Thinking ahead to success: How to sell or merge your business

We interview Mark Standish on the best practice when selling or merging your business.

Looking to exit or expand your business in the future? If the answer is yes, then take advantage of our interview with experienced corporate financier Mark Standish. With more than 25 years’ experience of helping companies with their biggest business deals, Mark offers some excellent advice on how to optimise your success.

When should business owners start thinking about a sale or merger?

Grooming a business takes time, so the earlier the better. The most successful sales and mergers are achieved in a planned and organised way, with one eye on the ultimate objective whenever you make key business decisions. Thinking ahead also prepares you for any unforeseen circumstances. For example, personal financial difficulties, a family crisis or poor health could force you to sell earlier than expected. This is when solid plans and a pre-groomed business give you the advantage, rather than scrambling to make the best of it in a short time frame.

What makes a business attractive to a sale or merger partner?

The heart of grooming a business is making decisions that enhance its appeal and value. Naturally, this means steering it into a good local, national or international competitive position, with strong levels of contracted or recurring income. Well-positioned businesses with growing sales and profit always attract a better price.

The way you manage the business is equally important. Too often, deals fall apart at the due diligence phase because something doesn’t bear up to scrutiny. Make sure you have excellent financial management and reporting procedures, adequate investment, and a best-practice approach to other aspects of your business such as employment and property. A strong secondary management tier is also extremely attractive in a sale as it means the purchaser doesn’t have to invest in new management. It can also greatly ease the transition period of your exit.

Proprietary intellectual property also increases the appeal and value of a business. Unique aspects of a product or service offering, together with any well-loved brand assets can be of particular interest to both purchasers and merger partners.

What are the best options for a sale or merger partner?

With sales, the best option is often found within the business, whether in the form of talented employees or the next generation of your family. You’d be surprised how many owners overlook employees simply because they don’t perceive them to have the financial capability, but many financing options may be available. Private equity can be a solution for larger sums, while bank loans can be a better option for more modest requirements. Owners may even be able to finance the arrangement themselves in the case of simple succession.

Mergers will always be with a third party, as will sales for which an internal route isn’t viable. The third-party route tends to result in a better sale price, but can be riskier than a well-planned ‘home-grown’ solution.

How do you choose a suitable third party?

In many cases, direct competitors are the most logical option because of the many synergies you have with them. A competitor can benefit from increased market share or geographical reach, cost savings, cross-selling opportunities, and even simply having a key competitor removed from their market. However, take great care over who you choose to negotiate with. Exposing your inner workings to an unscrupulous competitor could result in significant damage to your business.

The risk of this is alleviated slightly if you chose a third party from your supply chain. One of your regular suppliers or customers may be open to expanding their offering or taking advantage of a cost saving. Bear in mind that you may not have as many synergies with a supplier or customer, which may be reflected in the price.

You also have the option of approaching a private equity purchaser. Larger businesses can consider direct investment by a private equity firm, while smaller businesses might be an attractive ‘bolt-on’ to something major that the firm already invests in. The down-side is that private equity firms rarely ‘overpay’ for a business, so you may not get the best price.

What are the alternatives to selling or merging?

Developing a strong secondary management tier gives you the option of a management buyout (MBO), and this offers many advantages. The management team is likely to be familiar with any due diligence issues that might put a third party off. Negotiations will be friendlier, with less chance of the price falling during negotiations. MBOs also tend to be discreet, which avoids the problems that can sometimes arise when customers hear rumours that you are selling.

Disadvantages of this route include a potentially lower sale price, and the restricted liquidity that younger staff members tend to face. However, there are many options that can make the sale more achievable. For example, you might consider a vendor-assisted buyout where you retain part ownership of the business during a pre-defined transition period. You also have the option of deferring part of the sale price, such as being paid in instalments. Managers may also be able to get private equity backing or loans to cover their stake.

How do owners get the best out of their advisers?

Financial and legal advisers ensure a smoother transaction and increase the likelihood of success. This is as much about capitalising on opportunities and the highest possible deal price, as avoiding the significant financial damage that a failed high-value deal can inflict.

Work closely with your advisers, and be open about all aspects of your business so they can be as prepared as possible for any eventuality. Don’t be afraid to ask questions, explore scenarios, or share visions about the future of your business. Your advisers want to understand your highest expectations, the lines in the sand you won’t cross, and everything in between.

One final tip. 

Although sale and merger transactions have standard procedures, look for advisers that have experience in a wide range of deals. Every situation is unique, and a breadth of expertise ensures they can respond quickly to developments, and protect you from increased risk and the erosion of value.

Mark Standish has worked as a corporate finance adviser for the last fifteen years, following more than 20 years’ experience in corporate banking. He has held senior positions with UK and European banks, accountancy firms and his own M&A boutique practice. He acts as an investigator for the European Central Bank, and as an expert witness in banking litigation. He also holds directorships and board advisory roles with a number of private and public-sector organisations. Click here to go to his website.

© SA LAW 2018

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.