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In association with


February 2009 £15.00 Issue 47

selling a business
Authors: Jonathan Buxton, Peter Gray (Cavendish Corporate Finance LLP)
03 Introduction Introduction
04 Making the decision to sell and timing The sale of a business is usually a significant and
08 Valuation in many cases life-changing event. Whether it is
09 Preparing a business for sale an entrepreneur realising his or her life’s work or
12 Appointing advisers a corporate group divesting a non-core operation,
it is not something which is undertaken lightly.
14 Developing a media strategy
15 Preparing information on the business Selling a business is much more complicated
17 Identifying potential purchasers and arduous than the uninitiated would think.
20 The sale process Although some very small and simple businesses
24 The negotiation process can be sold with a straightforward sale and
28 The due diligence process and warranties purchase agreement, the sale of most businesses
with turnover of £1 million or above is a highly
29 Conclusions
complex exercise taking at least six months.

A core aim of the Corporate Finance Faculty is to support the The complexity comes from the huge number
professional development and lifelong learning goals of all its of ‘moving parts’ – valuing the business, timing
members through its suite of services. To reflect the wide breadth a sale, finding the right buyer, negotiating price
of professional qualifications that our members hold we have been and terms, going through due diligence and then
in discussion with a number of professional bodies. Did you know actually concluding a sale, which in itself involves
that, for example, attendance at our events: seminars, forums and extensive legal and other negotiations.
debates and reading this best-practice guideline and Corporate
Financier magazine, can contribute to your Continuing Professional To achieve a good result and come through a sale
Development (CPD) requirements? exercise unscathed takes excellent planning, a lot
of work and, most importantly, the right advice.
Faculty members who are members of the following professional The emphasis of this guideline is to demystify the
bodies will find that engaging with the services of the Corporate process and set out some practical considerations
Finance Faculty can assist with their CPD: for achieving the best possible sale of a business,
• The Institute of Chartered Accountants in England and Wales including in different market conditions. Guidance
(ICAEW) on the role of advisers, regulatory requirements,
•S olicitors Regulation Authority (SRA), formerly known as the Law taxation and issues around structuring of deals is
Society outside the scope of this guideline.
•A ssociation of Chartered Certified Accountants (ACCA)
•S ecurities & Investment Institute (SII) The guideline also does not specifically address
•C hartered Institute of Taxation (CIOT) the distinctive points which can arise upon the
•A ssociation of Taxation Technicians (ATT) sale of family-owned businesses, such as limited
•A ssociation of Corporate Treasurers (ACT) deal experience, limited management resource,
continuity of management. Other reading is
The onus is on the individual to ensure that the activity is relevant to suggested at the end of the guideline.
their respective programme and needs.

Written by Cavendish Corporate Finance LLP © 2009

The views expressed herein are not necessarily shared by the Corporate Finance Faculty or by
The Institute of Chartered Accountants in England and Wales. Guidelines are published without
responsibility on the part of the publishers or the authors for loss occasioned in any person acting
or refraining from acting as a result of any view expressed herein.

2 3
Guideline Selling a business
2. Making the decision Choice of exit route
External factors
to sell and timing In addition to company specific
Reviewing the alternatives factors, there are a number of external
The first task for anyone consider- Caution Objectives Type of Exit factors which may have a bearing on
ing a sale of a business is to deter- the optimal time to sell. These include:
mine their objectives, both financial Cash out/retirement Trade sale/MBO/financial l a bubble in the sector has resulted
and otherwise, and then determine purchaser in high valuations, or there are
whether those objectives are likely to concerns that a downturn is likely to
be achieved by selling the business Part cash out/ Partial sale to private equity arrive in the foreseeable future;
and whether the business is saleable retention of equity house l the acquisition strategies of major
at the right price and terms or indeed Sale to strategic buyer with players in the sector and/or
saleable at all. long earn out consolidation patterns that may
There are a number of different exit be emerging;
routes available. These include: No cash out Flotation or injection of l changes in technology;
l a sale of 100% of the shares in the Ambition Capital growth growth capital l the state of the economy and,
company; in particular, the stage of the
l a partial sale of some of the economic cycle;
equity; or consideration which is acceptable. l an imminent retirement / succession l changes in market conditions;
l a stock market flotation. This can be an extremely useful problem; or l recent or impending legislation
In many cases, not all of these options exercise in flushing out issues prior l an approach has been received affecting the business; or
will be available. For example, a to the sale but even in the absence from a credible buyer or buyers of l the strength of the M&A market
company may be too small or may of such a memorandum, a consensus the business. and the stock market.
not have a sufficient profit track record Reviewing the shareholders’ objectives parties such as management to needs to be achieved on those matters. For a group of companies, possible It is important that a vendor not be
for a flotation or alternatively, market As far as possible, the exit strategy enter into a formal memorandum Disputes between vendor shareholders reasons for the sale of a business include: coy about the reasons for sale. It will
conditions may preclude it. chosen must fit with the needs of all in advance of the sale, covering once the sale process is underway l the business may no longer fit usually be one of the first questions
As shown in the chart opposite, interested parties, including members issues such as the minimum price need to be avoided at all costs. within the group’s core activities or asked by a potential purchaser and a
the objectives of the owner or parent of the management team who are not expectation, preparedness to remain future strategy; reluctance to answer the question may
company will determine which of shareholders of the business. with the business following a sale, Reasons for sale l the business may have been a poor make the purchaser suspicious.
these exit routes represents the It can be very helpful for the willingness to give warranties to The most frequent reason given for acquisition; or
best alternative. shareholders and any other interested the purchaser and the type of considering a sale is to realise capital, l the group may have to sell because Getting the timing right
either for financial security or new of liquidity problems. It is extremely difficult to pick the
Case study – Partial sale to private equity projects.
Maximuscle There is, however, rarely one Case study – 100% sale to a trade buyer
reason alone, but generally a Vitacress
combination of the following:
Founded in 1995 by Zef Eisenberg, team to allow him to focus on his two and the management team successfully l the recognition that the business
a former body builder, Maximuscle passions of product development moved the business into more has reached a premium value; Vitacress is one of Europe’s leading growers and the values he had built up.
produces and markets sports nutrition and marketing. mainstream sporting sales away from its l the realisation that the business and packers of watercress and successfully The obvious buyers were competitors
products for athletes, fitness enthusiasts Following further discussions between bodybuilding roots and also established cannot grow without a significant pioneered a wide range of ‘baby leaf’ salads of Vitacress, competing to supply to the
and gym goers. Zef and his advisers, it was clear that new routes to market through capital injection; in the UK. The business farms in the UK, UK retail market, a number of which had
Zef, at that time the sole owner of these objectives would be best achieved wholesaling to the retail multiples. l the need to access new markets Portugal and Spain. already expressed an interest in acquiring
the business and just 29 years old, by a partial sale to a private equity firm. This resulted in top-line growth of by being part of a large, possibly At the time of sale, Vitacress had a the business. However, it was apparent
approached his advisers with three very Following a competitive process, Piper more than 20% per year over a three international, group; turnover of £81 million, EBITDA of £6.4 that these parties would ultimately just be
clear objectives: Private Equity was selected as preferred year period. During this time, Zef was l the business has reached a size million and farmed over 1,200 hectares of paying for additional turnover and would
l to realise a significant proportion of the bidder on the basis of its expertise in able to focus on the parts of the business where the owner feels unable or land, having expanded from a single small therefore seek dramatic cuts in the head
value of Maximuscle in cash but to growing branded consumer businesses. he enjoyed and let the team deal with unwilling to manage it; field of watercress in 1966. office and workforce.
also leave behind a meaningful equity In parallel, Paul Hick, formerly Chief the day to day running of the business. l a disagreement among shareholders The main shareholder of Vitacress was Accordingly, purchasers were sought
stake, as he believed that the business Executive of Lee Cooper, was recruited In 2008, a subsequent sale to Darwin which means that the business is no in his late 70s and, as there was no family outside the industry and, following a
still had huge growth potential; as Chairman and Ivor Harrison, formerly Private Equity for over £75 million longer manageable under existing succession, expressed a desire to realise the formal auction process, the RAR Group, a
l to bring in an investor which could CEO of Premier Foods, brought in as CEO. realised a further substantial cash sum for ownership; highest possible cash sum for the business, Portuguese conglomerate was selected as
take the business to the next stage; and Following the investment by Piper at Zef – more than doubling his proceeds l the only alternatives are closure or whilst also finding a purchaser which would preferred bidder. RAR ultimately completed
l to bring in a professional management a valuation of around £10m, Paul Hick from the original sale. sale by an administrator, receiver be sympathetic to the management team the acquisition of Vitacress for £52.5 million.
or liquidator;

