How to maximise the potential of buying or selling a business in today's economic climate seminar - 13 September 2012
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Blake Lapthorn, Critchleys and Shirlaws hosted a seminar on Thursday 13 September at Blake Lapthorn's Oxford office on maximising the potential of buying or selling a business in today's economic climate.
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How to maximise the potential of buying or selling a business in today's economic climate seminar - 13 September 2012
- 1. Planning is everything: How to maximise the potential of buying or selling a business in today’s economic climate Thursday 13 September 2012
- 2. How to maximise the potential of buying or selling a business in today’s economic climate Rowan Andrews Team Leader, Shirlaws UK
- 3. Agenda • Your business journey • The economic cycle • Timing • Building the value of your business
- 7. Mar ’19 – Jun ‘23 Mar ‘23 – Jun ’27 Jul ‘07 Sept ‘09 July ‘11 Mar ‘09 Q3 ’12 – Jun ‘16
- 8. Mar ’19 – Jun ‘23 Mar ‘23 – Jun ’27 Jul ‘07 Mar ‘21 - Jun ‘25 Sept ‘09 Mar ‘09 2012– Jun ‘16
- 9. Mar ’19 – Jun ‘23 Mar ‘23 – Jun ’27 Jul ‘07 Mar ‘21 - Jun ‘25 Sept ‘09 Mar ‘09 Mar ’12 – Jun ‘16
- 10. V=PxM
- 11. V=PxM
- 12. How to maximise the potential of buying or selling a Business in today’s Economic Climate 13 Sept 2012 Justin Ray Head of Corporate Finance Critchleys is a trading name of Critchleys LLP © Critchleys 2012 Content is for information only. No action should be taken without seeking professional advice.
- 14. Stages of Selling a Business Time (months) 1 2 3 4 5 6 7 8 9 Planning Marketing for Heads of Completion Potential Buyers Agreement Preparation of Due Diligence Memorandum of Sale Negotiating with Serious Buyers © Critchleys 2012
- 15. Preparing a business for sale • what can be done to make it as attractive as possible? • tidy up any skeletons • tax planning • anticipate due diligence, disclosure and warranties! • need to demonstrate independence of business © Critchleys 2012
- 16. The Selling Document (Information Memorandum) • first impression! • preserves market sensitive information • identifies advantages to purchaser • identifies opportunities for the business • highlights strengths of the business • describes people and business in commercial terms © Critchleys 2012
- 17. The Selling Document (Information Memorandum) The aim •to ‘sell’ the company to the potential purchaser • to provide enough information to allow a purchaser to provide an indicative bid • to provide a level playing field for all interested parties key is to look at the business through the buyers eyes……what is driving them to consider your business. © Critchleys 2012
- 18. The Process - making approaches • depends on circumstances - small market/obvious acquirers – “confidential approaches” - directly by phone - approach the right person! - don’t blanket mail - commercial risk - non disclosure agreement prior to issuing information document © Critchleys 2012
- 19. The Process - receipt of offers • inevitable flexibility in timetable • offers will not be formulated in the same way - need to clarify and evaluate • highest price not automatically best deal © Critchleys 2012
- 20. The Process - evaluating offers • headline price - parameters on which it is based • deal structure – cash loan notes / deferred consideration earn out (ie risk!) shares • fit with bidder? Culture, gut feel etc • internal process - is the price funded, fundable, VC approvals, board approved etc • timetable and due diligence requirements © Critchleys 2012
- 21. The Process - moving towards Heads of Terms • may be one clear preferred bidder • if not - need to be clear with bidders where process is at? • seek clarification, seek second round bids • keep the playing field level • tax! • get to acceptable offer and then strike heads © Critchleys 2012
- 22. The Process – managing due diligence • know the likely problems up front • aim for no surprises – surprises lead to price adjustments! © Critchleys 2012
- 23. Legals – • complex process that involves specialist corporate lawyers © Critchleys 2012
- 24. Valuation and Structure © Critchleys 2012 Content is for information only. No action should be taken without seeking professional advice.
