DO YOU NEED ADVISORS?

You are a successful businessperson. To have created a successful business you must know how to negotiate sales, and having built up a successful business in your own industry you must know the main players within it and who is likely to be interested in buying your business. Other than a solicitor to help with drawing up the final contract, why then do you need any costly professional advisors and what can they possibly add?

There is no doubt that professional advisors’ fees are going to be expensive. While initial meetings with reputable advisors at which they discuss the prospective sales strategy will be free, almost all will then require some form of commitment fee usually amounting to several thousand pounds quite early on in the process. This is because most fee arrangements are based on a percentage of the total sales price achieved, typically ranging from say 2% to 5% of the sale price achieved, or on variations such as step percentages relating to achievement of specific target prices.

Such fees (known as contingent) are obviously uncertain and due to the length of the sales process can often take many months from the start of work to be received. The purpose of the commitment fee is firstly to ensure that the seller is a serious seller, so that the advisor does not spend a significant amount of time advising the client, preparing paperwork, and conducting marketing activities, only to find that the client fails to conclude a suitable transaction, and secondly, to cover some of the basic costs and overheads of undertaking such work.

Any commitment fee should in any event be treated as simply an advance against the total fee payable to the advisor on completion of the sale.

It is increasingly common for advisors to have minimum fee levels. The time taken in preparing the documentation and marketing for sale a £20m turnover business is probably much the same as marketing for sale a business turning over £2m, however the sales proceeds (assuming similar profit percentages apply), will obviously be significantly different as will all the resulting fees for the advisor.

Firms are therefore increasingly setting internal limits as to the minimum prospective fee level that they are prepared to accept an instruction on which to act (also known as a ‘mandate’). At the time of writing, some of the larger corporate finance departments within the Big Four accountancy firms are rumoured to have minimum fee levels of between £150,000 and £200,000, some firms within the rest of the Top Ten accountancy firms have a guideline at between £50,000 to £60,000, whilst some practitioners within the rest of the Top 20 accountancy firms are starting to have guidelines of around the £20,000 to £30,000 mark.

Undoubtedly for many owners contemplating selling their business, such fees as a percentage of the likely sales proceeds will appear a large price to pay for advice. However, it is worth repeating that selling a business is a complex, long drawn out affair which will differ significantly from any other transaction with which you have been involved whilst trading and growing your business, and one which it is critical to get right. The potential cost of errors in dealing with the process of finding the buyer who is prepared to pay the most, negotiating the best price available, and structuring the most appropriate deal 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.

HOW DO YOU CHOOSE ADVISORS?

Given that good professional advice is so important to obtaining a good result, it is critical to get the best professional advisors working on your behalf and you will need the help of specialists in the area, not your current general business advisors.

You should therefore be looking for a number of qualities in your professional advisor, including:

• A high market reputation for doing successful deals. This demonstrates their professionalism and expertise and proves they can do the job. You are looking for somebody with a good track record who knows how to sell businesses for good money, you do not want somebody to be learning their trade or practising on your company because you need a good result. In addition, as we will come on to, part of the advisor’s role is to put your business in front of prospective purchasers. Advisors with good track records of placing successful deals will have built up contacts with potential purchasers which means that your potential deal is likely to be looked at sooner and more seriously by prospective purchasers than if it is presented by someone with a poor or no reputation in the marketplace. You and your business will also be judged in part by the company you keep. Therefore if you engage an extremely professional, well known and successful advisor, you are demonstrating that you are someone who looks for and takes the best advice available. Put your business sale proceeds in the hands of a cowboy, and you will not impress prospective purchasers.
• The sales process will be a long, complex, and stressful one, so you need to look for someone with whom you will have a high degree of personal compatibility, whose views you will respect if you need to have difficult conversations about your business, the sales process, negotiations, or any changes that need to be made to how your business is run in order to obtain the maximum value. They will also need to demonstrate to you that they understand the objectives you are trying to achieve (which may range from the maximum cash from the sale and hang the consequences, through to securing the future of your long-term employees who you are leaving behind in the business) in how the sales process negotiations are managed.
• Since this personal compatibility is so important, you are also looking for evidence that the senior person with whom you are establishing this personal rapport is actually going to continue to provide you with the service you want and stay focused on achieving the sale of your business. You are therefore looking for some evidence that the business is not handling such huge numbers of business sales that it is obviously ‘a numbers game’ as far as they are concerned, since you want your business sale to have a focused level of attention. So you want to ensure that your specific advisor will not be working on so many deals that they will not be able to give your business the attention that you require with the result that you find much of the work on your sale is being handled by significantly more junior staff with less experience who you have not met during the tendering process. Inevitably, the advisor you deal with at say partner level, will be there principally to give advice and help you in discussion of your strategy and negotiation, while much of the legwork in terms of preparing documentation and undertaking activities such as market research will be done by a more junior manager within the firm so ensure that they have sufficient staff to handle the work involved in the deal as well as a sufficient range of expertise in all the areas required such as tax or pensions. You should also ensure you meet the whole of the team who will be working on your account, and ensure that you know and are comfortable with who is going to be doing what on your behalf.