4 5
Guideline Selling a business
optimum time to sell a business. price is based and the assets being trade buyers (which typically target sectors such as nursing homes and value and so it is important to be factors, if the business is performing well
however, observing some general sold. Furthermore, it means that the market leaders or at least the no.2 renewable energy. ready to move very quickly once the but the global economy is weak, it will
principles in timing a sale can be helpful. vendor is able to provide financial in their sectors) in a company worth during a recession or downturn market is more favourable. later, ‘me generally be saleable.
Timing is particularly important warranties to the purchaser based on £5 million compared to one which in M&A, transactions will generally too’ sales can often be disappointing
given the damaging consequences a recently audited set of accounts. is £50 million. Moreover, in general, be much more difficult to conclude, as the keenest bidders with an Sell when you don’t have to
of an aborted sale process. The sale Where due diligence by the purchaser’s the bigger the company the better particularly where, as at the time of interest in a particular sector, whether The one overriding rule in timing the
process often distracts management accountants takes place simultaneously its risk profile and earnings quality. writing, there is a shortage of debt trade buyers with a strategic need or sale of a business is to always sell at a
from running the business, which may with the year end audit, this can help As companies grow in turnover and finance. This will also tend to have an private equity with an appetite for time when there is no absolute need
adversely impact sales and profitability. minimise disruption to the business profitability, they will typically have inevitable effect on prices for most the sector, may have already made to do so. Buyers will quickly sense a
in addition, if a business is placed on and maintain confidentiality. less dependence on one or two key businesses. exceptions can include their acquisitions in that sector. forced sale and use that knowledge
the market and then withdrawn, the members of the management team, strategically important acquisitions and A downturn may also put pressure to their advantage. history is littered
business may gain a reputation for Tax reliefs will have a better spread of customers trophy assets where price is not the on businesses to shed non-core and/or with examples of vendors who left it
being permanently for sale, which can The current tax regime is always a and be less vulnerable to attack from main consideration. loss-making operations, which therefore too late, having often been in denial
damage relationships with suppliers relevant consideration in timing a competitors. in general, a recession will have to be placed on the market almost of the need for a sale.
and customers as well as acting as a disposal. This can be seen from the typically see a ‘flight to quality’, regardless of price. Similarly, businesses
deterrent to future bidders. surge in company sales precipitated have regard to market conditions where purchasers will only acquire may have to sell part of their holding to Time scale
by the withdrawal of capital gains tax Proprietors must consider the state of the strong performers and sector leaders. refinance or secure funding to survive determining the optimum time to start
Trading history (CGT) taper relief in April 2008. M&A market in their sector. if there is a operations which are effectively the downturn. a sale exercise will be influenced by
A purchaser will find a three year valuation bubble in a particular sector, underpinned by government note that the sale of a business the timetable for a sale process which
profit history much more convincing Size characterised by exceptionally high profit spending, such as suppliers to through administration, receivership or can be used as a rough guide (see
than a three year profit forecast. it is As a company grows in size, not only multiples, a proprietor would be well local authorities, may also become liquidation procedures are outside the opposite). The timetable also shows the
important to have a good profit track will it become more valuable by virtue advised to consider a sale at that time relatively more attractive. scope of this guideline. demands on management time which
record to show potential purchasers. of its growing revenue/profit stream even if he had not otherwise planned A downturn can also present The timing cycle below shows the a typical sale exercise will impose.
but it will also generally be accorded a on selling at that stage. The reason is significant opportunities, such as a key factors to consider when deciding in general, a sale exercise can be
year end higher valuation multiple. that the valuation bubble will inevitably more favourable property market for on the best timing for a sale. The more expected to take around six to seven
Planning a sale exercise to complete The relationship can be primarily burst, such that even if the business’s retail roll-outs. Businesses which are these are aligned, the more likely that months. however, this is only a rough
shortly after a financial year end can explained by two factors. First, profits grow strongly in the aftermath, well placed to capitalise from these a successful sale will be achieved with guide. it can take considerably longer
be a good idea as it will allow the as companies get bigger, more the proprietor may not achieve the same opportunities will be most likely to the most essential components of a but will rarely be significantly shorter,
sale to be based on an audited set of purchasers come into play. There is valuation for many years. achieve premium prices. successful sale on the inside of the save in the case of a distressed sale or
accounts and will reduce uncertainty significantly less interest from private This was seen in the dotcom bubble in more adverse market conditions diagram. For example, although there a ‘rifle shot’ exercise involving only
as to the profits on which the purchase equity houses and particularly overseas in the late 90s and subsequently in vendors should consider whether it is an obvious interrelation between the one purchaser.
is appropriate to place a business on
TimeTable the market and discuss with their
advisers the likely prices that could The Timing cycle
be achieved given the conditions.
Management time commitment

it may be preferable to ‘sit tight’,

conserve cash and focus on preparing
the business for sale when economic
conditions are more favourable,
although this could take some time –
information possibly several years.
memorandum M&A demand following a
initial meetings recession is often cyclical, with
Potential Commence with potential receive indicative due diligence exchange and activity developing in particular
purchaser list marketing purchasers offers completion sectors at different times, as they
come out of a downturn. For
no. of months example, consumer businesses tend
to benefit more immediately from
a consumer upswing than business
0 1 2 3 4 5 6 services operations. The first few
businesses placed on the market in a
Advisers draft heads of given sector will typically achieve a
appointed appointment premium price due to their scarcity

