THE IMPORTANCE OF FIRST CONTACT

Once you have prepared your list of potential targets, which you have screened and prioritised on the basis of the available information, you then need to take the next step of actually approaching businesses to open discussions about a sale.

In doing so, to continue the house buying analogy, you need to be looking to arrange a viewing, on the basis of which, if the target appears to be what you are looking for, you will then want to agree an offer price with the seller.

Your detailed checking work or due diligence will then follow this agreement of an offer in the same way as your survey once you have agreed to buy a house. But be warned, your due diligence work and the preparation and sales contract which will run in parallel will be costly exercises, so before committing to this expense you need to be as certain as possible that:

• this is the business that you wish to buy
• the seller is really interested in completing a sale.

Until you have the opportunity to conduct your proper due diligence you are likely to have only a limited time to make enquiries and limited information on which to make a judgement, so it is important to be as focused as possible and make the most of any opportunities to understand the business as quickly as possible.

At the same time, if you are dealing with a business that was not formally for sale, you need to be taking every opportunity to sell both the idea of a sale, and yourself as the ideal purchaser to the business owner. Your first impression and approach to the business and its owner during this stage can be critical in deciding whether the owner will commit to a sale or not.

APPROACHING THE BUSINESS

When dealing with a business that is actively for sale the mechanism for an initial approach is relatively simple in that you need to respond to the advertisement or listing direct to the business or to its advisers.

In the first instance you would expect to receive further information about the opportunity in the form of a sales pack, which would typically contain information such as the following.

Business background

• Summary of the current nature of the business and apparent opportunities.
• Summary of the current and projected operating results.
• Summary of the current balance sheet.
• Summary of the ownership structure.
• Summary of the reasons for sale.
• If seeking investment, how much investment is required, what it is to be used for, what return the investor can expect and in what timetable.
• Risks facing the business and steps taken to address them by management (say in the form of a strengths, weaknesses, opportunities and threats or ‘SWOT’, analysis).

Market information

• Summary of products.
• Summary of markets and trends.
• Summary of customers.
• Summary of competitors.
• Summary of sales trends by product/market.
• Key competitive strengths.
• Assessment of competitors by product/market segment.
• Product/market segment growth and profitability.
• Branding.
• Sales staff.

Operations

• Product lines.
• Intellectual property.
• Suppliers and products.
• Management (including an organisation chart).
• Research and development.
• Opportunities identified (internally such as improved efficiency, and externally, such as new potential markets and products).

Assets

• Description of land and property.
• Description of plant and equipment.
• Description of data systems.

Appendices

• Current balance sheet, profit and loss account, forecasts.
• Product information and brochures.
• Summary CVs for key management personnel.
• Employee details (giving number of employees, length of service, and age, which allows calculation of potential redundancy costs).
• List of trademarks and patents.
• Detailed lists of land and buildings, and major items of plant and equipment.

Financial information in the body of the pack is normally kept as simple as possible, with the detail available in the appendices (which should tie up clearly and easily to the data in the main pack and be clearly cross-referenced). Look for information about the key assumptions underlying any forecasts or financial information.

Provision of a good comprehensive sales pack should enable you to get a long way down the road of assessing the business with a view to making an offer even before visiting the site.

APPROACHING A BUSINESS THAT IS NOT FOR SALE

Of course if you are looking at a business that is not formally for sale, then there will be no sales pack available. However, you are still going to need similar information in order to make a decision.

It might therefore be tempting to give the above list to the prospective target at an early stage and ask them to provide the information. In many cases this will be counterproductive as the task of preparing the information in a sales pack will usually have taken corporate finance advisers some time and some of the financial information will have been created from scratch.

Many business owners in the early stages of dealing with what is, after all, an unsolicited interest in buying their business are likely to react adversely to what will be seen as an onerous task and will not have been prepared by advisers to expect this as a request.

I would therefore suggest that you use this list as a checklist by all means but keep it private and focus on the specific areas that you believe are significant for you in respect of this particular business. Do not forget that once you have agreed a purchase price with the seller you are likely to move into a period of formal due diligence during which time your professional advisers will be reviewing the business’s current and future performance and assets and liabilities in some detail, and any issues arising out of the due diligence process can be reflected in the final sales price negotiated.

Initiating contact

In the absence of any active marketing of the business by its owners, you will need to initiate contact. This is normally done by way of an approach letter to the major shareholder stating that:

• you are interested in making an acquisition
• you have identified their company as being of potential interest on the basis of publicly available information
• you have funds available with which to make an acquisition
• if this is of interest, you would like to arrange an initial discussion.

Such a letter can either come from you direct, in which case you are obviously giving away immediately your identity, or from your advisers. In any event you should obtain advice from your advisers as to the contents of any letter so as to ensure it complies with the relevant legislation.

Where your adviser is sending out letters they will tend to personalise them to produce a more tightly focused letter to go to a smaller group of target companies. Such a letter might go into much more detail as to why the adviser thinks this purchase might be a good fit and the adviser may even name their client.

