Each business is different, but most of you want to see a future event that secures you financially. So, here’s a simple guidance document from the RDLC to help save you some pain and maximise your gain!
- Who is going to buy your business?
- Why would they buy your company?
- Do you want to sell?
- Will you stay or go?
There are plenty of ways to sell or finance the purchase of some, or all of your business. However, if you want it to be as simple affair as possible; be bought not sold and minimise the chipping at the end, then start as you mean to go on:
- Set structure and rules
- Be on top of and record, all things legal, financial and operational
- Involve professionals as soon as you can – FD, Advisor/NED, Lawyer and HR.
2. Start with knowing your number
Knowing exactly what your business will be worth in 3, 5, 10 or 50 years from now is impossible. So is knowing how you’ll feel about it over these time frames.
So, let’s deal with today, what would you want and what would you take, to de-risk, walk away or be part of a bigger play?
This can be a number; it can also be a ‘springboard’ opportunity that augments your position many times over and so giving up a little bit of jam today for a huge dollop of cream tomorrow can also be a good thing.
Remember, history is written by winners and good news travels fast. So true numbers of multiples achieved, cash received, legal documents binding the deals, are hard to decipher and the spoils may not be what they appear to be.
You actually have to be within the lucky 1% of recruitment agencies to do a material walk away deal!
3.Bodie, Doyle or Judge Judy, you need to call in a professional.
Great businesses are bought and the rest are sold!
If you haven’t got one already, invest in a proper FD/Accountant, not the cheap person down the road or your mates mum who once did purchase ledger. Knowing your numbers are correct, recorded as required and bankable, will save you time, effort and huge costs at deal time.
Have a strong relationship with a good lawyer and law firm, talk to corporate finance teams to measure the landscape and ensure your bank and ID facility are on the ball.
Tough questions along with heavy financial, legal and market due diligence, is all part of the deal journey, so make sure you iron out as many of the bumps as possible.
With good professionals and advisors on board they can make sure that not only are you maximised for sale, but that they have also been whispering in the right ears to get you noticed and increase the number of interested parties.
4. Be in the room and on the ball
If a deal is not going how you envisaged or you aren’t going to get what you need, let alone what you want!
Be prepared to pull the plug and walk.
You have to remember that lawyers, corporate finance even the bankers looking for a larger account, are all incentivised to see this deal happen. So, they may not always be the best placed for impartial advice if the deal is near to closing.
5. What deal suits you?
Are you selling all or some of the business? Is it a buy-out, buy-in, trade sale, PE acquisition or a merger? Or do you just want to de-risk and take something off the table?
It has to be right for you or you are storing up trouble for the future.
After you have agreed an indicative number you will go into an exclusivity agreement with the acquirer/s and a timescale in which to do the deal.
It is especially important when acquiring a recruiter, as a recruitment business, your only real asset is your people. If the acquirer isn’t comfortable, they won’t engage in expensive due-diligence.
Most recruitment deals require management to be part of the deal in order to keep consistency and continuity, post deal and into a growth future.
Before the deal hits the hardcore actions of the lawyers, banks and corporate finance, you are very likely to be involved in signing Heads of Terms (HoT). Some HOTs can be very long and full of micro detail. The HoT is there for a purpose, read it, understand it and if it’s not right, don’t sign it.
What will it show they’re buying?
Full Share Sale
You sell the entire company (your owning %) and all liabilities sold as a going concern. As a shareholder you may pay capital gains tax (CGT), but this could be reduced to 10% through entrepreneur’s relief on the first £10m.
The payments can be made up in many ways, but they are normally a form of cash, loan notes and/or shares.
You agree with the buyer which assets and liabilities are to be transferred. You still own the limited company and will need to close it down. Employee discretion is far more difficult. Business premises need to be transferred, which can be costly and time-consuming. If you have employees, the TUPE regulations are likely to apply, and legal advice should be obtained. You pay corporation tax on any profits made from the asset sale, and CGT on cash withdrawn as a dividend.
Goodwill (Intangible Assets)
Unlike a share or asset sale, goodwill is an intangible asset and, as a result, difficult to value with precision, but can be a great way of arguing for an improvement on price.
6. Pricing and Value
The value and worth you place on your business may have nothing to do with market reality at that point in time. Buyers today may not be the buyers of the future and multiples change with the economic landscape.
In reality your business is worth exactly what the highest bidder will pay for it!
So, know your number, what you will and won’t take and be absolutely sure you’ve allowed for tax and fees.
The better your story, cleaner your business, the more stable your position and the greater the future opportunity, the better you should do on a deal versus the market.
Point to be aware of: a lot of businesses experience a poor ‘deal year’ as they focus on the deal rather than the business and take their eye off the ball. Be careful as it can give an acquirer space to chip the price.
Once all agreed on price, terms and dates, a ‘locked-box’ calculation of Enterprise Value(total price) to buy your business (normally) at a debt free, cash free basis, with balance sheet adjustments for debt and working capital, will be confirmed. This gives the equity value you will receive.
7. What’s the mullah look like?
There is a saying that turnover is vanity, profit is sanity, but cash is reality.
BUT, cash on its own isn’t accretive, in fact it generally loses value in today’s economy…
So, weigh up the options. Loan notes can be the accretive, a gift that keeps on giving if the business does well. Shares can see a big upside and give you rights. Just make sure the structure is considered.
Cash (& deferred cash)
Simple, understandable, clean, low risk, immediate and likely to qualify for 10% entrepreneur’s relief. You can get on with your new life. If the cash is spread over several years, you will probably pay the full tax bill up-front and the business needs to succeed.
You don’t get all of your money straight away. A proportion is dependent on future profits, sales targets or other criteria. This adds time and risk. However, your buyer may do great things which make it easier to hit the targets, and you may end up with more money eventually.
Earn-outs can be complex and there is no clean break. The worry continues and you certainly haven’t let go. You may face conflict in the future with your buyer. But in recruitment with people as assets, its fairly normal, unless a huge buyout.
Basically, an IOU from the buyer. You get paid in future instalments. You should get paid interest on the loan note. To reduce the CGT, you could cash-in your loan notes over several tax years. Loan notes come in two forms and can be highly complex with tax consequences. Tread carefully.
Ordinarily, loan notes don’t qualify for Entrepreneur’s Relief but careful tax planning can take care of this.
Shares in the buying company
If you are happy to sell to a business, you may well be happy to invest in them for future profit potential.
Whatever offer is dangled in front of you, be sure to know how the offer is made up. Never assume it’s going to be 100% cash.
8. Don’t lie
Buyers generally know the market they are buying into and weren’t born yesterday.
Know your numbers, your market, your clients, structure and what the future holds.
You will go a long way into the decision to acquire your business, if you are spot on, they will be quicker to seal the deal.
9.Do DD on your buyer
There are many buyers running around shaking a cheque book wanting to acquire recruiters.
However, as you’d expect there are some disingenuous, Machiavellian people out there who may shaft you pre or post deal.
Ask for references, meet their teams, check their background and don’t waste time on tyre kickers or the wrong acquirer. It will cost you time, effort, money and maybe your business.
You may miss your business and no amount of cash will solve that, but more importantly you will have warranted many things and signed covenants around your post deal practices.
Breach these and they will come after you legally.
Some do it just to scare, even when there’s no breach.
They are just protecting their asset, its business and rarely emotive, so don’t expect to appeal to their understanding side.
If you started as you meant to go on, got your house in order day one, engaged with the right advisors and hired the right team at sale… you will be fine!
DK & GG