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Guideline Selling a business
3. Valuation commonly applied earnings multiples, free cash flows to the company,
A valuation ahead of a sale will always where profits are very low or non- in order to arrive at a net present
be a theoretical exercise and the final existent, it may be appropriate to use value (NPV) of those cash flows. The
valuation for the business is that which multiples of gross profit, contribution free cash flows are the residual cash
a willing purchaser is prepared to pay or turnover. amount after deducting all operating
the vendor. Turnover multiples may also be used expenses, taxes and expenditures
A vendor will only really get a preferentially in certain sectors, such for maintenance of the business, but
feel for what the valuation is likely as technology and consumer brands, prior to deducting debt and equity
to achieve when conversations are usually where there is huge growth financing payments.
initiated with purchasers and the level potential relative to the size and The appropriate discount rate (or
of interest in the business determined. profitability of the business for sale. cost of capital) used to calculate the
Prices of companies in common with NPV will reflect the risks associated
other prices are largely determined by Comparable companies with the future cash flows. The
the laws of supply and demand. The earnings multiples applied discount rate is calculated by taking
Nonetheless, a pre-sale valuation are typically based on multiples of a weighted average cost of capital
of a business can be an advisable quoted companies that, ideally, are (WACC). The rationale for using
component of the sales process. comparable in terms of activities, size, a weighted average is that the assets
There are several factors which geographical location and financial of a business are financed through a
will affect the value of a business, performance. The multiples of the combination of both debt and equity.
including: comparator companies are derived Estimating the costs of equity
l the company’s historic and from quoted public companies, and debt are determined by reference
projected financial performance; since only quoted companies have to debt instruments and comparable
l the attractiveness of the sector in valuations which are readily accessible quoted companies for which data is
which the company operates and and which have been established by available. The higher the inherent risk
the strength of its market position; the market. of investment, the higher the required
l the size of the company; Once the comparable quoted rate of return, and hence the discount
l the strength of its management public company multiples are rate, that will be applied.
team; and identified, an appropriate discount Care should be taken in drawing
l the company’s asset base. should be applied if valuing a private conclusions from this methodology, as
During the course of negotiations company. On average UK private this valuation is heavily reliant
with potential acquirers, a number companies are sold at a discount to on the company’s financial projections
of different valuation methodologies l discounted cash flows (used by applied, taking the following into fixed assets and growth through quoted public companies though the and even small changes to the
will be used to establish the range of private equity houses). consideration: acquisitions or organic growth level of this discount has reduced in discount rate and other assumptions
prices within which to negotiate the by stripping out the effects of recent years. It may be appropriate could have a material effect on the
sale. It is important for the adviser Multiple of normalised earnings EBIT depreciation and amortisation. to reduce the discount applied due valuation. As with all valuations reliant
and the vendor to understand these This valuation methodology applies Companies have different financial to particular strengths of the business on projections, the result is only as
methodologies and the issues that an appropriate multiple to the structures and therefore different PE ratio such as growth, profile, market share good as the assumptions made.
may arise. normalised earnings to capitalise those interest costs and rates of taxation. The PE ratio is the ratio of the market and size.
Common valuation methodologies earnings into a value for the business. The EBIT multiple is a pre-tax multiple value of the equity of the company 4. Preparing a business
are outlined below and other reading Normalised earnings are a company’s and is considered by many to be a to its after-tax earnings. The PE ratio Comparable transactions for sale
is suggested at the end of the reported profits adjusted for abnormal more appropriate multiple where a focuses directly on profits available In conjunction with multiples of To maximise the proceeds of a
guideline. or non-recurring items. company has significant levels of debt. to equity holders, but its drawback quoted public companies, it is also company sale it is essential to prepare
Having established normalised is that it does not reflect differences useful to utilise the exit multiples of the business for sale well before the
Methods of valuation earnings, the appropriate variant EBITDA in gearing, depreciation and recent completed transactions in the actual sale process. A grooming
Although there are a number of of earnings to multiples must be In using an EBIT multiple, an amortisation. same sector as the company to give exercise, which can take place over
methods for valuing a company, the applied. The multiples normally assumption is being made that the It some cases, it is advisable to an indication of pricing and trends in a few months or even years before
following two are the most utilised by applied are: depreciation charge for the year use the different types of earnings its market. a sale exercise, aims to enhance
acquirers: l Earnings Before Interest and broadly equates to the company’s multiples to act as a counter check to the attractiveness and value of the
l multiple of the normalised earnings Tax (EBIT) capital expenditure for that year. This each other. Discounted cash flow (DCF) business to potential purchasers. This
and turnover using multiples from l Earnings Before Interest, Tax, could clearly not be the case, thus, valuations is achieved by measures such as:
comparable quoted companies and Depreciation, Amortisation (EBITDA) the EBITDA multiple extends the EBIT Turnover, gross profit and The discounted cash flow l identifying potential purchasers
transactions (typically favoured by Care should be taken in selecting the assumptions to include differences contribution methodology values a business by early and positioning the company
trade buyers); and appropriate earnings multiples to be due to financing arrangements for In addition to the above more discounting the projected future to attract them;

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Guideline Selling a business
business can be run for a period with valuation issues. Consequently the just before or during a sale exercise; the other party to terminate on a
these costs removed. vendor should discuss the impact l valuations of properties and sale) are potentially ‘poison pills’
There may also be costs which a of such schemes on a sale and the investments; and for a purchaser and to the extent
buyer would not incur due to cost potential remedial actions with the l research and development – this possible should be resisted;
synergies and these should be clearly advisers at the earliest opportunity. may play a large part in the l intellectual property (IP) rights
identified ahead of a sale. purchaser’s interest in the business. are registered. Where overseas
Operational matters Small companies are frequently expansion forms a key part of
Assets review Management review bought for their innovative the company’s growth story, it
When a business has assets which may The quality of the company’s skills and product development significantly adds to credibility if
not be required or fully valued by a management team will generally capabilities. Where all research and the proprietor of the business has
purchaser, such as surplus property be of paramount importance to a development has been written registered IP rights in the territories
or investments, removal before a purchaser, especially where the senior off in the past through the profit he has targeted for expansion;
sale exercise commences should be management are proposing to leave and loss account, this should be l shareholder agreements and
considered. the business at the time of, or shortly identified and highlighted. articles are examined to review
In the lead up to a sale, working after, a sale. It is important to be provisions relating to a sale;
capital should be reduced to the able to demonstrate to the purchaser Management information l where possible, any outstanding
minimum level required by the that there are competent second tier and budgets litigation is cleared up. Even if it
business. Policies concerning stock management available to assume It is essential for the vendor to start may be covered by insurance,
holding levels, debtors and creditors executive control of the business preparing high-quality monthly major litigation can be a deterrent
should therefore be reviewed at an following a sale. This will involve management accounts and put in to a purchaser;
early stage to ensure that there is no devolution of management control place management information l to the extent possible, the
‘fat’ in working capital. If the company by the owners in the lead up to a systems which track KPIs if they do not ownership structure of the
is sold with excess stocks or, due to sale. Where second line management already do so. During a sale process, it company is simplified. This may
poor credit collection, excess levels are taking executive decisions, this is vital to have up to date information involve buying in minority or joint
l raising the public profile of the It is also necessary to commence of debtors, the vendor is, in effect, should be documented. For evidential on the current trading performance of venture interests. Purchasers value
company; the grooming process long before gifting the excess working capital to purposes, it may help to recognise the company and the purchaser will simplicity and complex ownership
l maximising recurring profits by the sale process gets underway, the purchaser. Any such surplus should their input formally by: be looking for the vendor to warrant a structures can diminish the
reducing or stopping non-recurring principally because the impact of the be eliminated and the resultant cash l minuting management meetings; recent set of management accounts. attractiveness of a business; and
expenses including any proprietorial steps taken to enhance profits will either stripped out or added to the and It is equally important for the l all leases, title deeds and other key
or non-business expenses; take some time to flow through to the purchase price. l issuing formal job descriptions and company to produce high-quality contracts are located and reviewed.
l improving margins through cost- company’s accounts. Any hidden or undervalued promoting senior management to budgets. At a minimum, a purchaser
saving measures; A review of the business to assets of the business should also be the Board. will be looking for profit projections Positioning
l in the case of a subsidiary or division determine appropriate pre sale identified. If the value of property for both the current and the following Well before a sale exercise is
of a larger group, ensuring that grooming measures should cover the assets is understated in the company’s Accounting policies review financial year. In the case of financial undertaken, the owner of a business
it can operate on stand alone following areas: balance sheet relative to their market With a sale exercise in mind, a review buyers, a three year financial plan with should identify the purchasers or
basis and possibly even running it value they should be re-valued should be undertaken of the following detailed supporting assumptions will categories of purchasers most likely
autonomously for a period; and Financial matters independently prior to a sale. accounting policies, with a view be required. If the company has not to be interested in acquiring it
l removing ‘fat’ from the balance Review of costs to maximising stated earnings and had a history of producing detailed and position itself as an attractive
sheet in the form of excess debtor A review should be undertaken to Tax review balance sheet values while, at the budgets (and preferably beating acquisition target for those purchasers.
or stock balances. identify and, possibly, eliminate all All PAYE, VAT and corporate tax same time, avoiding overly-aggressive them) any projections produced
The more prepared the business is proprietorial and other costs which matters should be brought up to policies that will lead to downward specifically for the sale exercise may Corporate strategy
prior to the commencement of the would not be incurred by an incoming date and approved by the business’s adjustments after due diligence: lack credibility. Before making any strategic decision,
sale process, the smoother, and usually purchaser. Examples of proprietorial tax advisers. Any tax losses available l recognition of profit, particularly a business proprietor needs to assess
more successful, the subsequent costs would include relatives on to be carried forward or company for contract related businesses; Legal review whether the decision would enhance or
process will be. However, it is the payroll, excessive travel and tax benefits from an Enterprise l depreciation policies, both for It may be sensible to consider a detract from value from a purchaser’s
important not to groom a business entertainment costs incurred by Management Incentives (EMI) scheme tangible and intangible assets; legal review, to be carried out in perspective. This ranges from the fairly
for sale in an over-zealous fashion or the proprietors and remuneration should be identified so that value can l provisions – excessive provisions conjunction with the company’s legal obvious such as not renewing a 20 year
attempt to boost profits in artificial which exceeds accepted market be obtained for them from a purchaser. against stock or debtors may be advisers. This would, at a minimum, lease on the company’s premises just
ways which will be exposed during norms. Whilst a purchaser might be motivated by tax planning or an ensure that: prior to sale (as this might represent
due diligence. This will back-fire on the persuaded that these costs should Pension schemes over-prudent approach and should l trading contracts are examined to a poison pill for a purchaser who
vendor and may destroy a relationship be added back to determine the Final salary schemes can be very be reviewed well ahead of a sale ensure that no change of control want to consolidate the company’s
of trust established between the company’s underlying profit, the problematic in the context of a process, as a purchaser is likely to restrictions or provisions apply. operations with its own) to more subtle
vendor and the purchaser. argument is always stronger if the sale exercise due to the associated be sceptical of provisions released Such provisions (which e.g. allow positioning type issues such as whether

