HAVING A PLAN

Finding and buying the right business will not just happen, you need to put in place a plan of campaign, your acquisition strategy in order to achieve your objectives.

Some elements of this plan will be immediately obvious and will cover issues already discussed, such as the sort of business you are looking for, which sectors are you interested in and what other characteristics such as geographical location are important to you.

But in setting the plan, you also need to consider a variety of practical issues concerning the process, such as:

• How are you going to go about finding a business to buy? Will you be able to pursue the search full-time, or will it need to be a part-time activity? Are you going to undertake the search process on your own or will you engage professional advisers to hunt down the targets for you?
• How much professional support are you going to need in checking the business out and completing a purchase?
• Where is the finance to do the deal coming from? Is it all going to be raised from your personal or business resources and/or borrowed against the assets being bought? Or are you going to need to find other backers such as a venture capitalist? In which case, do you need to start meeting potential backers early on in the process, before finding a specific target?
• How long are you prepared to, or can you afford to, search for?
• Should you work on your own or as part of a team?
• What sort of corporate vehicle should you use to buy?

DOING IT AS A GROUP

If you are an individual looking to buy a business of any size you might consider getting together with other people to buy it as a group. Doing so can have a number of advantages, as a group of people are likely to have a mix of:

• skills covering a variety of functional expertise such as finance, operations, sales and marketing. A team therefore tends to run less risk of having a major hole in the management’s skills than an individual
• board level experience
• industry knowledge and contacts
• preferred team roles and personal operating styles.

Analysis of team roles

The most commonly used analysis of team roles is that of Belbin which gives eight main types (or in later versions nine when a technical specialist is included), which are broadly as follows:

• Chairman – controls the way the team works. They tend to have a strong sense of their objectives and a willingness to bring out the value of potential contributions from all the team members, whilst being able to recognise its strengths and weaknesses.
• Shaper – the person who ‘shapes’ the way that the team applies its efforts and sets its priorities. They tend to be focused and certain of their course and push things through with drive and determination.
• Plant -these are the ‘ideas people’ who can generate creative and innovative ideas for the business.
• Resource investigator – the networkers who are also part of the creative resources of a team as they make use of people and contacts to find out what it needs or to achieve objectives. They are good at responding to challenges or exploring anything new.
• Company worker or implementer – is focused on the good of the company, organised, hard-working and practical. They tend to be the ones you can rely on to get on and do the jobs that no one else wants to do.
• Monitor/evaluator – the shrewd hard-headed judgement maker, able to coolly assess the merits of any proposal and an antidote to ‘seat of the pants’ management.
• Team worker or team builder – a critical facilitator, able to respond to people to ensure that all members of the team work together and to promote team spirit.
• Completer/finisher – a vital member of the team, the one who follows through to ensure that things are taken to a conclusion.

To take advantage of an understanding of team roles, firstly you need to establish each team member’s preferred roles by the use of psychometric testing. Then any conflicts need to be resolved so that each member of the team knows which role they should focus on.

Group formation process

In many ways this process can help work through one of the key problems in putting any group together from scratch, in that a group will always take time to ‘gel’. Any new group will go through a process of:

• forming – selecting the members of the group and bringing them together to meet
• storming – having disagreements as to how it is to operate
• norming – reaching some kind of agreement as to how it is to operate; before finally
• performing – being able to focus on the task that the group is to achieve rather than on how the group is structured.

The process of explicitly discussing and settling on roles can go a long way towards accelerating this process and dealing openly with conflicts such as too many people wanting to take the role of leader so that these are resolved rather than festering.

Financial advantages

Additionally a group is likely to have an increased financial capacity to buy a business as they should be able to raise more equity between them than you will as an individual.

Disadvantages

There are, however, some downsides in working with a group, and you need to think through:

• How as a group you will get consensus on whether to buy a particular business, and how will you deal with the situation if some members dissent from a decision to buy?
• Do you feel that you have a sufficiently strong relationship or history with each other to make working as a group a realistic prospect, as the search process will be a long and stressful one?
• How are you going to deal with a situation where one of the team may have significantly more money to put into a business than the others?

