How to get the best value when selling a business
The sale of a business is a life-changing event for a business owner. The business can represent years of work and its value can often be a significant portion of the owner's wealth. The sales process is complex and there are many ways that value can be eroded during the process if it is not handled properly. Consequently, good advice and proper preparation are absolutely key to a successful outcome.
The ongoing volatile global environment led to a 4pc year-over-year drop in global mergers and acquisitions (M&A) deal volumes in 2016. This was exacerbated in Ireland as a result of the UK Brexit uncertainty. The top 10 advisers in Ireland advised on 50pc fewer deals in 2016 when compared to 2015. However, this year is expected to bring a bounce-back in M&A activity, notwithstanding the geopolitical challenges.
Companies and private equity firms are realising that their strategic plans cannot be put on hold to wait for final Brexit certainty - and Irish target companies continue to attract strong interest from international investors seeking to enhance their European presence. The recent sale of Irish packaging group Americk to a Spanish packaging company, Saica Group, in October 2016 is a case in point.
While realising value will be a key driver, there are many reasons why an owner might consider selling. These include a desire to retire with no apparent succession, a wish to expand the business as part of a larger group or an unsolicited approach from a credible buyer.
The complexity of the sale process should not be underestimated - it generally takes at least six months and there are a number of distinct stages, including preparation, identifying potential buyers, negotiating price and terms, due diligence and legal documentation.
This complexity reinforces the importance of exit planning. It will never be possible to maximise the value of a business in a sale if the appropriate steps have not been taken in advance.
The first consideration is to determine the right type of buyer to meet the owner's financial and non-financial objectives. A sale to a strategic buyer offers the greatest prospect of a 100pc sale and the opportunity for the owner to leave the business. It is also worth noting that earn-out structures requiring the owner's involvement for a period post-sale are quite common.
On the other hand, a whole- or part-sale to a private equity fund may suit an owner seeking to de-risk by taking some money out but also requiring further investment to expand aggressively for the next stage of growth.
Strategic buyers may be willing to pay a premium price for a business in order to secure entry into a new market or acquire an additional product range to be sold through their distribution network. If competitive tension can be generated for the company involving a number of bidders, a valuation in excess of the norm may be achieved.
A common scenario is where a company receives a direct approach from a potential buyer and enters into bilateral discussions which are then broadened into an auction process involving other bidders, thus maximising the value achieved. Sometimes even just the threat of moving to a wider auction can optimise the result for the target company.
The value of a business being sold is ultimately determined by a willing buyer and a willing seller and in a sale a company is worth what the buyer is prepared to pay for it. Company valuations are not an exact science but can be estimated by experienced advisers based on a number of factors, including current market data, the company's historic and projected financial performance and the strength of its market position.
The sale of aviation software provider, Arconics, to US-based technology company, ViaSat Inc. in November 2016 highlighted how an Irish home-grown technology business could attract a premium valuation from a major quoted US buyer as a strategic asset. IBI Corporate Finance expects the technology, media and telecommunications sector to continue to be the most active for sell-side deals in Ireland (accounting for 16pc in 2016) and we also have visibility on a strong deal pipeline in the food and healthcare markets.
A purchaser of a business will carry out a robust due diligence exercise before completing the transaction. Any weaknesses identified during the due diligence process may be used by the purchaser to challenge the terms of the deal. Therefore, any potential issues should be identified upfront and either rectified or appropriate remediation measures put in place.
In summary, the sale of a business is a complex transaction and to achieve a successful outcome, good advice, proper planning and a lot of hard work is required for any business owner.
Laurence O'Shaughnessy is director of IBI Corporate Finance