10 11
Guideline Selling a business
diversifying the business into related it identifies issues which can be basis in the first instance. By way smaller business can be quite presented to a potential purchaser. better placed to find purchasers
activities will make the company more addressed before the sale exercise of example, although the vendor different to those needed on larger In choosing an appropriate outside the sector, who may pay a
or less saleable. is initiated. is likely to have a good idea of transactions. financial adviser, a vendor should also significant premium to get in.
In choosing a vendor due diligence the likely UK trade buyers of his l A  ccountancy firms – in volume have regard to the following: Bring a financial adviser on board
Environmental audit provider, the vendor should consider business, his adviser is likely to have terms, the major accountancy l make sure that your deal will be an well before the sale process actually
Potential environmental liabilities will the appropriate skills of the accounting broader knowledge of potential firms are among the largest important one for the adviser. In gets underway. The preparation of
be a major area of concern for any firms able to provide the service and overseas purchasers and purchasers players in the UK M&A advisory that regard, you are much better the business for sale is equally as
purchaser. Depending on the nature give consideration to whether using outside the vendor’s sector. market. The accountancy firms off being at the top end rather than important as the sale process itself.
of the business, it may be appropriate its own auditors / accountants / M&A It is also useful to have an may offer an attractive ‘all-in’ the bottom of the adviser’s typical
for the vendor to conduct an advisers or an independent firm, is intermediary negotiating the sale of package of taxation, vendor due deal size spectrum; Basis of fees
environmental audit prior to the sale to appropriate. A purchaser is less likely a company as this enables a tougher diligence and accounting services. l conduct a ‘beauty parade’ of Most advisers charge an initial retainer
enable him to identify and remedy any to accept a report it does not consider negotiating stance to be taken Vendors should consider each two or three potential advisers, and then a success fee based on the
potential problems at an early stage as to be independent. The worst case by the adviser and so permits the part of the package on its merits preferably from different types amount of the consideration received.
environmental issues coming to light scenario is for a vendor to incur this vendor to maintain a good working and also in light of the need for of organisations; Typically success fees for mergers
at a late stage in the process have the time and expense only for the bidder to relationship with the purchaser. A independent advice. l ensure an adviser has relevant and acquisitions advice will be in the
capacity to derail a sale exercise. ultimately commission its own report. good financial adviser should be able l B  outiques – there are a number experience in the type of range of 1-3%, depending on the
to add value to the transaction many of M&A boutiques which are transaction envisaged; size of the deal. Most fee structures
Data room 5. Appointing advisers times the amount of his or her fees. either generalist M&A advisers l always insist on references. When contain a fixed minimum sum plus a
Gathering information for a data room Selecting a financial adviser or focus on particular industry obtaining a reference always check ratchet, whereby the percentage fee
at an early stage can significantly speed Why appoint an adviser? Role of the financial adviser sectors such as financial services. who within the adviser’s firm increases if the purchase price exceeds
up the subsequent process and is almost There are a number of reasons The role of the financial adviser acting Care needs to be taken before performed the work; pre agreed levels. This ensures that the
essential to a formal auction process. why it is generally preferable for a for the vendor of a business could appointing an adviser within this l make sure the appointed adviser adviser is incentivised to achieve the
The contents and organisation of proprietor to engage the services include the following: category to ensure they have has a good overseas network to highest price for the business.
the data room are considered in the of a professional adviser to sell l advise on appropriate measures to adequate resources to provide a secure overseas buyers; Care should be taken in fee
section on the sale process. his business rather than adopt a groom the business for sale; comprehensive service. l beware of false economy. negotiations with advisers to ensure
DIY approach. These include their l advise on timing and give an Before appointing an adviser, the Don’t allow fees to be the main that:
Vendor due diligence superior knowledge of potential indicative valuation; vendor needs to be satisfied that the determinant of the choice of l the concept of ‘consideration’ is
Vendor due diligence involves the purchasers and their negotiation l prepare the information adviser does not have any conflicts adviser. There is often a reason why fully understood by both parties.
vendor instructing accountants to skills as well as their ability to memorandum; of interest. Such conflicts can arise one adviser can consistently charge Does it include non-cash items,
prepare a due diligence report on the approach buyers on a confidential l identify and approach appropriate if one or more of the likely potential higher fees than its competitors; pre-sale dividends and assumption
business in advance of a sale exercise purchasers; purchasers is an audit client or l ensure that an adviser will not of debts?
being undertaken. The report is then Top tips for appointing advisers l lead the negotiations with potential alternatively has been retained by the face any conflicts of interest if l any abort fees should be clearly
given to potential purchasers who purchasers; firm on either an acquisition brief or to appointed; understood and agreed. These
have expressed serious interest in the l advise on the offers received and provide corporate finance advice. l always insist on fee quotes and can be justified where a difficult
company for use in finalising their l A
 sk for unrestricted references. the appropriate structure of a sale; An excessively close relationship ascertain who will be working sale is envisaged or where the sale
offers for the business. l A
 rrange to meet with the entire team, including the l manage the due diligence and between a boutique and a purchaser on the transaction on a day to could be terminated by the vendor
The main advantage of vendor operational staff as well as the frontline partners or legal phase of the transaction; and could also prejudice impartiality. day basis; through no fault of the adviser, but
due diligence is to flush out financial, directors. l ensure that the transaction is A vendor should check if the firm l ensure the adviser is properly as a general rule you do not want
tax and other issues relating to the l It is good practice to ask all potential advisers to completed on a timely basis. is allowed to access geographical authorised under the Financial to be ‘paying for failure’;
business at the outset of the sale sign a confidentiality undertaking to ensure that the markets outside the UK (particularly the Services & Markets Act 2000 Act or l the adviser is not going to seek
process. As a result, the chances of discussions you are having at the selection stage (ie Types of financial advisers USA), that it has sufficient professional the Designated Professional Bodies a fee from the purchaser, unless
the deal collapsing or the purchase pre-engagement letter) remain confidential, as does Some advisers merely act as indemnity insurance cover, is FSA (DPB) route, and has adequate this is specifically agreed upfront.
price being reduced once heads the information you are passing them. introductory brokers while others authorised and has a good international professional indemnity insurance; It may not be in the interests of
of agreement have been reached l T
 ake care to check that the valuation given does not provide a full advisory service to the network to source overseas buyers. and the vendor for his or her adviser
or a preferred bidder chosen, are appear unrealistic and/or is not properly justified. client. The main categories of M&A l consider the potential benefits to seek fees from purchasers as
significantly reduced. It is unlikely that l Beware
 if the organisation appears unduly busy or advisers are as follows: Choosing a financial adviser and disadvantages of sector it will compromise the adviser’s
any material financial issues will arise conversely has no work on. l Investment banks – investment The personal chemistry that must exist experts – some knowledge of a negotiating position, particularly as
from the purchaser’s due diligence l You should not be pressurised to put your business banks tend to focus on larger between adviser and vendor should sector can be useful, however some purchasers will never pay fees
which had not already been identified on the market immediately, without any real transactions. Potential vendors not be underestimated. Frequently, the ability to sell a business in and thus may not be contacted by
in the vendor due diligence report. justification. Advisers make their money from selling should ensure that their business a sale exercise will involve stressful general can be more important the adviser; and
In addition, vendor due diligence businesses but they should also be prepared to take a falls within the typical size range negotiations with the need to make than reams of sector knowledge. l the adviser is not incentivised to
can form a useful part of the long view and give impartial advice. for an investment bank, as the important decisions quickly. It is An adviser who does not know push a transaction towards or
grooming process to the extent skills and expertise for selling a important that a cohesive team is the sector intimately may even be away from certain purchasers. This