Practical issues

There are also some practical issues to consider. You will be well advised to put in place:

• a shareholder agreement that specifies your relationship and covers for example the basis on which any shareholder who wants to retire will be bought out, and whether in the event of the death of any of the shareholders, their shares will be bought out by the others; and
• key life policies which can provide the funds with which to buy out a deceased partner shares in the event of their death.

As an individual, you will also have to decide how you feel about having others involved in the business that you want to buy. If one of the reasons for looking to purchase is to be able to run your own show without interference, then this may make working as part of a group contrary to your objectives.

Management buy outs and buy ins

The idea of working in a group is most obviously directly applicable to a management buy out (MBO) team, which will by its nature generally involve a group of senior managers who have worked together as a team before, with skills across the range of disciplines required to run the business, have a good knowledge of the business to be bought, and have experience of the sector/industry.

When looking at a large financial acquisition, venture capitalists will tend to put together a management buy in (MBI) team comprising a number of senior executives. This is in part to ensure there are no holes in the management team upon acquisition in either skill sets or team roles because of the issues discussed above.

As MBIs have historically been more risky than MBOs as a result of the inherently greater risk of dropping a new set of managers into an unknown business, it appears that BIMBOs (Buy In Management Buy Outs) which create a mixed team of new executives with the existing senior management in the company, are increasingly favoured by venture capitalists.

PURCHASING VEHICLE

You have a choice in presenting yourself when you come to buy as to whether you are buying:

• in your own name as a sole trader
• as a team in partnership (either a traditional partnership or a new limited liability partnership)
• as a trading company owned by you solely or by a team
• as the holding company of a group of companies (even if the rest of the companies are dormant).

If you are working with a team to buy a business you will normally incorporate a company (’Newco’) to act as your vehicle for the purchase early in the proceedings, and as discussed above you should already have in place a shareholder agreement.

As will be demonstrated in the following chapters, establishing your credibility as a buyer with both potential sellers and their agents (as well as with financiers and your professionals) can be critical in both finding appropriate targets and completing deals. As insignificant as it sounds, operating through a pre-established corporate vehicle can help to give you credibility right down to apparently minor things which all help to give the impression of substance to your interest, such as the ability to:

• give potential intermediaries your Widget Acquisitions Limited business card that describes you as managing director rather than just acting in your personal capacity as Joe Smith
• send a target a letter from Widget Acquisitions Limited asking if the business is for sale, which is likely to be taken more seriously than one from Joe Smith.

Choice of an acquisition vehicle is the first step in packaging yourself as a credible buyer.

Purchasing structures

Your choice of purchasing structure is also important as it will affect the degree of risk that you are taking in buying the business, as well as having tax implications.

The ways in which you can trade are as:

• A sole trader where you as an individual trade in your own right under either your own or a business name. Essentially there is no distinction between you and your business and so you own the business completely and the business’s profits form part of your taxable income. This is, however, a risky way to trade as you are making all purchases for the business personally and are therefore personally liable for all its debts.
• A partnership – a group of at least two people who are trading together with a view to making a profit. Unless you have agreed a partnership deed which sets out how profits and losses are to be distributed this will be governed by the Partnership Act 1881 under which all profits and losses are shared equally between all partners. In a normal partnership all the partners are liable individually for all the partnership’s debts (known as joint and several liability), so if one partner cannot pay their share, the others will still be liable for the full amount due.
• A limited liability partnership (LLP) where the partnership is a distinct legal entity from the partners and the partners’ liability for any debts of the business can be limited to the partnership’s assets. In return for this limitation of the partner’s risks, LLPs have to file public accounts and returns at Companies House in the same way as limited liability companies.
• A limited liability company identified by the word ‘limited’ or the abbreviation ‘Ltd’ after its name, which is a separate legal entity from its shareholders and directors. This means that the company trades the business in its own right and the company is liable for the business’s debts (unless the directors or shareholders have personally guaranteed those debts or are made liable for them as a result of having fallen foul of the rules governing matters such as insolvency). Since the company is able to take credit from suppliers in its own right, the owners and directors are therefore protected from being liable for these. Creditors are in turn protected by the requirement for a company to file accounts and annual returns at Companies House so that the status and profitability of the company is public information.