HOW DO YOU FIND PROFESSIONAL ADVISORS?

Professional advisors, for the purposes of this chapter, are broadly accountants who are acting to sell your business. They will generally describe themselves as being corporate finance advisors or occasionally brokers. Their job in part is to help by project managing the sale and in this process they will assist you and other professional advisors who may need to be engaged, such as valuers.

In addition, you will undoubtedly need a good corporate finance solicitor to deal with negotiation of the sales contract. Again, just as marketing your business for sale and dealing with due diligence are specialist areas in accountancy, negotiating the details of the sales contract and the impact of warranties, escrow clauses and noncompetition covenants are specialist legal areas where it pays to get the best advice. Many of the comments in this chapter concerning advisors will also apply to engaging your legal advisors.

Corporate finance advisors will generally be found in the corporate finance department of any accountancy firm of any size. This is also an area, however, where successful individuals within firms will often spin out to go on their own, setting up successful one, two or three partner ‘boutiques’ focusing on this area.

Other than as an indication of potential minimum fees, size of firm is therefore not necessarily any guarantee of the quality of service you will receive. Indeed, given the comments above about the need for personal attention and the focus by your professional advisors, there is potentially an argument that smaller may be better.

At the larger end, the main competition to the larger accountancy firms in business sales starts to come from merchant banks who also have their own ‘mergers and acquisitions’ (M&A) departments.

Finally, since business sales often form part of business turnaround or rescue processes, a number of individuals practising as company doctors are also successfully involved in the process of buying and selling businesses. If you are looking to sell your business and it is in some form of distress or difficulty, it may well be worth contacting one of these specialists (log on to the local help form at www.turnaroundhelp.co.uk for a referral).

So how to find the right advisor for you? There are a number of ways to identify potential corporate finance advisors.

Far and away the best is by way of personal recommendation. Contact your usual personal network of contacts within your industry or area to identify people who have sold their businesses over the past few years. Call them to find out who they saw, who they used and why, and how they performed. If you would like my suggestions for a local specialist, please contact me at markb@reinventyourbusiness.co.uk.

You may obtain professional recommendation to a local advisor through either your own accountant, or bank manager. Such recommendations can be extremely valuable as the introducer may well have had dealings with the advisor in the past, and therefore seen evidence of their abilities and work. You should however treat such recommendations with a certain degree of caution as most professionals, advisors and bankers operate in a local context of mutual work referral. For example, if your corporate bank manager has a target of 12 new accounts to open this year, he will be looking for accountants who can introduce him to sufficient numbers of new businesses that he can pitch and obtain work. At the same time, accountants will be looking to bank managers for introductions into new audit clients, and transactions such as business sales to generate their fees. There is therefore a significant trade of mutual leads between accountants, solicitors and bankers (known as ‘reciprocity’) where introductions are currency to be paid, received or banked.

When taking a recommendation from a professional advisor, you should therefore quiz them as to how much business they do or have done in the past with the person they are advising, and use the opportunity of having the recommendation to ask for referral sites to speak to as part of the process of following up with the suggested advisor.

I am not suggesting that your advisor or bank manager will introduce you to someone who will not be able to service your needs, as undoubtedly your advisor or bank manager will be looking for the firm they have introduced to do a good job so as to retain your business and goodwill into the future (particularly once you have come in to the money from the sale). You would therefore expect it to be in their best interests to introduce you to an effective and efficient player. Nevertheless you must bear in mind that they will have some self-interest in respect of their own business links with that individual.