12 13
Guideline Selling a business
typically happens where a business l g et fee quotes up front. Fees fall do is to conduct a press search on must have regard to two key factors: a number of key elements including buyer may leak damaging stories to
has had an approach before the broadly into three types: the company. It is often advisable Would publicity have a damaging an aspirational (but not excessive) the press to try to deter other bidders.
adviser is appointed and so the fee 1. Time costs with a ‘hard’ cap therefore to raise the company’s effect on the business? and price expectation, a commentary on The vendor should therefore be
arrangements are skewed towards 2. Time costs with a ‘notification profile prior to a sale by conducting What need and scope is there the performance and prospects of the prepared to rebut such stories and,
new buyers. Consequently the threshold’ cap a PR campaign directed not at the for the business attracting ‘left field’ company and where appropriate, the if appropriate, to make their own
adviser may spend huge amounts 3. Contingent fees with an ‘abort company’s customer base but at buyers as a result of some carefully fact that it has elicited interest from suitable press announcements.
of time on new buyers and neglect costs’ element potential buyers of the business. targeted publicity via the media? several potential acquirers.
the existing bidder. There are advantages and Examples of profile PR of this nature In terms of attracting ‘left field’ Post sale PR
disadvantages to each type of include editorial coverage on the buyers, publicity can be particularly Press strategy in the event of leaks – It is essential for the vendor to ensure
Appointing legal advisers arrangement. Your financial adviser company in trade or financial useful where the business in question confidential process that the correct message is conveyed
Legal advisers are not a commodity. should be able to talk you through publications. There are specialist PR is a ‘trophy asset’, that is a business Consideration should be given regarding the sale of the company
A good lawyer with commercial the most suitable scheme for your firms who focus on pre sale PR of such as a football club, luxury yacht to a press strategy to contain the both internally within the company
flair can add significant value to the business and situation. this nature. or car manufacturer or other luxury story in the event of a leak, ideally and externally via the media. This
transaction, not only in terms of the brand name which confers status by suppressing it entirely but as a is of particular importance where
quality of his or her legal advice, Appointing tax advisers Pre kick off on the owner and therefore may minimum to ensure that it is at least there is an earn-out involved where
but also in ensuring that the deal It is not so much the purchase price Before a sale process is initiated, a be attractive to high net worth accurately reported – for example the vendor has a significant vested
completes in a timely manner with as achieved on a sale of the business decision needs to be made as to individuals who may be difficult to if the sale is at a very early stage interest in the future performance
little acrimony between the parties as which is important so much as the whether the process will be conducted identify from desk research. to make sure that the story reflects of the company. In particular,
possible. The following guidelines can amount the vendor gets to keep after as a public auction (that is, announced If a decision is made to place that it is only one option under customers’ minds should be put at
help when choosing a lawyer to advise paying any capital gains tax on the to the world at large) or an attempt a story on a potential sale to the consideration. rest by stressing the advantages to
on the sale of a business: proceeds of sale. In that regard, the will be made to keep the process media, a decision needs to be them of the company joining forces
l e  nsure that the lawyer is an appointment of an appropriate tax confidential. made regarding the most suitable Press strategy for a public auction with a larger group, or in the case of
M&A specialist with appropriate adviser is vitally important. In making this decision, the vendor publication. The story should contain In a public auction of a company, a a deal involving a financial investor,
experience of similar transactions; Once again, the key is to appoint a the benefit of additional investment
l m  ake sure that the chosen law firm specialist adviser who has considerable into the company coupled with
has sufficient resources to properly experience in advising vendors. The management team continuity.
service an M&A transaction. The alternatives include the law firm The subject of informing employees
chosen law firm should have retained to advise on the sale, a firm is covered in a later section.
expertise in all relevant practice of accountants or a firm of specialist
areas which could include tax, tax advisers. It is always useful to get 7. Preparing information
property, intellectual property, second opinions and if a tax scheme on the business
pensions and employment law as is proposed which is particularly At some point, interested parties will
well as corporate finance. In the aggressive, obtaining an opinion on require information on the business.
later stages of the transaction, the scheme from leading tax counsel This can take the form of a detailed
the lawyers will need to provide a may be a worthwhile investment. information memorandum, a shorter
round the clock service; ‘teaser’ document or even a face to
l d  o not underestimate the 6. Developing a face presentation. The comments
importance of having a good media strategy below are specifically in relation to a
personal relationship with your Utilising the media is a key element full sales memorandum but can also
lawyer; in any sale process. A media strategy be applied to the various alternatives.
l c onduct a beauty parade involving needs to be put in place covering each It is often helpful to have both a
two or three suitably qualified of the following: memorandum and a more detailed
law firms; l grooming period pack of information prepared, so
l insist that a suitably experienced l pre kick off that buyers can be progressively
person is present at all key l leaks introduced to more detail on the
negotiating meetings; l post sale business once they have confirmed an
l if the transaction has an initial level of interest.
international aspect, ensure that Grooming period
the lawyers have a good network of Potential purchasers are generally The information memorandum
overseas offices; more amenable to a company they The main purpose of an information
l e  nsure that the law firm has have heard of than one whose name memorandum is to enable potential
adequate professional indemnity they don’t recognise. Also one of purchasers to decide whether
insurance; and the first things any purchaser will or not the company is a suitable

14 15
Guideline Selling a business
memorandum, regard should be had l executive summary; help to determine the most suitable
to the following points: l key selling points of the business; route for sale, be it a sale to a private
l hype, glossiness, superlatives l sale process; individual, a trade sale to a private or
and pretentiousness should be l history of the company; public company, a management buy-
avoided. In particular, documents l business description; out (MBO), an institutional buy-out
written in the ‘last chance’, ‘must l details of management and (IBO), a management buy-in (MBI),
buy now’ style are unlikely to be employees; or buy-in management buy-out, often
taken seriously in the context of a l financial record and projections; referred to as a ‘BIMBO’.
business sale; and An optimal potential purchaser is
l restrict the number of people l growth prospects. one which will, ideally:
involved in drafting the information l pay a premium price for the
memorandum. The involvement 8. Identifying potential business;
of a large number of people will purchasers l add value to the business;
inevitably lead to a mismatch Identifying the optimal purchaser l be acceptable to management;
of styles. It can also extend the To determine who might represent an l not require shareholder or other
timetable unnecessarily; appropriate purchaser for the business approvals;
l ensure that underlying financial one must first consider the objectives l not involve a Competition
projections will stand up to detailed of the vendor. Commission referral or other
scrutiny; and The vendor’s objectives will regulatory issues;
l ensure the memorandum influence not only who is targeted as a l not have to raise equity funds to
has the appropriate ‘health potential purchaser, but also how the finance the acquisition; and
warnings’ and disclaimers, and business is presented to purchasers l have a good understanding of the
that, if appropriate, it is issued and the way in which the negotiations business and not require extensive
by a regulated adviser with are handled. For example, there is commercial due diligence.
the appropriate control over no point in marketing the business In selecting potential trade or financial
distribution. to a purchaser which could only offer buyers, regard must be had to any
acquisition target. Although the document before deciding to reject a foreign owner; The standard contents of an shares as purchase consideration published acquisition criteria, their
information memorandum needs to it, or pass it to a colleague for a more l u nique product attributes; information memorandum are: if cash is the only acceptable form acquisition track record (if any) and
be accurate, it is essentially a selling detailed analysis. Therefore, the l intellectual property rights; l legal conditions on which the of consideration. their ability to finance a deal of the
tool. Presentation is therefore as executive summary and key selling l ability to cross sell products to the document is issued; The vendor’s objectives will also size in question.
important as the substance and the point sections of the document must company’s customer base or
memorandum needs to reflect the be positive and punchy. vice versa;
style of the organisation being sold. l potential overhead savings;
An information memorandum Contents of the memorandum l strength of management;
is not generally a prospectus and It is not always necessary to send the l brand names; and
is thus not normally verified by same information to all purchasers. l distribution channels.
lawyers. It is generally exempt from For example, commercially sensitive The financial section should show the
the requirements for approval as information, such as the names sustainable recurring profit, adjusted
a financial promotion, however its of customers or suppliers, can be for costs or income which would not
contents will be governed by the excluded from copies sent to certain occur under new ownership. Such
Financial Services and Markets Act recipients such as direct competitors. items may include:
2000 which prohibits misleading As certain purchasers might value l expenses of a proprietary nature
or deceptive statements in such certain attributes of the business e.g. private staff on the company’s
a document. while others might be attracted payroll;
No potential purchaser will make to other features of the business, l directors remuneration in excess of
a final decision on the basis of an the information memorandum can market rates;
information memorandum. The main also be varied to highlight features l management charges to be
purpose of the document is to bring of particular interest to specific terminated on a sale;
a purchaser to the negotiating table. purchasers. Examples of particular l gains or losses on disposal of
There is no point therefore in making attractions to a purchaser might fixed assets; and
the document too voluminous. The include: l other extraordinary or exceptional
initial reviewer may only have a l access to the UK market; items.
short period in which to review the l potential for overseas growth with In preparing the information

