HOW LONG WILL IT TAKE TO SELL YOUR BUSINESS?

First and foremost, be prepared for the long haul, as the entire process of selling your business from start to absolute finish could take as long as nine years.

If this seems surprising then I’ll say at once that this assumes a structured grooming and sales process of two or three years with a year in which to actually sell your business; whilst the rest of the prospective nine years relates to dealing with the aftermath.

To illustrate what I mean and to give a flavour of some of the issues covered in the rest of the book, set out below is a summary of the sales process that a normal mid-sized trading business might go through in order to obtain the best realisation.

Two to three years prior to sale

As a business owner you will need to seek recommendations as to good potential advisors, meet with them and discuss your plans with them.

Having done so, on the basis of the advice received from the advisors, you should start to groom the business for sale. This means ensuring that its trading performance is managed to demonstrate strong, reliable profits and growth. This may involve either restricting your drawings by way of salary, and abandoning other mechanisms used to reduce profits and hence tax paid, which will result in the business paying higher taxes than it used to; or at least keeping detailed records of all such issues with which to subsequently adjust the published profit and loss and to support these adjustments during the due diligence process.

This is a good moment to consider whether you are actually a serious seller as there is little point committing to paying higher taxes than you need to if you are subsequently not going to sell.

One year prior to sale

With the business trading and demonstrating good strong profits, it is time to tidy up the business’s paperwork and reduce the risks, get all its contracts in order, negotiate any leases that are required for the ongoing trading of the business, tie in key employees and also to tidy up the physical plant, machinery, and property of the company so it appears well ordered and attractive to prospective purchasers when they come to look round.

Ensure that you have all your books and records up to date, with copies of management accounts to demonstrate your strong profits and tight controls. It may also make sense to undertake a mock due diligence exercise (effectively to undertake the sort of audit of your business that a purchaser will undertake during the sale process), so as to identify any potential legal or financial problems that the purchaser’s advisors may find, so that these can be resolved prior to entering into actual sales negotiations.

Start of the sales process

Meet with your advisors to finalise their instructions and work with them to prepare the necessary information. The advisors will generate a list of potential purchasers from your knowledge of the industry and by searching commercially available databases. This list will need to be discussed with you and the strategy on approaching prospective purchasers agreed. At the same time, the advisors will put together a sales pack which you will need to approve and, you will need to have discussed with them the valuation of the business and agree both your target price and a price below which you are not prepared to go.

Months two to three of the sales process

Your advisors will be out approaching the prospective purchasers, seeking to find whether they are actually interested in buying your business or not. On a regular basis, the advisors should be meeting with you to update you on progress, the responses received and any other prospective purchasers who may be added to the target list. At the same time, for those prospective purchasers who have expressed an interest, confidentiality agreements will be being sent out for signature and return, to allow sales packs to be despatched and discreet site visits arranged for those who are interested.

Months four to six of the sales process

By this stage your advisors should be pressing interested parties to make their initial offers, which should then be discussed with you, so that between you and your advisors, you prioritise those interested parties who are serious and most likely to do an acceptable deal, so that your advisors can concentrated on these.

Further site visits are likely to take place and interested parties will be looking for more information to be provided which may require you to set up a data room (an office where information will be available to prospective purchasers to look through), either somewhere on your site, or more often off-site with your advisors. Meanwhile your advisors will be continuing to negotiate widely with a range of potential interested parties and construct their strategy for conducting the sale eg should they conduct an auction, grant exclusivity or move to a ‘best and final bids’ in order to ensure they obtain the best offer.

However, by the close of this period you need to be assessing the offers available and looking to negotiate with one, or possibly two, interested parties in order to achieve an agreement on price, and so produce a formal offer known as heads of terms or heads of agreement.

Months seven to nine of the sales process

Protected by an exclusivity clause in the heads of agreement, in parallel the buyer undertakes their detailed due diligence review of the business whilst the terms of the final sales contract are negotiated.

Any issues arising out of the due diligence will be being fed into the contract negotiations until a final contract can be drawn up by the solicitors which is why it is best to have cleared up the many issues as can be identified well in advance of this stage.

The buyer then completes the final closing due diligence, the contract is signed and on completion day all the actions take place which are needed to conclude the deal, such as transfer of the funds, and valuation of the stock. It is worth noting that in the sale of a distressed business, this timetable may need to be considerably shortened.

