Softer Issues when Selling a Business - Interview with Mike Kane, Turcan Connell

Business owners may have spent many years, perhaps a lifetime building and growing their business and it can be overwhelming mentally, emotionally and in practical ways to start the process of selling that business, from preparing the business to be sale ready, finding a buyer and then getting the deal over the line with a satisfactory outcome. We recently caught up with Mike Kane, Partner and Head of Business Law at Turcan Connell to discuss some of the issues for owners to think about when selling their business.

The Right Team

Often underestimated is the time needed both to continue to run the business and to prepare it for sale. It is critical to pick the right team of advisers from the outset. It is tempting to stick with the family lawyer and accountant who have served you well in the past, but having the right people with the right experience around you will maximise your return. While much of the heavy lifting is done by lawyers, tax advisers and corporate finance, it is important to have someone in place to help with preparation for sale, getting your ducks in a row, so to speak and who can interface between the owner and the advisory team which is where Business Sale Basecamp can assist.

The Seller

What does the seller want to achieve from the deal? Money will be important but how much is optimal, realistic or negotiable? Tax optimisation is desirable - selling in the best way to mitigate the tax bill. Legacy, leaving something behind for those who want the business to continue, who are concerned about their management team and employees, who do not want the business to be asset-stripped and sold off. These concerns will inform how the deal is structured. Advisers need to understand what the seller wants as this will affect how large the buyer pool will be and who can be included.

The Buyer

The starting point and the easiest, less intrusive sale will be to family or management. Who is already involved in the business and can they take it forward? It speaks to a family succession plan or a management/employee buyout. If not, then sale will be through a third party, financial purchaser, private equity or trade competitor. Sellers must understand their competition. Are they a strategic buyer looking to add additional capacity, intellectual property or a new geographical location? Preparing the way in advance, by using a tool such as LinkedIn will be useful to sellers in advertising such things as expansion, a big contract win, a great quarter’s figures, thereby making themselves an attractive proposition for potential buyers. It may be necessary to involve a corporate finance adviser or agent to assist with finding potential buyers.

The Right Time to Sell

The best time to sell a business is when you don’t have to. It is important to pick the right time to sell and optimise the value of the business. Is the business in a growing market or a declining one? Will advancing technology such as artificial intelligence, robotics or machine learning impact future value? Is the business goodwill dependent on the owner? Are tax rates changing? Are key management people about to leave?

The seller must think strategically about the timing as they are the main investor and carry all the risk. It would be madness to invest everything in one stock on the stock market but that is essentially what the business owner is doing, if they have all or most of their financial eggs in their business.

Some business owners leave it too late, there is a time to sell and if you miss the boat it may not come back your way. Some owners will take seriously ill or die before realising the benefits of their hard work. You cannot assume things will continue in the same way, we saw that in 2020 with Covid-19.

The Deal Time

Where the deal is agreed and the transition to sale is fairly straightforward, the deal will take around 8-12 weeks. However, this is rare and when starting from scratch, around 9 months minimum or longer will be required. It may be that the business is not sale ready, more time may be required to stabilise and help the business, getting the right people involved can result in an improved sale outcome.

The Due Diligence Process

A due diligence checklist, usually includes legal, property, financial, tax and commercial. The buyer will want to scratch under the bonnet of everything for two reasons. Firstly, a buyer wants to know that the price being paid is robust, that something will not come out after completion affecting the price paid. Secondly, a buyer is walking into a potential set of liabilities. For example, where there was a family buyout of a company, the client wanted very little due diligence to be done. Two weeks after the purchase, as the buyers were coming to grips with the business, one of the workers fell through a roof on site with the buyers being prosecuted under health and safety legislation. They inherited liability because of not doing enough due diligence. Due diligence needs to cover risk as well as financial and contractual matters.

The Valuation

Ultimately, a company is worth what a buyer is prepared to pay. To reach a valuation, various methods can be employed. Net asset value involves looking at the balance sheet, property, cash, a minimum of what should be paid. The more recognised way of arriving at a valuation is looking at profitability, using a metric called EBITDA (earnings before interest, taxes, depreciation and amortisation), assessing profitability and financial performance. The multiplier changes depending on political circumstances, location, age of management team, desperation of the seller to sell and so forth. So, where the business can demonstrate growth, it will probably sell in a higher multiplier than a steady state business. As a basic example, you have a business throwing off ￡1m EBITDA and if the multiplier is 4, it would give an enterprise value of ￡4m, effectively the goodwill value. You then add the excess cash from the balance sheet to the enterprise value and you arrive at the acquisition value. This is where the right advisers can really help to deliver additional value to sellers.

The Negotiation

Old style negotiation was very aggressive, dirty and point scoring. Now, it is generally more professional and business-like, with each side trying to work out what is important to the other side. What are the red lines that could derail a deal? Red lines can become pink lines with negotiation and compromise – a seller may pay a bit more than they intended and a buyer may receive less than they wanted but the deal is done. The principle of ‘buyer beware’ applies, the buyer must decide if they are happy with the deal and will ask for certain protections from the seller. The seller will want to limit these protections wherever possible leading to negotiation of the warranties and indemnities.

The Price Chip

A seller agrees a price with the buyer, then close to completion or at some point on the journey to completion, the buyer lowers the price. Price chip reasons generally fall into 3 categories: Firstly, legitimate, it is found through the due diligence process that profitability is not as high as thought; secondly, a price chip is dressed up as legitimate but is not, the buyer realises there will be a tax charge on disposal of property and wants to reduce the price by the amount of that tax charge, but a buyer ought to have known this and you need somebody experienced to push back; and thirdly, the buyer is being difficult.

Although a bitter pill to swallow, a seller must ask themselves: Is there another buyer? Do I want to restart the process with so many existing costs and would be future costs? Do I have time to start again, do I want the hassle of it? Seller circumstances such as illness, family issues or retirement are factors to consider and sellers must be careful not to overshare personal information that could be used against them by a buyer to chip at the price. It's not always roll over and accept the price chip but we do need to stop and think about whether to negotiate it. Buyers too must think about whether they want the reputation of engineering price chips in every deal they do as this could affect their business going forward.

The Key Points

Sellers, think about why you own the business, where you want to go and what the end strategy is. This will help you identify potential buyers. Timing is everything. Do not sell when you are under pressure. Think about how much money you need to retire on and if you get more, it's a bonus but don't let that drive your decision making. Get a good set of people round you. If possible, know your advisory team 2-3 years ahead of the point of pressing the button. There are going to be some difficult moments, you must trust your team and know that their advice is solid.

With thanks to Mike Kane – Turcan Connell

For more information about Business Sale Basecamp and the services we have to help business owners prepare their companies for sale, please visit:

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

You can also contact me directly at:

[email protected]

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