16 17
Guideline Selling a business
Types of potential purchasers from the company through aggressive one part of the supply chain. Case Study – Purchasers in related sectors (2) private equity backers.
There are several broad categories organic expansion or by poaching the There are some cases where Aroma Café Chain The second approach is to run
into which most potential purchasers vendor’s key employees. On the other vertical integration can make sense, the MBO bid process concurrently
fall. These include direct competitors, hand, there may be situations where for example, if the company being with seeking offers from potential
overseas buyers, financial purchasers, the synergistic benefits available to sold accounts for a large proportion The Aroma café chain was owned by a suffering from both healthy eating concerns trade purchasers of the business. The
companies in related industries competitors are such that they will of a supplier’s sales, the supplier consortium of individuals and private equity, and saturation of their core brands. In addition rationale for this approach is to enable
and wealthy individuals. For certain almost inevitably outbid any other may be interested in acquiring the led by Apax Partners. Having funded the Aroma’s market research showed that its main the vendor to conduct an auction
companies, it will be appropriate category of purchaser. business as a defensive strategy to business from its start-up with a single site customers were women aged between 25 and among both trade bidders and private
to target all of these categories of prevent it losing its customer to a and seen turnover grow to over £5 million, 35, a section of the population to which the equity houses to extract the highest
potential purchasers. For others, it Companies in related sectors competitor. Similarly customers may the investors wished to realise the proceeds fast food groups had struggled to appeal. price and to reduce the risk of the
may be appropriate to target only Most companies focus on their be interested in securing jointly- of their investment. The marketing exercise was therefore management team trying to push the
one or two. core business with the result that developed technology. It is therefore It was clear that other café and sandwich focused on the fast food industry. price downwards.
Each type of potential purchaser diversification strategies such as those worthwhile reviewing major suppliers chains had no reason to pay for the Aroma Following an auction process, McDonald’s One of the potential problems
has its own characteristics and the practised by Hanson and Williams and customers as potential purchasers. brand name and would only be attributing Restaurants was selected as preferred bidder, with running MBO and trade bids
way in which a particular purchaser is Industries in the 80s and 90s are a As a general rule, however, vertical value to the additional sites. At the same time, ultimately concluding the acquisition at a in tandem is that trade buyers
approached will vary accordingly. thing of the past. However, companies integration is unlikely to maximise research showed that the fast food groups were value of some £12 million. may be reluctant to compete with
Set out below are the main still make acquisitions in industries value for vendors. incumbent management in buying
categories of potential purchasers related but tangential to their core the business. There is also the danger
together with a brief description business. Moreover, such acquirers will Management buy-outs and buy-ins adviser) introduces an MBI team to are so great that a private equity bid that management may be less than
of each. often be prepared to pay a premium The potential for a management take over the running of the company will not be comparable. fully co-operative in presenting the
price for the business as an acquisition buy-out of a business backed by a following the sale. The MBI team will If all of the pre-conditions to a business to trade buyers in an attempt
Direct competitors may be the only feasible means of private equity house should always take an equity stake in the business successful MBO have been satisfied, to maximise the chances of their
For reasons of confidentiality, a entering the relevant market. be considered. For an MBO to be alongside the private equity house a decision then needs to be made as MBO bid succeeding. One way of
vendor may not wish to approach Accordingly lateral thinking in feasible, the management remaining which is financing the bid. to how best to progress the MBO. overcoming this potential problem
direct competitors at all. Even where terms of identifying related sectors with the business following the sale Where the existing management The key issue with a buy-out is that is to offer management a substantial
information is supplied to competitors and potentially acquisitive companies must be sufficiently strong to assume team has some, but not all, of the management team are effectively bonus on completion of the
on a confidential basis, there is within them is important when the executive control of the business. the skills required to manage the incentivised to acquire the business transaction if the sale proceeds with a
always a danger that competitors determining a list of likely buyers. In a situation where the management business following a sale, a BIMBO at the lowest possible price, thereby trade buyer and/or for the abort costs
will attempt to use the fact of the of the business has been largely (buy-in/management buy-out) may maximising both their equity package of the MBO bid to be underwritten.
impending sale of the company to Suppliers and customers confined to the vendors, this may not be appropriate. In this situation, and future returns. Under either scenario, an
their advantage by disclosing that fact Vertical integration (the purchase of be the case. the management team, post sale, From the perspective of maximising upfront written agreement with the
to the company’s customers, suppliers a business by a supplier or customer) In such a situation, it may be that will comprise some of the previous value, there are two approaches which management team covering their
or employees. Accordingly, even if a is now relatively rare in the UK as it a management buy-in would be management together with one are commonly used: conduct and the running of the
vendor is prepared to approach direct is generally accepted that businesses appropriate. In this situation the or more additions (such as a new The first is to run an ‘arms business during the sale exercise
competitors, he may only wish to do achieve more success by focusing on private equity house (or vendor’s chief executive or finance director) length’ MBO process, so that will be very helpful, so that it is
so when he has an offer on the table introduced by the relevant private the management team are made clearly understood what both the
from another buyer and a sale seems Case study – Purchasers in related sectors (1) equity house. aware that they will only have an management team and vendors are
virtually certain to proceed. This Princess Yachts opportunity to do a buy-out with the expecting of each other.
approach is usually feasible as a direct Managing an MBO institution which makes the best offer
competitor will be able to determine At an early stage, the vendors need to for the business. This is sometimes Overseas purchasers
very quickly whether it wishes to Princess Yachts is one of the world’s builders but as Princess was undergoing a determine: referred to as an “Institutional Buy Overseas acquirers account for a
acquire the company and, if so, the premium yachting brands, and at the time transformation from a marine-engineering (i) The level of interest the management Out with Management Participation”. substantial proportion of acquisitions
price it would be prepared to pay. of sale had benefited from the increasing led business to a luxury brand in its own team has in pursuing an MBO Control over all aspects of contacting of UK companies, particularly
A direct competitor may not demand for larger and more luxurious right, the advisers believed that purchasers (ii) Whether management would be private equity sponsors and obtaining larger deals. In the case of smaller
always be prepared to pay the highest yachts, successfully expanding this part of should be sought from the luxury goods backable by a private equity house offers from them should be kept by companies, the due diligence and
price for the business even where the business. sector. (iii) Whether management’s the vendors and their advisers, so post-acquisition management costs
it appears to be the most logical The vendor requested that his advisers find Accordingly, the sale exercise focused involvement in an MBO bid will be a that management are only brought can be prohibitive where the overseas
purchaser. The preparedness of a a purchaser which could add to the business the purchaser search on high net worth significant deterrent to trade buyers into the process at relevant points purchaser does not have an existing
competitor to pay a premium price and help it grow but would not burden the individuals with a background in luxury (iv) Even if the first three conditions and not allowed unfettered access presence in the UK. In any event,
for the business may be limited by business with debt, given the cyclical nature of goods, which culminated in a sale for £200 are met, whether an MBO bid could to the successful institution(s) until overseas purchasers typically target
the extent to which it believes it the boat building industry. million to a consortium led by Bernard match the price which trade buyers a late stage. This is an established UK market leaders or at least number
could obtain the same result as an The obvious candidates were other yacht Arnault, the head of LVMH. are likely to offer. If may be that the method of managing MBOs and 2 in the space they have targeted for
acquisition by winning business away synergies with potential trade buyers should be acceptable to most acquisition.