THE FIRST MEETING

The initial meeting may take place at the company’s premises, its advisers’ offices or some neutral location such as a hotel.

Your objectives

Your objectives at this first meeting are broadly to:

• establish a personal rapport with the owner
• gather information about the business
• start to form a judgement on its attractiveness
• persuade the owners to sell (if it is not already being marketed)
• reach some kind of agreement with the owner as to how your interest can be taken forwards.

Obviously the degree to which you can progress each of the above objectives at the first meeting will vary significantly from situation to situation.

Questions to ask

While in every case you should be professional, businesslike and polite, it will be a matter for your judgement as to how to manage the meeting. If the business is obviously for sale then the two parties’ agendas and roles are already quite clearly defined and you may wish to move the business agenda along quite quickly and be able to ask questions about the business and their motivation in selling. These might include:

• How long has the owner had the business? You want to know whether they have been in it for a long time or whether this is something that is quickly back on the market. If applicable, also ask what the business was like before they bought it and what changes they’ve made.
• What does the owner think are the pros and cons of this particular business, the threats to it to watch and the opportunities that are likely to present themselves?
• What has been the owner’s approach to the business over the last few years and how would they see it developing after the sale?
• What role does the owner need to have in a social sense in interacting with customers or suppliers?
• To what extent is the existing owner critical to the operations and sales? How difficult do they think it will be for you to take over?
• Why is the business on the market? Many reasons for a business sale have nothing to do with the state of the business but are to do with the owner’s circumstances, such as retirement, ill-health, or desire to move on to a new business. Some, however, clearly have implications for you as a potential purchaser such as problems in the business, or a desire to escape before major change.
• What does the owner want out of the sale personally, and for their company, employees or management team? You may need to judge whether for example, it would matter to them if following a sale you relocated it or restructured its significantly. Some owners are emotionally attached to their businesses, seeing them as their life’s work, and can be determined that the company should continue on after them.
• Do they have children in the business? Do they want to ensure they have a continuing role?
• Are they looking to stay with the business after the sale, either permanently, or for a period, or are they looking for a clean break and an exit? If so, what are they planning to do, retire or go into another business?
• Do they want to retain any particular assets, such as the land and buildings, or any particular contracts?
• If they are selling in order to help their main business develop, what characteristics are they looking for in the purchaser?
• What sort of payment terms would be best suited to them and their financial situation from a tax and pension planning point of view?
• Will any sale require the consent of any third parties such as franchisors, licensees or landlords, and does the owner anticipate any problems with any such parties?

If the business is not for sale

If the business is not for sale then you are likely to have to take the process more slowly as you will first need to get to know the owner in order to both establish their confidence in you and to identify the arguments that may help persuade them to sell up. You’ll also need to appreciate that they will need time to consider their position and response, and if necessary to take advice.

Important considerations

While you’re conducting your initial discussions you need to remember the funnel principle outlined in Chapter 5 and be continually looking at a range of targets.

It’s also important to remember that you need to ensure that the target is both really of interest to you and interested in selling, before getting as far as an offer. The real expenditure on professional fees in respect of a purchase starts immediately afterwards in the due diligence process, and you will want to avoid spending time and money on a prospect which then does not complete. It is essential therefore to be able to use these initial meetings to screen out targets that are unsuitable well before negotiating an initial offer.

I would always recommend that you adopt some form of standard approach to your reviews of businesses such as the one outlined in this chapter. Doing so gives a defined structure to your initial review which both helps to ensure that you do not miss anything, and makes it easier for you to compare various businesses.

UNDERSTANDING THE BUSINESS BEYOND THE NUMBERS

Having screened your target list on the basis of financial information before making an approach, there is a natural temptation to see the company simply in terms of what it contains, its balance sheet and profit and loss.

In some ways this is absolutely right as in a share purchase agreement you will be buying the company shell and all that it contains, while in an asset purchase agreement you will be buying specific assets from within it.

But it is also fundamentally wrong. No business exists in isolation and in fact businesses only do exist because they interact with the outside world.

Business as a process

Try to imagine the business as part of a process that brings value to the customers:

If you think of the business in this way, you can see how embedded it is in an overall process and how dependent for its success it is on the strength of the overall flow of the transactions and its relationships with the other parties. If either end of this process starts to have problems, where does it leave the business in the middle?

It also vividly illustrates the view of many advisers in that the business’s biggest asset is not on its balance sheet but walking around on two legs – its customers.

The other half of this observation, incidentally, is that a business’s biggest potential liability is also not on its balance sheet but is also walking around on two legs – its employees.

In order to buy the business, you need to understand how it works, what the business does for its customers that adds value for them, and why customers buy from this business and not its competitors.

You therefore need to undertake what is essentially a basic review of the business’s strategy and competitive position, to complement your review of its financial position, since it is this aspect which will drive the business’s numbers. Only by doing so can you form a judgement as to whether this is an opportunity worth pursuing. The price you would wish to pay for it is based on the information supplied to you by management at this stage.