In the current economic climate, there are many CEOs finding themselves faced with the unfamiliar prospect of arranging the sale of their business.
There are a variety of approaches that may be taken to facilitate a trade sale but the best approach is often dependant on the individual business, its industry and its markets. The following outlines a general approach that is often effective but is not a substitute for quality professional advice.
Consider the Sale ObjectivesIt is worthwhile to identify from the outset the commercial reasons as to why the owners, (be it management or a corporate entity) consider the divestment of the business necessary at that particular point. Common reasons include impending retirement, business underperformance or favourable market conditions. Once the motivations behind the divestment are explicitly understood, a set of broad objectives can be identified and explored. Objectives provide a broad frame of reference from which regular assessment and review of the process can be conducted. Sale objectives do not necessarily have to be financially based. Common objectives include employee job security, formation of post sale strategic alliances or an ongoing role in the business.
Continue to Add ValueDo not allow the sale process to distract the running of the business. In order to attract the best possible price it is advantageous if the company’s shows good performance in the six months before the business is placed on the market. As price is usually based around a multiple of maintainable Earnings Before Interest & Tax (EBIT), a high EBIT will produce a higher purchase price. Value is also added through ongoing strategic alliances or supply/trade agreements.
Prepare an Information MemorandumAn Information Memorandum (IM) is the document which will sell your business and, as such, is extremely important. Just as a prospectus provides information to potential shareholder so too does a IM provide information to potential acquirers (although it is important to state that the IM is NOT a prospectus). In recognition of the documents importance many companies retain professional advisers to prepare it for them.
A good general approach to the construction of an IM is outlined below -
- Firstly the offer should be described in detail. This may include an indicative timeframe for completion and a description of the investment process that the vendor would like to follow. The proposed nature of the sale (ie sale of share, sale of parts of the business etc) should be disclosed in this section.
- A profile of the business should be provided next. This will include a description of business history, corporate structure, premises, IT systems, corporate governance procedures, regulatory issues and current financial position.
- A brief listing of senior management should be prepared, along with summaries of their CV’ s. This is intended to demonstrate to potential purchasers that they are not only buying the physical assets of the business, but also significant human capital. It may be useful to include CV’s of the board of directors as well.
- A detailed description of products and services follows on from management information. This section may be constructed according to divisions or revenue streams.
- Industry and markets should be mentioned in detail. In particular mention should be given to target markets, competitors, market size, market segments, trends, political and regulatory environment and major customers.
- Growth opportunities and critical success factors should be explored next. A description of key growth areas as well as the risks and factors which will determine the business’s ongoing success should be detailed here.
- Finally financial information should be provided. A balance sheet is essential, along with a Profit & Loss Statement with a three year history and one or two year forecasts. A statement of cash flows is not necessary but often useful.
Confidentiality AgreementUpon completion of the IM a Confidentiality Agreement (CA) must be drawn up. This is a standard document which will need to be executed by any potential acquirers prior to receiving an IM, and is designed to protect the confidential interests of the vendors business.
Distribution of Information MemorandumsOnce a potential acquirers have been identified the IM’s can be distributed (subject to execution of the CA). There is likely to be varying questions on aspects of the document and possibly requests for site visits by interested parties.
Parties should be directed to submit indicative offers by a specified date.
Due Diligence and Contract of SaleBased on the indicative offer, one or several preferred bidders, should be given the opportunity to conduct due diligence. During this stage it would be expected that vendor and potential acquirers enter into some form of negotiation on price and terms of the deal. Once general consensus has been reached, a heads of agreement will be drawn up which will eventually lead to a contract of sale.
Selling a small business can be surprisingly complicated and it is strongly recommended to any business considering a trade sale to appoint professional advisers to guide them through the process.