Frequently asked questions
- How much is my company worth?
- How long will it take to sell my business?
- What do I need to do to prepare for the sale?
- What about lawyers?
- What about tax advice?
- What size and type of company does Impentab help?
- What is Due Diligence?
- What is the Business Purchase Agreement?
How much is my company worth?
The million dollar question with no simple answer.
The easy response would be to state that your business is worth a standard multiple of earnings or adjusted profits. However the right answer, that we must face up to, is that your business is worth what someone is prepared to pay for it.
Motives and not multiples determine value. The issue is more about negotiation than valuation.
Often quoted is a multiple of 6 or 7 times adjusted operating profit (that is operating profit after making adjustments for the profitability of the company under new ownership and after corporation tax).
The reality is that your company may be worth much less than the above or much more. On average we find that the difference between the highest bidder and the lowest bidder is 220%. The reason for this is that they are buying with different motives. A strategic buyer is likely to pay a higher price than a return on investment buyer.
Your objective must be to put yourself in the best possible negotiating position and that means having a choice of buyers. It also means being well prepared for the negotiation.
We wish there was an easy answer to this question but the truth is that there isn't one. Any other advice is seriously flawed and could result in you significantly underselling your business.
Traditional valuation based simply on return on investment makes an assumption that nobody will pay a premium for your business. This may be true but it is a very premature assumption. However be careful not to limit your aspirations.
How long will it take to sell my business?
Another difficult question. Many shareholders never manage to sell their companies, others take many years. The main reason for this is a passive selling process. No enquiry generation means that you rely on a buyer finding you. Not only can this take many years but leaves you in a poor negotiating position.
Using the BCMS process our clients have an aspiration of ten to twelve months. Sometimes it can less sometimes a little longer.
From the brief to received bids is consistently 5/6 months. The Due Diligence and Legal processes are more difficult to guarantee.
What do I need to do to prepare for the sale?
Important preparations include:
- The Impentab/BCMS 78 point checklist
Within 4-5 weeks of commencing a new project we will carefully work through our 78 point check list in order to prepare for the forthcoming negotiations. We will need to collect all the information necessary to answer the questions that may be raised during the negotiation meetings.
The most importantant aspect for establishing control of the negotiation is to locate a choice of prospective purchasers. Following that comes good preparation of documentation.
- The BCMS Dry Run meeting
Prior to the negotiations BCMS carry out a dry run meeting. During this time we will act as pseudo acquirers, together learning the best tactical approach. The main reason for this meeting is simple. Most of our clients have little experience in selling companies. On the other hand most acquirers are experienced in these matters. The playing field needs to be levelled and the dry run meeting is the ideal tool.
To add to the problem we often find that the first potential buyer to attend the negotiations is one of the best. You don't want this meeting to be your guinea pig.
In addition we will need to take early tax advice in order that the lawyers can structure the deal in the most tax efficient way.
What about lawyers?
Along with your accountant, your lawyer needs to play a key role in your plans to sell your business, and in drawing up the legal documents that will carry out those plans. It may be that the lawyers that you use for general commercial activities are not experienced in the mergers and acquisitions field. If this is true then find another practice.
It may also be worth considering that your present lawyer has a built-in incentive to dislike any deal you may propose: if you sell your business, he or she will probably lose a client! Consequently, whether they realise it or not, some lawyers who represent small businesses may tend to "pick apart" a deal by finding so many roadblocks that your deal falls to pieces, or drags on so long that the other party loses interest.
It is also true to say that it is unlikely to be necessary that you need to employ a big city practice whose fees can be exorbitant. There are a good number of experienced regional practices that will do an excellent job. Among these you will find the BCMS approved lawyers who have been through a screening programme with BCMS. It should be noted that there is no commercial link or gain to BCMS in these partnerships.
If you've used an accountant regularly to prepare your tax returns and draw up financial statements, he or she will be very well acquainted with the financial shape of your business. This knowledge may be helpful during the due diligence process.
Your accountant will also be essential in drawing up the historical and projected financial statements and other data required to place a benchmark value on your business, and in gathering and organising financial data that will be requested by the buyer during the due diligence phase of negotiations.
If you haven't been in the habit of getting audited financial statements, we strongly suggest that you do so now.