18 19
Guideline Selling a business
Case Study – Sale to wealthy individuals
Black & Lizars Wealthy individuals The Sale Process – Formal Auction
Wealthy individuals or consortia
of individuals should never be
Black & Lizars, Scotland’s leading bidder on the basis that unlike private equity discounted as a source of potential Pre Sale Period: Initial Assessment Choosing Advisers Review of Alternatives Pre Sale Grooming
independent chain of opticians, was formed they would not require any re-investment by buyers, even for larger deals. This is
by the merger of Lizars and C. Jeffrey Black the shareholders and would not rebrand the especially the case with prestigious Sale Process: Prepare Information Memorandum Vendor Due Diligence Timetable
in 1999 and has a combined trading history chain like most of the trade buyers. trophy asset businesses. Any
of over 200 years. As well as maximising the The nature of the consortium did, approaches by advisers or vendors to Identify Purchasers
price, the shareholders were keen to find a however, draw the process out well beyond potential consortium members should
buyer which would not rebrand the business the original timetable, in part due to the ensure compliance with the financial
Contact Purchasers Confidentiality Letters
(due to their family links with the brand) difficulty in getting a collection of individuals promotions order in the UK or the
and would also not require them to reinvest to all agree at the same time. Ultimately, it relevant regimes in other territories.
Preliminary Offers Shortlist Purchasers
substantially in the business. was necessary for the consortium to appoint
At the shareholders’ request, a wide two of their number as representatives Sovereign wealth funds
Due Diligence Management Presentations, Site Visits, Data Room, DD Report, Draft Contract
marketing exercise was undertaken, to negotiate on behalf of the group. Sovereign wealth funds in substantial
covering high net worth individuals, private Nonetheless, the transaction was successfully trade surplus countries such as China, Contract Race Final Offers Deal Structures Forms of Consideration
equity, and trade purchasers. Interest concluded with the consortium achieving a Singapore and the Middle East now
was received from all these categories of sale which met the specific objectives of the eclipse private equity funds in terms of Choose Preferred Bidders Preferred Bidder Exclusivity Conditions
purchaser but a consortium of wealthy shareholders without the drawback of either financial firepower.
individuals was selected as the preferred trade buyers or private equity. Sovereign wealth funds were Further Due Diligence Control Information Flow Vendor DD assigned to Purchaser
responsible for some of the largest
deals in 2008 including the Legal Contracts Warranties + Indemnities Service Contracts
Disclosure Letter
Nationality of Acquirers of UK businesses (by value) 2007 controversial refinancing of Barclays
Bank and should not be ignored Legal Completion Public Announcements Net Asset Adjustment
where large or prestige businesses are
for sale.
UK 52% Continental Europe 30.7%
North America 7.1%
Shell companies The Sale Process – Informal Auction
A shell company is a quoted company
which typically has cash reserves but
Rest of the World 10.2% Pre Sale Period: Initial Assessment Choosing Advisers Review of Alternatives Pre Sale Grooming
limited existing business operations,
often as a result of closing down or
selling its original core business. The Sale Process: Prepare Information Memorandum
board of directors may therefore
decide to seek suitable acquisitions. Identify Purchasers
Source: AMDATA 2007
A shell company can be used either
as an alternative route to obtain a Contact Purchasers Confidentiality Letters
Top tips for identifying and approaching purchasers stock market quotation or as a means
of achieving an outcome similar to a
Hold Off-Site Meetings
trade sale with the vendor shareholders
l It is important to think laterally – it is to between 10 and 30 of the most being paid in cash or more typically
Obtain Indicative Valuations
often the less obvious buyer who will be likely buyers within a short period of with a combination of cash and shares
prepared to pay a premium price for the time should, in most cases, generate an in the listed shell. Whether the shell
Arrange Site Visits
business. optimal outcome as opposed to a broader company will be able to outbid trade
l Start off with a full list including potential approach which may end up deterring or financial buyers will largely depend Negotiations Deal Structures Forms of Consideration
purchasers from different sectors and buyers, who may feel that they have a on the individuals behind the shell. The
countries. Then reduce this list to a relatively low chance of securing the stronger their reputation the greater Heads of Agreement Exclusivity Conditions Timetable
manageable number by dividing them acquisition. the capability of the shell company to
into an ‘A’ list and a ‘B’ list containing l T he process needs control – do not pay an attractive price. Due Diligence Control Information Flow
names to be held in reserve. allow other advisers to make further
l A targeted and confidential approach approaches without approval. 9. The sale process Legal Contracts Warranties + Indemnities Service Contracts
Disclosure Letters
Choosing the right sale process is
Legal Completion Public Announcements Net Asset Adjustment

20 21
Guideline Selling a business
l the general state of the M&A Staggering approaches be worthwhile to have the adviser
markets. In approaching potential purchasers, prepare an information memorandum
If no offers have been received by the the objective is to ensure that even to show that the vendor has a serious
deadline imposed and the vendor or where a formal auction is being intent to approach other potential
a number of parties have missed the deployed, all offers for the company buyers of the business in the event
deadline and the vendor is then forced are received at broadly the same time. that the purchaser does not deliver
to give time extensions to interested Some purchasers will require more on his offer.
parties, his negotiating position will be time than others to assess whether
seriously weakened. they wish to buy the business and the Contacting potential purchasers
If there are likely to be a large price they would be prepared to pay. Each type of potential purchaser has
number of overseas purchasers Overseas companies and potential its own characteristics which will
interested in the company this also purchasers outside the vendor’s sector determine the preferred method of
argues against the use of a formal will require more time to reach a approach, but some general rules
auction as they will require variable decision than direct competitors and apply. Sending out anonymous
and in some cases unknown lead will therefore need to be approached descriptions of the business to
times for response generation. first. The staggered method of potential purchasers is not usually a
Accordingly, if there is any doubt approach can be employed, to some successful method of approaching
as to the likely level of interest in extent, even in the context of a buyers and any approaches
the business, it is best to avoid a formal auction. by advisers or vendors must, if
formal auction. If, subsequently, the appropriate, comply with the financial
approaches to potential purchasers Dealing with unsolicited offers promotions regime in the UK or the
generate an extremely positive If a proprietor receives an unsolicited relevant regimes in other territories.
response, the option always exists offer for his business which is pitched It is generally not advisable to
to convert the exercise into a formal at an acceptable level, should he give purchasers an indication of
auction at a later time by imposing progress that offer or test the market the vendor’s price expectations. If
absolutely essential for a vendor This route is only feasible where it The likely level of interest in a formal deadlines for bids. more widely to determine whether one gives a price indication to the
intent on maximising value. Getting is expected that there will be a strong company will, in turn, typically depend In the case of smaller or less a higher offer could be achieved? purchaser, offers will automatically
the process wrong can have dire level of demand for the business on a number of factors including: attractive businesses, the vendor is There are no hard and fast rules on be capped at that price and if the
consequences from a valuation allowing the vendor to dictate the sale l the size of the company (the bigger compelled to run at the speed at this issue. Generally speaking, there price expectation given is excessive,
perspective and may well ruin the timetable to potential purchasers. The it is the more interest it will attract); which purchasers are prepared to will be little downside in conducting it may frighten some purchasers
sale completely. There is no ‘one size timing itself must not be too rushed – l the attractiveness of the sector in respond and therefore cannot set a wider marketing exercise as it is off. It is usually preferable to let
fits all’ sale process. The two most for example, if likely bidders will need which it operates; deadlines for the receipt of bids. generally unlikely that the party who purchasers arrive at their own
commonly used processes are formal to go through an approval process, l the company’s historic and Competition between purchasers can has made the approach will go away. valuation and then work the offers
and informal auctions but even the adviser must allow reasonable projected financial performance; still be generated if sufficient interest However, if there are no other logical up to an acceptable level.
within these two categories, there are time for that to happen. and is obtained but the resultant auction buyers for the business and the offer Exceptions to the general rule
significant variations on these themes. is less formalised than the process is at a level which, in the opinion of include possible ‘time wasters’ or
Case study – Rifle shot described above. the vendor and his or her financial direct competitors. A vendor will not
Formal versus informal auction Cannon Avent advisers, represents a very full price wish to progress with such purchasers
With a formal auction, potential Rifle shot for the business, it may be that the unless he is confident that they can
bidders are given a timetable In some cases it may be appropriate best alternative is to commence meet the minimum price expectation.
requiring them to give the vendor Cannon Avent, the baby care business, was (representing nearly three times turnover), to sell to a single buyer without any negotiations on the offer on a ‘rifle In terms of maintaining
an indicative valuation by a certain founded 20 years ago by Edward Atkin when they asked their advisers to complete the sale marketing to third parties at all. shot’ basis. This is particularly so confidentiality, purchasers can be
date on the basis of information he was feeding his own children and realised to Charterhouse as quickly as possible and This can be for a variety of reasons, where there is a real chance that the asked to sign confidentiality letters
contained in the sales memorandum. that traditional baby bottles were not up to the with minimal disruption to the business, on a because the offer is unlikely to be offer may be withdrawn unless it is before being given the identity of
Upon receipt of indicative offers, task. At that time the business also made rubber rifle shot basis. beaten by any other bidders, for a progressed on a timely basis. the vendor and receiving the sales
several potential purchasers are short car mats and he used his chemical engineering Accordingly the advisers managed an vendor’s personal reasons or simply Even where it is decided to memorandum. Other measures which
listed and given the opportunity to expertise to develop a bottle which was the accelerated process, running contract because there is only one purchaser pursue a ‘rifle shot’ approach and should be taken include:
meet management, conduct site next best thing to breastfeeding. negotiations in parallel with due diligence and for a particular business. talk exclusively to the purchaser in l holding initial meetings with
visits, given access to a data room The Atkin family had established a close also demerging the rubber mats business. The Great care must be taken to question, in order to support the potential purchasers at the adviser’s
which will typically include a vendor relationship with their advisers over many entire process was concluded within eight ensure that the buyer in a ‘rifle shot’ vendor’s negotiating position, it is offices;
due diligence report. Following this years. When they received an unsolicited offer weeks, giving a 100% cash exit for the Atkin exercise does not abuse their exclusive often useful to remind the purchaser l ensuring that the purchaser always
they will be required to make a final of £300 million from Charterhouse Capital family and their co-investors, 3i. position. that other buyers are potentially communicates via the adviser
binding offer for the company. waiting in reserve. For example, it may rather than directly with the

