I’m a stakeholder… get me out of here!

1st March 2011

2

Agenda

Talk about my experience of building and selling a Company

The factors that I found important

Answer any questions

3

In the beginning

Start up

Survival

Growth– New challenges

– Excitement

– Success

– Rewards

Sale?

4

What Changes?

Professional

Personal

Market opportunity

Mixture of above

5

My Own Experience

AudioSoft

– I founded in 1995

– Grew very rapidly

– Won D&T award for fastest growing Co in SW in 2000

– Over expanded

– Back on growth at 20% per annum

– Co always profitable

Sold to Ultra Electronics in August 2008

– Met objectives of sale

– Still with the Company

– I have a boss!

6

The thought stage

Reasons for sale?

– Approach

– Co’s growth starting to slow

– Reached the point of inflexion

– Consolidation

– Didn’t want to be working my backside off with a smaller business

Summer holiday 2004

– 5 point plan

– Covered items like customers, IP, dependency on me, future revenue streams etc

– Big question – Did I really want to sell?

7

The chew on it stage

If I did sell what do I want to do?– Lie on a beach dreaming of selling business?

– New startup?

– Personal lifestyle issues

How would it effect employees?– Loyalty

– Future

The deep hard question - Do I really want to sell?

8

Research Stage

My own research

– Various valuations etc

– Other Companies in similar industries

How would I sell the Co?

– Seminar

– What effect on my time – I am running the business!

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Action Stage

Worked with Randall & Payne

– Full audit

– Advice

– Knowledge and experience from a trusted source

Appointed a Company which specialises in selling Companies

– Not accountants

– Not solicitors

– Not a friend of a friend

– Sell your Company like you sell your product

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Action Stage

Appointed BCMS summer holiday 2007!

Their process

– 6 months

– Generation of Information Memorandum

– 250+ prospective Co’s

– Letters sent out

– Meetings

– Offers

– Create a market

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Accountants and Lawyers!

Right fit with the business

– D&T?

Why Randall and Payne

– They know our business.

– Size & resource

– Relationship – dealing with a Partner

– Response – Sat, Sun afternoon, on holiday.

Why is this important?

– It’s a new experience

– Still running the business – hence likely to be outside normal office hours

12

Legal Advice

Two options;

– BCMS recommendation

– Accountant recommendation

Why Winterbotham Smith Penley (WSP solicitors)?

– Size

– Dealing with a Partner

– Importance to them

– Close relationship with Randall & Payne

– Personal previous experience

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The right team – why it is important

Still running the business

– How many hours are there in the day?

New experience for the vendor

– Acquirer may be doing this all the time

One thing I can guarantee

– There will be problems – Heads of Agreement meeting

Reassurance for the buyer

– Post acquisition comments

– Our acquirers were very complementary about the team

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Summary

Plan to make the Co fit for sale – timing is vital

Sale process – remember you must still run the business

Professional advisors – engage early and get a team that is right for you.

Valuation – be realistic. There will always be an expectation gap.

Keep something on the table for the acquiring Co

Selling the Business

Will Abbott LLB FCA

Partner

Randall & Payne LLP

Introduction

• Valuations

• Tax

• Strategies

Valuations

• Multiple of future sustainable earnings

• Asset valuation

• Discounted future cashflow (minority)

• Specialist valuations: turnover multiples

Valuations

• Multiple of future sustainable earnings

• Maximise the multiple (10+?)

• Always lower than plc

Valuations

• Start with historic profit

• Adjust for unusual items– Director remuneration– One off contract

• Use weighted average

Valuations

• Usually apply 5-8 times – 9/10 accountants will do this

• Often for tax purposes

Valuations

• PCPI average 11.2 times historic profit

• Mean deal size £20m

• Median deal size £6m

Valuations

• UK200 SME index P/E 6.8

• Mean deal size £2.65m

Valuations

• Debt free / cash free basis or Normalised working capital

• Build up of cash in the balance sheet

• Valuation plus the cash

The New Tax Regime• Entrepreneurs’ Relief

– Lifetime allowance £5m gains at 10% (x2?)– Individual allowance – Must be claimed– Business or part of owned for 12 months– Not business property or assets used unless

– Sold within 3 years of associated disposal &– No rent paid

Company Shares• Trading company

• 5% of the shares & 5% of voting rights

• Officer or employee– Officer = director or secretary

• No substantial non trading activities

Property• ER if owned by Co & shares sold

• But buyer may not want the property

• Use of SIPP or SSAS

• EFRBS

Tax Summary

• Much more restrictive regime

• Loss of indexation on property assets

• No reward for long term ownership

• Less reward for serial entrepreneurs

• But CGT better than 40%/50% IT

• Debt free/cash free disposals

Strategies

• Identify what are you selling– Customer list– Product/service– Personnel skills– Knowledge/know how– Geographic presence