It is absolutely essential that at least one of the members of your team be an expert in dealing with the tax aspects of business sales and acquisitions. This person may beyour accountant, your lawyer, or you may also decide to hire a specialist solely for this purpose.
Depending on how the deal is structured by the lawyers, you may face an enormous tax bill upon the sale of your business, or next to none. There are a lot of opportunities to save money here.
Taking advantage of tax-saving opportunities requires planning in advance of signing the sales documents. We suggest that you start talking to such an adviser 4-6 months before a deal is expected.
What size and type of company does BCMS help?
Most BCMS company disposal clients are small to medium sized businesses. Eighty percent of clients have a turnover from £1million to £50million.
Each year BCMS carry out several hundred projects from every industry imaginable. Click here to view some of these sectors.
You might be interested to know what characteristics are likely to make a company more attractive to a buyer:
- An enviable client base without vulnerability to any single customer
- Strong potential for growth
- Scarcity
- Cash generative abilities (rare)
- High Awareness / reputation
- Guaranteed income streams via service agreements etc
- A strong forward order book
Things to be avoided include:
- Serious unresolved litigation
- Major financial debts
- Skeletons in the cupboard
- Minority shareholder problems
What is Due Diligence?
Usually, after a buyer signs a letter of intent to purchase a business and the seller accepts the letter, the buyer will have a specified period of time in which to conduct a due diligence investigation of the seller and the company. During this period, your buyer should have access to your financial and other records, facilities, etc., to investigate before finalising the deal.
BCMS will have assisted you in the preparation of documentation so by now you should have collected and examined most of the information the buyer wants. The vast majority of it is in the form of paper. The buyer will want to see copies of all leases, contracts, and loan agreements in addition to copious financial records and statements. He or she will want to see any management reports you use, such as sales reports, inventory records, detailed lists of assets, facility maintenance records, aged receivables and payables reports, employee organisation charts, payroll and benefits records, customer records, and marketing materials. The buyer will want to know about any pending litigation, tax audits, or insurance disputes.
Buyers will also look at the environment your business operates in, including the size and makeup of your market, your principal suppliers and customers, your competition, and your industry. They may ask you for more and more information until you feel overwhelmed! We suggest that you respond patiently, and cooperate as much as you reasonably can. Just keep your mind on the goal - selling your company at a price and terms you can live with - and you will get through this potentially very trying period.
Your own due diligence
You should also do some serious investigating of your own. You'll want to find out the buyer's credit record, management experience, reputation, and the plans he or she has for your company's future operation. This is particularly true if you plan to continue an employment or consulting arrangement with the buyer after the sale
What is the Business Purchase Agreement?
The purchase agreement for your business is one of the most important legal documents you'll ever sign. After all, many years of hard work will culminate in this single transaction. You don't want to have problems collecting the money due you or to have legal problems haunting you into the future, and a carefully constructed purchase agreement can be your best insurance policy for preventing such catastrophes.
Customarily, the buyer's lawyer provides the initial draft of the purchase agreement for a business. This makes sense, since the buyer has to live and work with the company while you will walk away into the sunset with the cash (theoretically, at least). However, we suggest that your lawyer should draft the sections that are most important to you. In most cases, that means the clauses containing representations and warranties about the business. Ideally, you should try to avoid or limit the making of any warranties or guarantees for which you can be held legally accountable. You may also negotiate closely with the buyer as to which liabilities he or she is assuming, and which will remain with you.
Here's where a good lawyer can pay dividends. Make sure that you maintain on-going liability insurance for any liabilities that will remain with you - for example, product liability insurance on products that were sold during your tenure as owner.
Indemnity provisions, in which you promise that you will reimburse the buyer for certain types of expenses if they occur, are often a hotly disputed area of the contract.
The purchase agreement is likely to be a lengthy, complicated document. For some of the more elaborate deals, the contract plus attachments can run into hundreds of pages. You should go through it carefully with your lawyer and make sure that you understand the implications of whatever is in there.
Once both parties have agreed on the language of the purchase agreement, it will be signed by both parties. The contract will state the date at which the final transfer of ownership and possession of the business will occur, and when the seller will get the money. With a signed purchase agreement in hand, the buyer can finalise any financing arrangements with outside lenders in anticipation of the closing.