- 25. Valuation • earnings basis • assets basis (essentially values the company on a break up basis) • discounted cash flow (used in valuing cashflows from secured contracts or major projects) • other methods: eg turnover multiples; Valuation is not a precise science. The value of anything is what someone is willing to pay for it. © Critchleys 2012
- 26. The ‘truth’ about valuation Price and value are not the same thing…. Price is the amount you pay for a company..Value is what it is actually worth. The valuation process strikes a balance between the two. © Critchleys 2012
- 27. Enterprise Value, Equity Value and Asset Value Equity Value Goodwill Either... Enterprise Value Net Book Value Value of Debt of Assets Goodwill Or.... Enterprise Value Equity Value Net Book Value of Assets Value of excess cash © Critchleys 2012
- 28. Earnings based valuations • (maintainable post tax profit) x (applicable multiple) • what are earnings? - maintainable - past, present and future - ‘cash’ based (e.g. EBITDA multiple) - post tax profits (e.g. PE ratios) • what is the multiple? - industry PE ratios - multiples paid for comparable companies © Critchleys 2012
- 29. Maintainable earnings • Add back - non-business costs - exceptional/one off items - non – competitive remuneration - any unusual accounting policies? • Deduct - non-maintainable contractual terms, e.g rent - non-competitive remuneration - replacements for existing shareholders © Critchleys 2012
- 30. Maintainable earnings • past, present, future or a mix of the three • growth profile of the company • structure of consideration © Critchleys 2012
- 31. Multiples - Comparable companies • similarity of operations • asset base • gearing • flexibility of workforce • tax © Critchleys 2012
- 32. Multiples - Comparable companies • for listed companies a discount to the adjusted PE is required to take account of the following in particular - marketability of shares - size of organisation • discount 40-60% depending on quality of company •.....but can your company attract a premium due to key USP’s or competitive advantage. • P/E arbitrage © Critchleys 2012
- 33. Multiples - Comparable transactions • information is collated by a number of organisations that reports on completed and rumoured transactions. • but..... very few will actually disclosed the value paid or deal structure. where a value is disclosed it is often ‘inflated’ as would included the full earn out amount, excess cash and freehold properties. the databases would use unadjusted historical reported profit (where available). • therefore (high number) divided by (low number) = very high multiple © Critchleys 2012
- 34. Current benchmark multiples •USPs Occurrence •competitive tension / auction process •positioning P/E multiple • UK 200 Group SME Valuation Index Nov 2011 6.0 times P/E (Nov 2009 6.8 times P/E) • EBITDA multiples on the same basis and over the same time frame has increased from 4.6 to 4.9 times • what can you do to increase the multiple? © Critchleys 2012
- 35. Maximising value • preparing for due diligence - no surprises • tax planning • independence (risk on business post vendor ‘leaving’) • management teams • consultancy / employment (effective handover) • deal sweeteners – earn outs / shares (sharing risk) • competitive tension © Critchleys 2012
- 37. Planning is everything: How to maximise the potential of buying or selling a business in today’s economic climate Edward Lee Head of Corporate Finance edward.lee@bllaw.co.uk T: 01865 254222
- 38. Who is the buyer likely to be and why? Private Equity – Very active? – What excites them? – Scaleability? Trade Buyer – How has your sector faired? – Market noise? – Exit strategy? MBO – Known entity? – Lower price = less risk? – Funding?
- 39. Who is the buyer likely to be and why? Consolidator – The cycle – The “King maker” Overseas interest – What are we seeing? – Why are we seeing it?
- 40. First impressions count! Legal audit – It’s like buying a house – Good and bad seen in context How do you make a good first impression? – Pre sale grooming – Tidy up! – Review contracts 2nd tier management – How good are they? – Why is it important?
- 41. Documents Confidentiality and Exclusivity Agreements – Confidentiality How to keep a secret? At what stage? – Exclusivity Only game in town or auction Timetabling and get out of jail free cards Heads – A summary – A moral stick – Time well spent?
- 42. Documents SPA – Shares v assets – Narrative – Warranties/Disclosure – Tax Deed Disclosure Letter – The more the merrier – Detail is everything
- 43. Risk DD – There is always a risk – Information is the key – Start process early Warranty Insurance – What is it? – How much? – Why use it? Limitations on warranties – All sellers? – Whole of price? – How long? – Cap, collars and floors
- 44. Buyer tactics Paper overload – Adding pressure – Bodies required Divide and conquer – Questioning quality of advice – The wedge Non lawyer heads – Experienced buyer tactic – Importance of early involvement of lawyers
- 45. Buyer tactics Tight timetables – More pressure – Late nights Good cop bad cop – Letting the lawyers take the blame – Prophets of doom! Industry specific tactics
- 46. Multiple 4.0 Scale 2.0 Brand – Brand Architecture 1.5 Channel Extension 1.4 Product Extension 1.3 Product Innovation 1.2 Systems & Infrastructure 1.1 Culture & Talent 1.0 Industry Benchmark 0.9 Costs 0.8 Revenues 0.7 Assets 0.6 Liabilities 0.5 Management Team 0.4 External Factors
- 47. Summary • Business cycle – Know where you are in the cycle – take the Stages test: http://www.shirlawscoaching.co.uk/stages • Timing – Invest in your business now and plan to exit ahead of the market! • Valuation = profit x multiple. Work on both to build value.