To obtain a large list of individuals engaged in corporate finance activity, you can start by looking for information published by the regulatory bodies. The Institute of Chartered Accountants in England and Wales, for example, has a corporate finance faculty which many individuals in this area will have joined. The disadvantages of these sorts of list are however that there are a number of individuals of whom I am aware who are members of the faculty who are not involved in the buying and selling of businesses at all, either because their main area of activity is in another area (such as say, insolvency) or because within corporate finance they are more involved with other activities such as raising funds, floating businesses or debt restructuring. In addition, such lists do not give a full picture of all individuals practising as corporate finance advisors as some may belong to one of the other professional bodies in the UK for such individuals, such as the Institute of Chartered Accountants in Scotland or the Association of Certified Accountants. Finally, inclusion on such a list tells you nothing about an individual’s track record and performance, which is obviously the vital element.

Another research based approach is to find a list of corporate finance work done within your area over the past few years and establish who the advisors were. Whilst there is at least one professional database available in the market which provides such details, this is probably not a practical option for the individual business owner seeking this type of information. However, regional business publications aimed at the mid corporate market (turnover say £5m to £50m) will often provide an annual or perhaps biannual list of deals done in the region as part of the information they provide to their readers. A trip to your local library to research such business magazines may assist you in identifying the appropriate advisors in your area.

If you do not choose an advisor based on strong personal recommendation, you may seek to have a presentation by a shortlist, of say two or three, to pitch for your business (a ‘beauty parade’). Before engaging advisors via such a beauty parade you should also always seek and take up references in respect of prior work.

INSTRUCTING ADVISORS

In order to instruct professional advisors you will have to sign a letter of engagement. This is your formal contract with your advisors and your authority for them to act on your behalf.

You should review this carefully before signing as it covers such contractual matters as:

• The basis of their fees, including how they are to be calculated, and payment terms.
• Limitation of liability, where your advisor will seek agreement as to their maximum liability in the event of any problem arising as a result of their advice (and you should check their professional indemnity insurance cover).

The engagement letter should specify the scope of the work to be undertaken for the fees agreed, indicate what information you are expected to be able to prepare and supply for the purposes of the sale, and give 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.

Corporate finance professionals will generally seek an exclusive engagement to sell your business for a specified period. Ensure that when reviewing the letter of engagement you are clear as to whether or not fees are due to the advisor in the event that a buyer they introduce during their engagement period purchases the business after the expiry of their exclusivity period, and whether a fee is due to the advisor should you find a purchaser from another source during the period within which the advisor has been engaged.

However, once you have engaged your professional advisors and have signed up to paying their fees, it is important that you commit to working with them so that together you can seek to achieve the best deal for both sides. It will be a long and involved process and there needs to be a high degree of mutual trust. Occasionally sellers will attempt to pull a fast one on their professional advisors by seeking to deal direct with prospective purchasers and cut out their engaged professional advisors from the process. All I would say on this is that achieving a sale of your business is a difficult enough process in the first place, without adding to the stress and purchasers’ enquiries by adding on a dispute with a firm of professional advisors into the process.

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

The letter of engagement should also give assurances to you of the confidentiality of any information you provide to the advisor; the basis under which they are empowered to disclose this information to prospective interested parties. It should also act to safeguard your right to any of your intellectual property or know-how to which you give the agent access.

HOW DO YOU USE YOUR PROFESSIONAL ADVISOR?

You will use your professional advisor to undertake a number of specific functions in relation to the sales process, but also to provide a variety of skills and resources that are probably not available to you within your business as it stands.

The specific tasks that the advisor will undertake on your behalf can be reasonably simply listed. They include advising on the range of values of your business and helping you to clearly set out your personal objectives in undertaking the sale. From that they can help you develop the selling strategy and undertake the necessary research to produce a list of potential buyers, as well as producing the necessary documentation of confidentiality letters, invitations to tender and a sales pack.

Having discussed the approach with you, they can then undertake the marketing programme, contacting potential buyers, signing them up to the confidentiality agreement and arranging initial visits and discussions, managing the process through to the stage where serious negotiations can be conducted with a shortlist of seriously interested purchasers, until an acceptable offer and heads of agreement (or heads of terms) are achieved. Samples of some of the typical documentation involved are set out in Chapters 7, 8 and 9.

The advisor will then help to manage the progress of dealing with the purchaser’s due diligence enquiries and supporting you and the solicitors in negotiation of the terms of sale so as to drive the sale through to a signed sales agreement. Thereafter they will also assist you in managing the closure process and handover such as dealing with preparation of completion accounts, and attendance at transaction stock counts.