Companies can be purchased off-the-shelf from a number of suppliers. They are governed by two documents, the memorandum of association which sets out the purpose for which the company has been formed, and the articles of association which are the company’s constitution, and in off-the-shelf companies will be of a standard type.

The company as a legal person in its own right will be liable for tax on its profits under corporation tax and the owners will only be able to obtain the benefit of the profits by way of payments from the company in the form of either salary or dividends. Since dividends do not attract National Insurance payments you should take advice from your accountant as to the most tax efficient way to pay yourself. Be warned, however, that there is an ongoing struggle between business and the Treasury as to the rules governing taxation in this area and the government is continually moving the goalposts.

• A public limited company (PLC) shares the features of a normal limited liability company but requires a higher level of share capital. The advantage of a PLC is that it will be allowed to be listed on a stock market providing it meets the exchange’s criteria.

ACQUISITION PLAN

It is good practice to set out your acquisition strategy in the form of a short business plan, which should cover:

• an executive summary
• your details (or those of the team if appropriate) setting out why you are a credible business purchaser (you should attach your CV as an appendix)
• the type of business sought and your acquisition criteria
• your search strategy
• your strategy for financing a purchase
• your advisers once appointed
• any appropriate references.

This approach achieves several things:

• It ensures that you formalise what you’re looking for and summarise it into a coherent and structured set of plans and criteria.
• It enables you clearly to brief your professional advisers.
• Returning to the theme of credibility, it means that you have a document which you can deliver to both your advisers and any potential sources of targets, setting out who you are, what you are looking for and your credentials to be taken seriously.

This obviously implies that the document needs to be finished to a professional standard in the expectation that you will be using it, or parts of it, to sell yourself both to business sellers and professional advisers.

WHO YOU WILL NEED

To buy any size of business you are going to need to obtain some help from professional advisers. The degree of help needed will of course vary depending upon the nature and size of the business you are looking at. As a minimum, in buying a small shop, for example, you are likely to need a professional surveyor to survey the property, some accounting advice on the trading accounts, a finance broker to arrange loans and a lawyer to handle the contracts and conveyancing.

On a larger transaction you will need assistance with all of the above functions but may require correspondingly larger teams to deal with the scale of issues involved. In addition you may need to have engaged professional advisers to assist you in finding a suitable target, approaching potential equity backers such as venture capitalists, and in negotiating the purchase itself. You may also need to engage specialists to deal with aspects of the due diligence process such as environmental risk assessment or health and safety reviews.

The four main sets of professionals that you will be relying on during the deal will generally comprise:

• Lead adviser – a corporate finance adviser who will act as your main adviser in locating a target and negotiating the sale. Think of them as your partner in making the deal happen. They are your ringmaster, coordinating all the other players into the project of completing a purchase, managing contact with the seller and the many other professionals who will become involved, as well as acting as a cut out between you and the seller who can keep things on a professional basis. The degree of work that you ask your lead adviser to undertake may vary from simply giving support during the negotiation of the purchase through to a full service involving locating targets, raising finance and managing the initial approach.
• Transaction support – the accountants who undertake the due diligence work of checking the business over before you buy it. These will usually (but not necessarily) come from the same firm as the lead adviser and buyers will generally look to have the firm that undertake the due diligence stay on to act as the company’s accountants and auditors going forwards.
• Lawyer – the importance of having an experienced corporate finance lawyer involved in undertaking the legal due diligence and drawing up the contracts, including the warranties, representations and indemnities, cannot be underestimated.
• Financiers – either your asset finance broker who is seeking to arrange finance for you, or your banker who is looking to put together a package to fund your deal. Those involved in arranging the finance for your transaction will need as much time as possible to review cash flows and forecasts and to make an assessment of your credibility and ability to make a success of the deal. You should therefore be seeking to work with financiers as early in the process as possible so that when you need to finalise putting funding in place, this can proceed as swiftly as possible.

In addition you will need a range of other specialists such as a property surveyor as already discussed, through to an insurance broker to make sure that you have all necessary cover in place as you do the deal.

APPOINTING ADVISERS

Of the above, the most critical advisers to appoint initially are your lead adviser and your solicitor.

