Part 1 - What is your strategic reasoning for acquiring a business? Why you want to buy a business, where to search and what to look out for. To start with, it helps to be clear about why you are buying. Acquirers can have diverse motivations: a carefully thought out strategyopportunistic e.g. see a competitor of a failing business is up for sale a belief that, by acquiring, you will be able to generate a value significantly greater and faster than the alternative of continuing organic growth. Often, the expected benefits will include one or more from: geographic expansioncustomer basecustomer spread, i.e. for a manufacturer a number of blue-chip customers, such that there is no undue reliance on a small number of customerscontract durationsrepeat business patternsskill-setstechnologyintellectual property rightsdepth and quality of managementuniqueness and competitiveness of products and servicesscalability of products and/or servicesmarket position and brandsystems and … [Read more...]
How To Get Maximum Value When You Close Your Business
In the first part of this blog I discussed what types of business are unlikely ever to sell and what you can do to extract maximum value. Now. Let’s assume that the day has come for you to close down, realise the assets, pay the bills and walk away into the sunset. Closing down a business is time consuming and emotionally draining for the owners. In most cases, they will be walking away from their life’s work. If your business has reached a certain size, it’s likely you will need help from a trusted advisor who should project manage the process for you, the owner. Bear in mind, the owner will have a much-increased workload dealing with customers, suppliers, staff, financiers, tax authorities and the many specialists who need to be involved. The many specialists involved mean the owner should meet with: registered insolvency practitioners and liquidators to understand the administrative and legal processes of closing down the business, and run a “beauty … [Read more...]
How to exit your business successfully even when you can’t sell it – Part 1
Let me repeat some statistics: 75% of all small to medium sized businesses never sell. 17% sell for a disappointing sum. Only 8% sell for a sum that meets the owners hopes and desires. That is 1 in 12. So if your business is likely to be in the 75%, what can you do to get value? Some businesses are not suitable for sale. Typically, we are talking about businesses in the following categories: Owner is totally critical to the business – examples can be found in most small professional practices where the client acquisition and service delivery is solely the responsibility of the owner Sole trader with distinctive skills, such as a trades professional e.g. a plumber or an electrician who are incapable of managing other people, or who prefer not to manage other people, and are satisfied to make a living on their own, having built up a wide referral base of satisfied customers Businesses dependent on one large customer such as a specialist … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 5
How secure are your forecast revenues and profits? In the last blog I dealt with the question of Forecast Gross Margins. Another hard lot of questions you will have to answer will be to do with your historical and forecast sales and profits. The hardest part of any sale is convincing an acquirer that the business is going to meet its forecasts. All acquirers will argue that the best guide to future performance is the current and past performance. If: you develop budgets and forecasts and report actuals against these forecasts on a monthly or quarterly basis, and your actuals are generally as good or better than your forecast, then you have started to provide a measure of comfort. You will need to look at each line item in your forecasts and if they show a steady progression and that is what you have always done, then there should not be a problem. However, if you are forecasting a rapid increase in sales … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 4
How secure are your forecast gross margins? In the last blog I dealt with the question of Employee claims. Another hard lot of questions you will have to answer will be to do with your historical and forecast gross margins. This is based upon an actual case. The Company in question sold products all over the world – 90% of sales were to overseas customers. It had grown and now turned over £5m and made a gross margin, after deducting costs of sales, and direct costs of carriage, freight, insurance and agent’s commissions (all of which varied from territory to territory) of around 30% overall fairly consistently year on year. The price for each customer was negotiated annually in advance and took into account these varying direct costs. Internally, the gross profit was really only accurately reported after a stock count which was performed every 6 months. The accounting system used did not have a dynamic stock and cost of sales program and sales were analysed by country. Yet … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 3
Any troubling employee issues? In the last blog I dealt with the question of Intellectual Property. Another hard lot of questions you will have to answer will be to do with your Employees. You have maintained good employee records and everyone has signed an Employment Contracts, you have written a Staff handbook, and you feel that nothing much can go wrong. One of the questions you will be asked is to provide full details of: “Outstanding and anticipated claims by past or present employees or officers for re-engagement or compensation or with reference to discrimination or victimisation or otherwise. This is the point at which you realise you have a problem. It is truly amazing how often this happens. Some of the examples I have seen that have held up a deal until they were resolved are: Employee on long term sick leave for stress; your employee benefit sick leave insurance policy has kicked in and the person is getting paid something every month and as far as you … [Read more...]
Selling a Business – Avoiding an own goal in due diligence – Part 2
How secure is your intellectual property? In the last blog I dealt with the tricky question of contracts and “change of control clauses”. Another hard lot of questions you will have to answer will be to do with your Intellectual Property. You have searched for all your IP stuff and mostly drawn a blank. The questions you could be asked are for you to provide a list and supporting documentation covering all: “Details of any software, web site or electronic database owned or used by the company indicating in each case whether the software, web site or electronic database is owned by the company or licensed. Supply copies of all licence agreements together with a list of fees payable and Copies of all other agreements relating to the development or operation of software, web sites, databases or hardware for or on behalf of the company. Details of any infringements or alleged infringements of any intellectual property owned … [Read more...]
Selling your business – The impact of customer contracts
Having built up your business over many years you have finally made the big step and decided it’s time to hang up your boots. You have a buyer and an offer has been made and accepted and now the due diligence process is under way. You are becoming increasingly frustrated by the questions you are being asked but, through gritted teeth, you have gathered together all the information and provided it to the other side. The hardest part was finding all the contracts with your customers and suppliers, making sure they were signed and current, but you got there in the end and gave yourself and your team a metaphorical pat on the back. One of the questions asked was: Are there any “change of control” provisions in any contract with a customer (or a supplier) such that the contract can be cancelled by the customer (or supplier) if they wish if the ownership in the company changes? And this is the point at which you realise you have a problem. There are two such contracts with … [Read more...]
Acquiring a Business – Issues to consider – Part 4
Before you make the offer to acquire a business – Consider what happens next Post-Acquisition Strategies Prior to making an offer, the acquirer should consider the purpose of the acquisition and re-visit the reasons for making the acquisition and how well the target fits within those reasons. The steps required are: Confirm the acquisition meets the deal objectives Is the business to be run standalone or integrated? Is the culture very different and will this inhibit the deal success? Does the acquisition meet the objectives set out in the overview? Ensure the commercial due diligence checklist is linked to running the business Understand the competitive landscape the acquisition target operates in. Understand the management intentions and how to use the management team being acquired to best advantage. Plan to take advantage of the “halo” effect Identify the areas where the quickest and most profitable extra profit can be obtained and assign people to exploit … [Read more...]
Acquiring a Business – Issues to consider – Part 3
WHY DO ACQUISITIONS FAIL AND HOW DO YOU AVOID A BAD OUTCOME? It is an unfortunate fact that Acquisitions have a very high failure rate. This may seem a powerful statement but it is borne out by the statistics. "If one were to define 'failure' as failure to increase shareholder value then statistics show these to be at the higher end of the scale at 83% (Cnnfn.com 1999).” “In 2004, McKinsey calculated that only 23% of acquisitions have a positive return on investment.(http://jurisonline.in/2008/11/failure-mergers/)” The generally accepted view is that over 50% of all acquisitions fail to achieve an increase in shareholder value. I believe that this applies mainly to very large acquisitions and they are the ones that hit the headlines. In my experience, most acquisitions, undertaken with careful planning and due diligence do provide significant value.The main areas to consider are: proper strategic thinking for an acquisition sufficient and well thought-through preparation by … [Read more...]
