by Margaret Evans FDR Law
ASSUMING you have reached a decision to sell your business and it is not a forced sale because of insuperable issues within the company, you need to review realistically the range of potential options.
You do however need to ensure you fully understand the range of sale options before embarking on the process.
There are a host of options but the mainstream ones (and the focus of this article) are set out below, including:
a flotation on one of the stock markets,
a trade sale to a competitor or related business,
a sale to a financial investor and
a management buyout or buy-in.
Most businesses are sold to another company operating in the same field or a complementary one. You need to be realistic about the likely route to avoid wasting time and money preparing for something which will never happen.
Flotation
The idea of being listed on one of the stock markets with the public trading in your company’s shares can be an exciting one.
However, the costs of preparing for a listing and then meeting the regulatory and corporate governance obligations of a public company can be at best daunting and at worst prohibitive. Not just financially but in terms of management time, too, for a small company.
The process can take anything from three months to a year.It is not a step which can be taken without a banking, broking, legal and accountancy team. You will have to produce a prospectus for potential purchasers of the shares and the statements.
In that prospectus will have to be tested by a process of due diligence to ensure:
they present an accurate picture of the company,
its past performance and
the outlook both for the company and the sector in which it operates.
The value of the company, as measured by the price at which the shares trade at listing, will be uncertain. Markets can be influenced by factors which have nothing to do with your company or your sector and events and sentiment on the day of listing can move the valuation substantially up or down. Small companies are more likely to suffer in an uncertain market climate.
A flotation does make it easier for you and other investors to realise their investment. It will also raise your company’s profile, give you access to new capital to expand the business and probably make it easier for you to acquire other businesses because you can offer quoted shares as well as cash.
Listing on the main London Stock Exchange is the most expensive flotation route and requires the largest continuing commitment, both of cash and management time. There are stringent regulatory requirements both pre and post flotation which make this a suitable route only for the largest companies.
AIM listings are intended for smaller companies. Initial and continuing costs are lower and regulation more flexible. However, the average size, in terms of market capitalisation – that is, the market valuation – of AIM companies has increased over time with smaller companies dropping out of the listings.
Trade Sale
For many small to medium size companies, the most favoured and most likely exit for shareholders is by a trade sale.
If you have created a successful start-up, turned around or developed an established company, then you and your business will be known to others operating in your sector and, of course, to your customers.
It is not unknown for a company to buy a key supplier but, more often, trade interest comes from a competitor or from a company making a related product. Key factors in deciding a potential purchaser to make an approach will be the synergies which can flow from putting the two companies together and the benefit of removing a competitor from the market.
A trade purchaser, familiar with the sector and making an opportunistic bid, may occasionally only require minimal information before proceeding with further verification of financial performance, contracts, ownership of assets and legal liabilities as the sales process progresses.
However, if you have not been approached by a potential purchaser or you believe you can maximise the price by stimulating competing bids.You will need to produce a Sales Memorandum. This is similar to the prospectus required for flotation but subject to less formal regulation.
A key difference between a trade sale and a listing is that members of the public can buy shares at a flotation and it can be assumed that they may have little expert knowledge about the trends for companies in your sector.
In contrast, a trade buyer will almost certainly have a clear view about whether the sector in which you both operate has a buoyant future or faces the challenge of managing decline.
Financial Sale
A planned flotation or a trade sale can both be derailed by interest from a financial buyer.
Private equity houses purchase businesses in diverse sectors as vehicles for investment and therefore have very specific requirements of their target companies.
Some private equity houses specialise in specific sectors; most, however, have a diverse portfolio of companies and are differentiated by the size of the deals that will interest them.
Private equity houses look for companies which have an above average potential for profit growth, either because they are in burgeoning sectors of the market or because they have been inefficiently managed with either too high a cost base or poor sales revenues compared to similar companies in the sector. The companies also have to be cash generative to meet repayments on the substantial lending which forms part of the private equity purchase package.
Private equity houses are not generally long term owners of a business, typically looking to exit with an above average return on their investment in three to five years. Management is incentivised to reach this target by being allocated shares at a favourable price at the time of purchase.
In theory, a private equity purchaser should not be able to outbid a trade buyer. The financial buyer does not usually have the cost synergies which come from putting two similar companies together nor the benefits of combing sales or manufacturing work forces.
If you want to attract a private equity buyer, you will have to prepare a case to show your business is capable of exceptional growth. You will also have to explain why you do not want to be around to enjoy the benefits of that growth or, alternatively, rely on the private equity experts perceiving a potential which has escaped you.
Management buyout (MBO) or buy ins (MBI)
For many business owners who have created an enterprise from scratch and are keen to see it continued with the same values and personnel, a management buyout (or a buyin) is the preferred sale option.
Selling your company to a family successor or to a group of employees within the organisation can be a good way of receiving value for your company and securing its independent future.
The decision about whether this route is available, however, is largely out of your hands. It requires a management team to have the entrepreneurial spirit and confidence in the future of the business to invest a potentially significant amount of their own assets or take the risk of substantial borrowing to raise the necessary purchase price.
Some owners help by retaining a shareholding alongside the new management owners, but you may find it hard to have a proportion of your assets tied up in a company which you once controlled but in which you now play no executive role.
However, you do need to ensure that even if your management team is keen to pursue this route that they will be able to raise bank finance to fund the buy out or the buy in.It can be difficult for a team with no track record of having discharged financial obligations to major lenders to do so.
There is no harm on running a trade sale process in parallel with allowing a management team or the wider body of employees to put together its own bid for the company.
Even if your business was a management buyout originally, secondary MBOs are now not unheard of. Certainly, if your management team do see themselves as purchasers, you will understand the thrill of becoming an owner of the company in which you have worked and taking it forward to new success!
At FDR Law our Corporate Team will work closely with you and your team of professional advisors to guide you through the process providing expert advice and assistance.
If you want any more information or if you are considering an exit strategy and want some legal advice and assistance then please contact our Head of Corporate, Margaret Evans on [email protected] or ring Margaret or another member of our commercial team on 01925 230 000 or visit www.fdrlaw.co.uk
For advice on a forced sale, please contact John King at [email protected]
**This article does not present a complete or comprehensive statement of the law,nor does it constitute legal advice. It is intended only to highlight issues that may be of interest. Specialist legal advice should always be sought in any particular case **