Within all this, it is important to emphasise the project management role that your advisor needs to fulfil. A number of professionals will become involved in the sales process (your solicitors, the purchaser’s solicitors, your valuers, their valuers, their due diligence team, the finance brokers, the purchaser’s funders), and somebody needs to take responsibility for managing the timetable to push the deal through to conclusion. Your advisor is critical in this process (spurred on by their percentage of the final sales price achieved) in chasing outstanding issues and ensuring they are resolved so that a sale can be completed.

The skills, knowledge, and resources that your advisor therefore brings to the party and which are vital for completing the process include their experience, not only of the current market which is obviously relevant for both estimating values and managing the sales process, but also knowledge of the process itself (which problems are serious, which are trivial, what is holding something up, what can be done about it). They are also the overall guide on technical aspects such as tax, albeit that whilst able to give you general guidance they may need to act the role of ringmaster in bringing in specific experts to deal with detail issues (such as specific tax or pension planning enquiries), or professional valuers to look at the property.

Coming out of their knowledge of the marketplace is also knowledge of potential buyers outside the industry as well as access to them. Many business owners assume that the most likely purchaser for their business is somebody already in the industry. This may well be the case, however it is often also the case that the buyer who is prepared to pay the most is somebody from outside the industry who is looking to get in. A good professional advisor will have contacts across a wide variety of industries and should be able to spot such opportunities. In addition, because your advisor is continually involved in selling businesses, they will have ongoing dealings with a number of prospective purchasers of businesses and should therefore be able to get your proposal looked at with greater ease and seriousness than if you were to attempt to approach such purchasers directly.

These types of purchasers may include both other trading businesses looking to expand their position in your industry (a trade sale) and financial institutions, such as venture capital (VC) houses, looking to acquire businesses as investments (a financial sale).

As your advisor knows and deals with these purchasers on a regular basis, they know which sorts of deals will be of interest to which sort of purchaser. If you were to attempt to sell to a VC you might need to adopt a shotgun approach of contacting many in the hope of finding one who is interested in your type of activity or size of business. Your professional advisor, on the other hand, should be able to bring a more focused approach from their knowledge of who wants to do which deal and introduce your business to the two or three where there is a real chance of a deal being done. You should bear in mind that most professional purchasers of businesses are in effect continually bombarded with proposals and requests to invest in businesses. They look to professional advisors to filter these proposals and direct those which are worth their consideration to them. Professional advisors therefore build their credibility and their efficiency in managing sales by improving their ability to filter proposals, and only introduce them to the right parties. Again, introducing your sale to a prospective buyer through the right intermediary helps give it credibility and ensures it is looked at seriously.

Your professional advisor also provides a valuable barrier between you and the process of sale for much of the period. You may for example initially want to ensure you maintain confidentiality as to the fact that the business is for sale. This is obviously extremely difficult if you wish to act to sell the business yourself. By using a professional advisor however, the details of the business can be summarised under a code name and circulated to prospective interested parties so that you control the moment at which the real identity of the business is revealed to prospective purchasers. You can therefore screen potential buyers and ensure they are signed up to appropriate confidentiality agreements before providing them with detailed information. At the same time, while the sales process is continuing, having prospective purchasers deal mainly with the professional advisor has a number of advantages:

• It allows you to continue running the business, as opposed to getting bogged down in dealing with significant numbers of purchase enquiries or managing a mailshot programme and supply of sales packs.
• It allows somebody to continue to present the company in its best light and to act as an advocate and sales person for it without appearing to be emotionally involved and potentially egotistical (where there is a danger that you as the business owner and entrepreneur might actually put potential purchasers off by the way in which you sell the virtues of the business).
• It can significantly help in relation to managing negotiation of the price where your advisor acts as your agent in negotiating, but will be seen by the prospective purchaser as operating within a framework of a deal that you are seeking and your agent therefore always has the fallback of needing to check with you as principal before anything can be agreed. Your advisor should also be well practised in negotiating such business sales prices whilst bearing in mind the impact of proposals in respect of terms.
• Finally, it provides an important cut-out between you and the purchaser over any ‘bad news’ or disagreements over price, given that in many instances you will need to work with the purchaser following the sale for a period in relation to handing the business over. You would therefore want to avoid any highly emotionally charged disagreements or disputes during the price fixing process, which can be achieved by handling this through the use of a trained professional to negotiate this aspect.