One to two years post sale

The sales contract is likely to include provisions that for a period of say, one or two years after the sale, the purchaser will have the right to claim back monies from the seller based on the warranties and representations given in the event that they find problems with the purchased business for which they may file claims under the terms of the contract.

In connection with this, part of the purchase price may be held on trust by a solicitor in an escrow account that can only be released at the end of the potential claim period. Conversely, the seller may need to stay on with the business, working for the buyer under a consultancy contract in order to ensure a smooth handover, and may even be entitled to receive further monies for a period of years following the sale under a form of escalator or earn-out clause if the business performs well.

Up to five years post sale

In order to protect the purchaser from the seller immediately going into competition with the new owners using the seller’s old network of contacts, most sales contracts will include clauses that prevent the seller from setting up in similar businesses in the locality for a significant period, often up to five years although the longer this period, the more difficult such claims are to enforce.

Therefore, as you can see, whilst a normal corporate sales process is itself a fairly long drawn-out affair, typically lasting up to say nine months, to get the best result requires a significant period of prior preparation over something like two or three years, whilst the full financial and contractual implications of the sale may well take two to five years to completely work through. Thus, from having decided that you might like to sell your business to having completed the entire affair, may in some cases take almost a decade.

ITEMS TO CONSIDER WHEN PLANNING TO SELL YOUR BUSINESS

Since the sale of the business is also the biggest sale the business will ever do, you have to commit time and effort to preparing the business for sale in order to find the right buyer and maximise the value you are going to get out of it. And since it will require an effort, it is worthwhile thinking in a structured way about what your goals are for selling the business, as set out below.

• What do you personally want out of the sale and what are your main reasons for wanting to sell the company?
• What do you want out of the sale for you, your company, your employees, or your management team? Would it matter to you, for example, if following a sale the purchaser shut your business down? Or relocated it? Or are you determined that your company should continue on after you?
• Do you have children in the business? Do you want to ensure they have a role going forwards?
• Are you looking to stay with the business after the sale, either permanently, or for a period, or are you looking for a clean break and an exit?
• Do you want to retain any particular assets, such as the land and buildings, or any particular contracts?
• If you are selling in order to help your business develop, what characteristics are you looking for in the purchaser? And what are the reactions of your customers likely to be?
• What sort of terms of a deal would be best suited to you and your financial situation from a tax and pension planning point of view?

The sales process is important. Like anything else, sales are unlikely to come to you. You will have to go out and sell your business in the same way as you sell anything else. And just as when your company is selling products it is selling them in competition with other companies, when you come to sell your company you will find you are in competition with other people who are looking to sell their businesses to purchasers who have the money. Be prepared so as to give yourself the best chance of success.

WHAT ABOUT A FLOAT?

A flotation of a business (sometimes known by its US term of an IPO, or initial public offering), really represents simply a specialist type of sale, where rather than selling the whole business to one particular party, shares in the business are offered for sale into a marketplace where they can be freely traded.

Many businesses that I speak to talk about ‘working towards a flotation’ and they may see this and the liquidity it will generate as the end objective.

This is a mistake, as a few moments reflection from the point of view of prospective investors will clearly show. If the management team who have built the business and grown it to the stage where it can be floated simply want to exit at this stage, why should I, as an investor, put money into buying something where the factor which has been key to its growth so far is disappearing to the south of France with a fat wad of money in their back pocket?

No, a flotation must be seen as a tool for attracting more money to achieve the business’s long-term goals. To be successful, it must clearly be an integral long-term part of the planned future development of the business, and can be presented as a way to raise funds for future investment in the business in order to secure future opportunities.

Preparation of a business for a flotation is probably worth a book in itself, but suffice it to say that many of the aspects of grooming a business for sale covered in this book will equally apply to a business looking to float. In addition, a management team that is looking to achieve a successful float must really run their business in terms of:

• management information
• investor relations
• strong financial management of the business with regard to return
• strategic planning, and
• corporate governance
• hiring of non-executives on the board as ‘independent outsiders’.

in the way that a fully listed PLC would, for a good period (say at least three years) prior to obtaining a full listing.

Thus investors and analysts who deal with existing listed companies and are therefore used to seeing compliance with governance codes such as Cadbury, the provision of financially appropriate information to investors and a strong integrated strategy in the businesses in which they are investing, will be reassured to see these in place in your business as you bring it to market.