Mergers and Acquisitions – What’s the Deal?

When selling a business, it is vital to obtain the right advice. This article is based on a recent discussion with Neal Allen, HNH Group and provides some valuable insights into getting the best deal in terms of value, structure and exit.

Options available to owners looking to sell a business

Generally, three types of deal are available. First, to float the company as a PLC, however this is usually not an option for most businesses; second, to sell to a trade buyer who has a strategic reason or rationale to buy the business; or third, to sell to a financial purchaser, where a private equity house or similar buys a business to drive growth. In terms of route to market, sellers can market the business directly, use deal advisers / business sale brokers or advertise through web channels and combinations thereof. Of course, there is also the option to transfer to employee ownership which may be suitable in some cases.

The reality of selling for the business owner

Selling a business is an intensive process. It involves setting parameters. What exactly is for sale? What value is expected and is this realistic? Who are the right parties to approach and when is the right time? The seller will require suitable marketing materials, conversations with interested parties to create competitive tension, negotiation and production of detailed information in preparation of sale. The structure of the deal itself must be addressed, not just the headline price but the detail, perhaps the use of earn-out clauses specifying future returns on the sale depending on performance.

The sale process and how the right advisers can help

Generally, the sale process will take six to nine months. It involves identifying buyers, producing information materials, both financial and strategic, then narrowing down to one buyer through to completion. Advisers will test the business quality, looking for potential issues. It is best to spot a problem up front rather than at the eleventh hour with time and money wasted. Everything must be examined - contracts, revenue, people - that all is as expected.

In the sale process, marketing materials are prepared, an introductory teaser is sent out to the marketplace aiming for the target buyer. Pulling together that list of potential buyers from the UK and perhaps further afield, working out the strategic rationale for each of the key buyers and how to position the business to appeal. Ideally, a seller will want five or six buyers vying for the business producing competitive tension, increasing interest to get optimal value and taking the winner to exclusivity.

The structure of the deal

The most common structure is the earn-out of a deferred element of payment. Pre-lockdown, many shareholders would exit in full. Post-lockdown the world has become a more cautious place. Almost every deal involves some form of deferred payment, usually between 15-40% of the consideration is paid one to three years after the deal, in both large and small transactions. Typically, 70% is paid with a 30% earn-out on an earnings or revenue basis over a one to three-year period to mitigate any potential future underperformance.

Information the business owner needs to provide

Initially, information is provided which piques the interest for a potential deal. Ultimately, a business owner should be prepared to provide all information. It's unlikely that a buyer will proceed without access to commercially sensitive information. The diligence process is wide-ranging, rooted in the financial including management accounts, statutory accounts, forecasts, budget, performance against budget, board minutes, tax returns, property leases/deeds, employee contracts and contracts with third parties. In larger deals there can be an element of commercial diligence, a detailed review of the sector or technology involved.

Information provision is a brutal process. It is one of the reasons behind setting up Business Sale Basecamp, to help owners prepare for a business sale, get documentation organised, prepare answers and understand what is involved in this fast-moving process. If the due diligence process causes the owner to be distracted while running the business and performance starts to dip, the result can be a price chip, or even a potential buyer walking away.

Benefit of deal advisers in adding value

The deal adviser shapes the process and adds value. They provide expertise on a day-to-day basis, bringing their experience of many deals to a one time only deal for a seller. Advisers will review the business, recognise the nuances of USPs, identify the risks and qualities of the business. This enables better positioning of the business, marketing in a bespoke sales environment with value drivers being identified, substantiated and highlighted.

Around the price chip the adviser is hopefully running several dialogues to raise competitive tension and broaden the set of interested parties. If a buyer then ‘misbehaves’, there is other interest that can be brought in to get the optimal price and deal structure.

Once in the process, various matters can go to or against value. For example, profit is not the only basis to structure a deal. Perhaps a business has just won new contracts, making historic profit less relevant, enabling use of a run rate EBITDA rather than historical EBITDA. An adviser will review profits and revenue to identify those value drivers. There may be add back value, for example, where an owner is exiting a business, their costs going forward should be discounted. Where the business is being sold at a point where most working capital is being used, it is useful to work out the average, the normal working capital of the business, using that as an adjustment to enhance value.

Errors to avoid that negatively impact on sale prospects or price

Financial buyers will only be interested if there's a management team or a team capable of taking the business on, which can be problematic when an owner wants to exit the business. Having the right people in place is critical, it is all about the building blocks. Market norms change all the time, so having incorrect price expectations can be a problem.

Impact of Budget tax changes on sellers and buyers

A word of caution against trying to rush a deal through because of potential tax changes. Buyers who see people stampeding to the exits for tax reasons will pay less than a seller would lose in tax. If it is a reasonable tax change, hopefully savings or value can be found elsewhere within the business.

Top three recommendations for best value when selling a business

First, management must focus on the day-to-day running of the business during the sale process as performance can start to fade. If the business starts to drift, especially at the point where the buyer gets exclusivity, you lose the advantage regarding value.

Second, preparation is key. Gather materials, ensure strategy is clear, have explanations ready for every piece of interrogative questioning. If you cannot answer questions or there are inconsistencies in the clarity, it can be distracting and stop the deal happening.

Third, a cohesive set of forecasts and budgets is key. Where is the business going? This is a question that must be answered in any due diligence process.

The next five years

Over the last five years, COVID-19 didn't help but generally the market was slowing towards the end of 2019, business confidence indicators were going the wrong way. However, there is money out there, particularly financial investors, who have raised money but not yet deployed it and are looking for the right opportunities. Since 2008, we have seen a succession of banking crises, health crises, the independence vote in Scotland and Brexit, resulting in uncertainty.

Eventually some business owners will get to the point where they have had enough. Business owners in their 50s, 60s and 70s who are not thinking about selling possibly should be, if not passing on to family. The younger generations put more of a premium on work-life balance and want to start enjoying some of the benefits of their business before other circumstances such as age, health or even death overtake. Some people leave it too late to sell to reap the benefits of their hard work. In recent times, it may have been advisable at certain points not to sell, but that's starting to change. It’s important to start preparing before you are ready to sell so that the business can be in the best shape, providing optimal value.

With thanks to Neal Allen, Head of Deal Advisory Scotland, HNH Group

To help business owners have the time and space to explore what is involved in selling their business and to give them access to expert help from someone who has started, scaled and sold a business successfully was one of the main reasons behind my setting up Business Sale Basecamp in July 2024.

It really is never too early to begin thinking what is involved with selling your business. Knowledge is power … once you understand what is involved and how you can prepare in advance to secure an optimal price, you will look at your business with a fresh perspective.

I provide business owners with a free 30-minute Teams call to discuss your business sale aspirations and what is involved in selling your business. I will also answer any questions you have about business sale.

To book this call, please either message me via LinkedIn or contact me at:

[email protected]

Further information on the services provided by Business Sale Basecamp is available at:

Business Sale Basecamp - Enabling you and your business to be sale ready