advisor can run a data room evaluation process for potential buyers to conduct their Due Diligence before the sale.
(b). A draft Share Purchase Agreement is prepared by your solicitors setting out the main terms for all buyers to mark-up and address key legal issues.
(c). The buyers should then be required to set out a more detailed offer setting out any adjustments they would propose to the Share Purchase Agreement and the price subject to a due diligence process. This minimises the possibility that they will walk away at a later stage and also ensures that there is an underbidder in place to acquire the business.
In some instances it is possible to appoint a firm of accountants to conduct a vendor due diligence report in advance of the sale. This is done on the basis that the accountants would agree to issue that report to the purchaser at a later stage.
4. A sale in 2 stages. Where the company has a good management team, it often makes sense to sell the business in 2 stages to the management team in order to maximise the price that you will get.
In the first instance, the principal shareholder can sell a Minority Interest in the business to the management team which is funded by external debt. As part of the sales process, the management team would be required to sign up to a Shareholders Agreement governing the relationship between them and the principal shareholder for 3-5 years post the first sale.
This can make the sale of the company more appealing to a 3rd party buyer as they know the management team are focussed on the sale as well and are likely to stay in the business. It also means that the management team themselves have an interest in acquiring the business as it enables them to maximise the value of their existing stake in the company. The sale to management option can be an excellent option as the management team are aware of the nuances of the business and don’t require the same level of due diligence.
In all instances it is worthwhile to have an eye to a sale at least 3 to 5 years before any sale takes place as you can ensure you make the right decisions to prepare for a sale and also means that you are ready should somebody make an offer that seems too good to refuse before you reach the intended sale date.
Timing the sales process to maximise tax reliefs such as Entrepreneurial or Retirement Relief for the family can help maximise the shareholders return.
We work with shareholders and their companies to prepare for sales and would be happy to assist you to discuss the options available to you.
If you require assistance in preparing a business for sale you should contact me at http://www.cantwellcf.ie/