Strategies

• Find a strategic buyer– Plc or private equity group - P/e ratios 15+, – buying 5-8 times = immediate S/H value– Goodwill write off may be an issue– Goodwill = price less net asset value

Strategies

• Set up an auction– Need 2 and more interested parties– Use a selling agent

• Many Accountants do not have the resources

– Avoid value buyers and investors – low multiples

Strategies

• Confidence– Business is worth what a buyer will pay– Confidence in your own business– Instil that confidence in them– Be prepared to stay on

Strategies

• Start process minimum 3 years ahead– Find the right advisors (solicitor/accountant)– Get the skeletons out and sorted– Legal agreements, employment contracts– Audited accounts– Spend money to make money

Strategies

• Business plan– Future strategy – Business Link: Growth

Programme– Build a management team – Prepare forecasts and meet them– Projections; but with buyer’s resources

Strategies

• Due Diligence– In house M&A team– Too many issues and deal is dead– No surprises beyond HoT

Strategies

• Make your own buyer– MBO/BIMBO– Company purchase of own shares– Unlikely to achieve 10+ times

I’m a stakeholder…

…get me out of here!

Peter Mardon

Managing Partner

Winterbotham Smith Penley LLP

Non-disclosure Agreement

• Confidentiality undertakings• Exclusivity (lock out)• Costs indemnity• Enforceability• Limited disclosure

Heads of Terms

• Price• Payment terms• Deferred Consideration• Earn-outs• Taxation• Ongoing involvement (terms of service

agreement/consultancy• Net asset adjustment

Due Diligence

• Paper trail (warranties and disclosures)• The right impression• Employment contracts (especially key

employees)• Terms of business• Agreements with main suppliers/customers• Property (lease terms, asbestos reports)• Licences, etc. (e.g. Data Protection Act)

Share Purchase Agreement (SPA)

• Operative parts• Warranties• Indemnities• Completion accounts• Restrictive covenants• The Tax Deed (or tax covenant)

What to do Now

• Service Agreements for you and key staff with restrictive covenants

• Tax planning, e.g. transferring some shares to your spouse, children, etc.

• Terms of business and contracts with main suppliers/customers

• Lease• Tidy up statutory books and records at

Companies House

Stewart BarnesStrategic Development Team

Business Link

I’m a Stakeholder…

…Get me out of here

or

I want to be a Shareholder…

…Let me in there

Personal Background

• Stewart Barnes

– 10 years with £100m Hansen Group (third generation, privately owned)

– Overall responsibility for the group with 14 business units in 6 countries employing 1000 people.

– Business Unit MD at 31, Main Board Director at 34; joint-CEO at 37.

– Bought businesses in Sweden (2); Denmark, Poland, UK

– Sold companies in Denmark (MBO, MBI) and UK (MBO)

– 10 years with Pilkington in sales & marketing management

– Strategic Development Team assisting regional businesses to grow and develop.

Personal Learning

• Structuring a business to run it is different from structuring a business to sell it

• Prepare 3 – 5 years in advance to get best value (‘grooming’ though a high - performing business should be doing the following anyway)

– Grow turnover and profits over the period

– Sell property and lease it back: sort lease

– Write a business plan (clarity) and update it annually

– Hit budgets, forecasts will be more believable

– Build a management team (it is not about you)

– Clear roles and responsibilities and contracts of employment

– Improve processes: ISO 9001, 14001, IIP, EFQM

Personal Learning

• The deal always takes longer than you think (minimum 6 months)…

• …and you have to run the business as well.

• Get advice from accountant/auditor - construct the balance sheet

• Involve your solicitor (specialist)

• Manage the advisors – do not let them manage you!

• Understand the terminology – HoTs; SPA; due diligence; warranties; deferred consideration; information memorandum

Valuation• Be realistic (when you are selling)

• Can buy businesses very cheaply especially if the target is cash poor or in distress

• Rules of thumb:– Buy at four to five times earnings (PBT)– Sell at greater than eight times earnings (PBT)– Many aim for seven times earnings (PBT) which is on high side –

depending on sector can be between 5.5 to 8.

• Other indicators:– Sales factor can range from 0.4 to 0.6 of total sales– EBIT factor can range from 5 to 7– EBITDA factor can range from 4.5 to 6.5

Opportunity Knocks

• You may not be planning to sell, someone may come knocking – maximise sales value by having a plan rather than a knee jerk sale

• Management team may be the buyers – beware of releasing the Genie from the bottle; minimal warranties

• Some “cheap” businesses may come available as companies run out of cash

• “What do I need to do now to help me?”

Business Link Many levels of assistance

• General Bulletins – Business i• Seminars, Events, Workshops• Business Advisers• Specialist Advisers – Finance, Innovation, Marketing• Strategic Development Team

Call 0845 600 9966www.businesslink.gov.uk/southwest

Any questions?