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Time for an exit?

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The last two years have not been easy for owners when it comes to buying or selling a business. A lack of liquidity from banks coupled with the desire of most corporates to preserve cash certainly hasn’t helped get deals done. The fundamental reason how

The last two years have not been easy for owners when it comes to buying or selling a business.  A lack of liquidity from banks coupled with the desire of most corporates to preserve cash certainly hasn’t helped get deals done.  The fundamental reason however is the mismatch of price expectations between buyers and sellers.  There are signs this is beginning to change.

Trying to sell your business in a downturn is rarely seen as a time to maximise the price and for those who aren’t sitting on a distressed business where they are forced to take some action, “Why would I sell now?” has been a common refrain.  Put simply, the price just hasn’t been right for them.  The underlying performance of a business and its resilience in tougher times becomes easier to test the further through a downturn we are.  A sustainable business with maintainable profits is likely to be the starting point for a buyer before they can look at any upside on the earnings potential which might increase the price.

Recent months have seen those wanting to sell a business receive offers reflecting a more favourable valuation, encouraging them to decide it might be time to sell.  Perhaps more importantly, there is a perception that the value they can get now may not increase significantly over the next couple of years raising the question why wait?

Evaluating the best exit option or options for a business will, of course, require a detailed look at the circumstances of a particular business and its marketplace.  Whether a sale to management is realistic will very much depend upon the management and the availability of debt and/or equity whether from private equity houses at the larger end or small funds or individuals at the other.  Trade sales are becoming more common with cash available to make acquisitions.

Whichever route is taken, getting paid in cash in full on day one is still tough.  Many buyers are still looking to defer an element of the payment to the seller which helps cashflow but increases risk for the seller; or to introduce an earnout, making part of the payment dependent upon the performance of the acquired business, which increases risk for the seller; or partial exit, where the seller keeps a stake in the business with a view to sharing in any later exit.  Each has its own attractions and risks.

In any event, considering the options for sale should also be coupled with preparing the business for sale.  This typically involves identifying the issues in the business which may affect a buyer’s willingness to buy at all or the price which they will pay.  These issues generally include quality management, key employee employment terms, the length and robustness of key customer contracts, ownership of intellectual property (whether technology, know-how or brands), regulatory issues and disputes and claims.  The list could go on, but one thing is certain the earlier the process that these issues are considered, the better the position when it comes to finding the buyer, negotiating the price and doing the deal.

Article featured in The Yorkshire Post, 15 February 2011