Lead advisers will generally be found in the corporate finance department of any sizable accountancy firm and for larger businesses in the mergers and acquisitions departments of merchant banks. This is an area where successful individuals often go out on their own, setting up successful small ‘boutiques’. Other than as an indication of potential minimum fees, the size of a firm is therefore not necessarily any guarantee of the quality of service you will receive. Indeed, given the need for personal attention and focus, smaller may sometimes be better.

Finding the right person

So how do you find the right adviser for you? Far and away the best way is through personal recommendation. Use your network to find people who have recently bought or sold their businesses. Call them to find out who they saw, who they used and why, and how they performed.

Your own accountant, solicitor or bank manager can also be a valuable source of recommendations from local firms they have dealt with. Treat all such recommendations with a certain degree of caution however, as most professionals, advisers and bankers operate in a local circuit of mutual work referral (known as ‘reciprocity’) where introductions are currency to be paid, received or banked. I would not suggest your bank manager or accountant would introduce you to someone they did not feel could do the job but you should ask any such referee about the amount of business they have undertaken with the firm being recommended.

Otherwise regional business publications aimed at the mid corporate market will often provide a list of deals done in the region that can show you who is active in the area.

Making your choice

However you find a professional adviser or advisers, you should generally seek to have a presentation made to you by a shortlist of, say, two or three to pitch for your business (a ‘beauty parade’). And before engaging any advisers you should check up on their prior work by asking for and taking up references.

So what should you look for in an adviser?

• A good market reputation and track record. If you want your lead adviser to be successful in finding you credible opportunities, you need a lead adviser who is credible in the marketplace and has the contacts to know or to find out which businesses may be for sale.
• Someone with whom you are likely to be able to get on with, as the purchasing process may be long, stressful and complex, and who understands your objectives and critical issues.
• Evidence that they will stay committed to you throughout the deal as your key contact point and will not simply delegate the job to junior staff.

Whilst this section has concentrated on lead advisers, all of the above points are equally applicable to corporate finance lawyers.

MANAGING YOUR ADVISERS

Buying a business is a complex long drawn-out affair and one which it is critical to get right. The potential cost of errors in dealing with the process of finding a serious seller, negotiating the best deal available, and structuring the most appropriate terms for your circumstances – before then managing the process of negotiation, due diligence and completion through to a successful conclusion – are so great that they do generally outweigh the very real costs of getting good professional advice.

Letter of engagement

In order to instruct professional advisers you will have to sign a letter of engagement. This is your formal contract with your advisers and your authority for them to act on your behalf. You should review this carefully before signing as it covers such contractual matters as specifying:

• the basis of their fees, including how they are to be calculated, and payment terms
• limitation of liability, where your adviser will seek agreement as to their maximum liability in the event of any problem arising as a result of their advice
• the scope of the work to be undertaken for the fees agreed, what information you are expected to be able to prepare and supply for the purposes of the sale, and the basis on which any further fees may be payable by you in respect of any other work needed which is not covered by the description and scope of the assignment.

The letter of engagement should also make clear that the adviser is acting as your agent in any discussion or negotiation, and is empowered to undertake negotiations on your behalf with prospective sellers.

The letter of engagement should also give assurances to you of the confidentiality of any information you provide to the adviser; as well as the basis under which empowered to disclose this information to other parties such as to assist in raising finance.

As it’s important to get good advice, do not simply buy your advisers on the basis of the lowest hourly rate. Instead, you should seek to manage costs by agreeing a cap on the level of expenditure with each adviser.

THE NEED FOR DUE DILIGENCE

The due diligence process is covered in detail in Chapters 12 to 14, however it’s worth noting at the outset that both you and the seller have a mutual interest in reducing the uncertainty involved in any sale as far as possible, in your case to reduce the risks and in the seller’s case to justify a higher price.

You will also find that you are likely to need to have demonstrated that you have undertaken sufficient due diligence to satisfy your potential funders in order to finance the deal.

The degree to which you decide to use advisers is up to you and you may feel that in dealing with a small-business purchase such as a pub there is only a limited scope of work that you would wish to have done. However, acting without an appropriate level of professional advice is dangerous in any business sale.

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