A guide to trade sales
This article is from a previous Equinox magazine, which you can view in full here.
Selling a business can be a daunting prospect, especially when to a competitor. With so much at stake, Equinox spoke to Sam Mabon, of law firm Brabners LLP, a leading expert in this field to find out more.
Many business owners will have a vague idea of how they will exit one day. Often, the goal is to simply sell the business and retire on the proceeds.
However, the sale process can be extremely complex. If not properly executed then business owners can miss out on the full potential of their sale. In some cases, they can end up working longer and harder than they originally planned, with possible impacts on the sale value of the business.
So, what can be done to avoid this? Unfortunately, each business is different, and last time we looked, there was no handy guide to this process. Therefore, Equinox decided to find out more from an expert on the topic. Sam Mabon is a partner at Brabners, one of the most experienced law firms in corporate takeovers in the North West.
Sam explains that the key to a successful trade sale is preparation; there can be a notable difference between wanting to sell and being ready to sell. Preparing for a sale is often much trickier than the sale itself – and takes a lot more time.
“As a rule of thumb, a typical transaction with a motivated buyer and seller and sensible advisers, can complete in six to eight weeks from issuance of the first draft of the purchase contract,” Sam explains. Yet he suggests beginning to prepare for a sale 18 – 24 months before exit, starting by consulting a lawyer and accountant to iron out any issues or barriers to avoid the risk of potential claims and maximise the value of the business. This ‘housekeeping’ can take even longer if there are structural deficiencies to be addressed. Sam says: “For example, rarely will a purchaser want to acquire anything other than 100% of the business. Owners need to consider if there are minority shareholdings and what arrangements are in place to ensure that the whole of the business can be sold.”
A major advantage to achieving the best price in a trade sale, as in any sale, is competition. Sam says: “One of the surest ways to achieve maximum value, but also the greatest opportunity for cultural alignment, is to create a competitive environment, with multiple buyers competing for the acquisition. Again, this takes some time to engineer, most often with the help of a corporate financier.”
Trade sales can be extremely beneficial to companies in certain sectors, offering a fast pass to greater profits and growth by benefiting from economies of scale. But this is not applicable to all sectors, as Sam explains: “Localised businesses that require duplication of resources
(for example an independent retailer or restauranteur) will find it harder to find a strategic acquirer on a buy and build strategy. The same could be said of a niche business where the pool of potential acquirers will be smaller than in a more mature market. Similarly, where there is no obvious underlying market value in the brand or intellectual property, this may also be of detriment.”
Assessing value in certain sectors can also be an issue. While the majority of companies are priced based on their profits, the speed of advancement in the technology industry means that a company’s value can plummet in a flash, while pre-revenue businesses can be worth millions purely in opportunity. “Facebook’s acquisition of Instagram at $1 billion is an obvious example,” Sam tells Equinox. “When the deal completed in 2012, Instagram had 30 million users, zero revenue and just 13 employees. However, the acquisition represented an opportunity for Facebook, coinciding with its IPO, which it has turned into a multi-billion dollar ad business with more than 700 million active monthly users.”
Another issue for buyers to consider can be the excellent relationships already in place within a business; if significant value lies in the relationships between clients and staff, a buyer may require reassurance that these relationships are securely tied to their purchase. There are possible methods to achieve this, Sam advises: “Perhaps through incentives, by bonus, option or share awards facilitating participation in the sale, together with robust restrictive covenants in the employment contract.”
Sam can’t think of many sectors which Brabners have not advised in. He has been (and is currently) involved in numerous trade deals, of various shapes and sizes. Though there are differences in size and sector, according to Sam, trade sales have one common factor – the process is extremely demanding. With the potential to last years, trade sales can be time-consuming projects which isn’t easy for business owners who still have to run their businesses in the meantime!
“The distraction cannot be underestimated,” Sam advises. “It will help if you are able to lend one or two key stakeholders with a full knowledge of the business to devote themselves to the process on an almost full-time basis.”
Sam’s advice for those considering the trade sale route is to manage expectations from the start and be honest about any skeletons in the closet before a price is negotiated to prevent any problems, or even a decrease in price, further down the line.
He adds: “Finally, the vendor who is able to negotiate with the confidence of being able to away from a deal will most certainly win the most favourable terms.”
How does a trade sale work?
No two trade sales are the same, but here is the basic route from ambition through to completion.
- Finding a buyer – instead of putting a business on the open market, the most common tactic is to have buyers in mind first. Appointing a corporate financier or specialist sales broker is usually the first step. If there are several potential buyers, even better – as previously mentioned, a competitive environment is the surest route to maximising the value of a business.
- Creating an Information Memorandum – this can be used as the basis of preliminary discussions around price and headline terms (if appointed, an adviser will help put this together).
- Invitations for offers – once a potential buyer (or hopefully buyers) have been identified, offers are invited and heads of terms (or headline terms) are prepared and negotiated with the preferred suitor.
- Legal stage – here a buyer will engage with their lawyers and accountants to commence legal, financial and tax due diligence. Subject to the deal size and sector, additional specialist commercial and technical due diligence may also need to be carried out.
- Contracts – at this point long form agreements are issued, negotiated and – hopefully – concluded!
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