22 23
Guideline Selling a business
vendor; and prospective buyers and approach purchasers of the merits of his
l o
 nly permit site visits where them confidentially. A number of business. A purchaser will often
potential purchasers have steps can be taken to maximise the attempt to reduce the price he needs
demonstrated serious intent and chances of keeping the sale exercise to pay for the business by offering
given an acceptable indication of confidential. sweeteners to the vendor such as
value. As mentioned earlier, it is advisable a seat on the purchaser’s board of
to assume that, at some stage, news directors or by stressing the benefits
Informing employees of the sale may leak and to adopt a which the vendor’s business will
In order to maintain confidentiality, it strategy to manage the leak. receive by becoming part of the
is usually preferable to inform only a For that purpose, a ‘hymn sheet’ purchaser’s group.
small number of key employees, usually should be prepared containing a
just senior accounts staff, of a potential response to a leak agreed by both Data room
sale exercise. It is often helpful to stress the vendors and their advisers. These A data room is a key element of
that the exercise is at a very preliminary responses may vary, depending on the the sale process. A data room
stage and may well not result in a sale. stage of the transaction. should contain all detailed financial,
As the exercise progresses, it may be An angry denial by the vendor commercial and legal information
appropriate to bring other staff into the that his company is on the market on the company including detailed
picture and it is good practice to have may merely serve to confirm the management accounts, copies of all
an agreed announcement. accuracy of a rumour. A relaxed and contracts, particulars of all employees
The vendors should also agree a disarming response to the effect that and properties and where available, a
handover plan with the purchaser, so ‘the company is always receiving vendor due diligence report.
that employees are informed of the sale approaches’ or something similar The data room is typically provided
ahead of any public announcement. is preferable. to purchasers in an on-line format via
Vendors should make sure that a secure third party on-line data room
they are proceeding in accordance Meetings with potential purchasers provider with password protected
with the relevant employment laws Before meeting with a potential buyer internet access. The data room can
and regulations, particularly if the of the business, it is essential that, also take the form of an actual room contacted, the negotiation process interested in the kudos which may other purchasers who bring similar
sale may result in redundancies and/ in conjunction with his adviser, the full of information, typically at the has effectively started. One cannot attach to the ownership of the synergistic benefits to the table.
or any significant changes in roles vendor has: legal advisers’ offices. be definitive as to how to negotiate business than its profitability. If that is
and responsibilities. For example, in l examined the potential purchaser’s The major advantage of an on- with potential purchasers. Different the case, it may be possible to extract Releasing information
the case of an asset sale the vendors past acquisitions and the prices it line data room is that it is accessible purchasers will respond differently to a higher price than the financial The release of information on the
should take advice on the relevant has paid; simultaneously by multiple users. different approaches and accordingly performance of the business would business needs to be carefully
TUPE regulations and the need for l d  etermined its funding capability; This makes the due diligence process the approach taken must be appear to merit. controlled. Although it is essential
formal consultations. l r eviewed any published acquisition much more efficient. It also gives the determined on a case by case basis. Similarly, if the potential purchaser to disclose all critical information on
criteria of the purchaser; and providers valuable insights from an There are nevertheless some general is considering the acquisition of the the business before signing heads of
Managing a leak l r eviewed what has happened to analysis of the information viewed rules which should be followed in business for strategic reasons, for agreement, different considerations
For the sale of a private company companies previously acquired by by the purchaser, the number of the context of negotiations with any example, to obtain entry into the apply after heads have been signed.
other than via a public auction, the the purchaser. representatives of the purchaser potential buyers of the business. European market, it may be prepared For example, it may be advisable not
vendor will seek to keep the sale The deliverability of offers is just as who have viewed the data room to pay considerably more than a to inform the purchaser about good
confidential until it is completed. important as the price at which they and on what information the buyer Understanding the purchaser’s conventional multiple of earnings. It news until a sticking point is reached
Proprietors of private companies are pitched. The vendor should never has focused. objectives is also important to understand what in the negotiations or to counter any
are typically concerned about the confer preferred bidder status on any The objective of the data room is It is important for the vendor to improvements a purchaser could attempt to reduce the purchase price.
negative impact which a leak about acquirer, without an extremely strong to ensure that final offers are made understand the potential purchaser’s make to the business by way of cost
the impending sale would have on conviction that the purchaser will on the basis of full disclosure and viewpoint and to ascertain what savings or revenue enhancement Bridging the price expectations
its staff, customers and suppliers. actually deliver on the offer he has that when preferred bidder status is it is seeking to achieve from the and to ensure that this is factored gap – earn-outs
It is common for example where made for the business. conferred on a particular bidder, the acquisition. For example, occasionally into the pricing of the business. A Differences in price expectations
competitors become aware of the Vendors are often surprised by chances of that bidder withdrawing a purchaser will be interested in the purchaser’s starting point in any price can be bridged by a number of
impending sale of the business to the fact that meetings with potential or reducing its offer on the basis of business for emotional rather than negotiations will be that they should techniques. The most obvious of
utilise the uncertainty surrounding buyers are often as much about the information gleaned during final due strategic or financial reasons. One not pay for any synergies which they these is an earn-out, whereby further
the future ownership of the business purchaser convincing the vendor diligence is significantly reduced. frequently encountered objective is bring to the vendor’s business but consideration is paid as and when
to either poach staff or customers. why they represent an appropriate status. If the target has an extremely they may, e.g. be forced to price in future profits are earned. Vendors can
Vendors are generally better advised buyer of the business as they are 10. The negotiation process prestigious brand name or a royal some of these synergies in order to often achieve a higher price via this
to target a selected number of with the vendor convincing the Once potential purchasers have been warrant, a purchaser may be more win a competitive auction involving route as they are assuming part of the

24 25
26 27

risk of the future performance of the Key considerations in reviewing offers for the business include: because the longer the transaction Why do deals collapse after heads of agreement?
business. In effect, they are ‘putting ensues, the greater the possibility
their money where their mouth is’ that the sale will be derailed by either
by agreeing to link the final price to l A
 n initial value given by a purchaser marketing the business, below which the an external factor (e.g. stock market Having prepared the business for sale, nor understand the nuances of what has
the financial projections provided to will not always remain until completion. business will not be sold. crash, war) or internal factor (decline identified a purchaser, and negotiated been agreed. As a result, misunderstandings
the purchaser. Earn-outs also help a Some purchasers have a reputation for l If the offers received undervalue the in profits). This period may be longer the terms of a deal, why do some sales can and do arise.
purchaser to pay a higher price by ‘chipping’ offers after they have been business, there is no obligation on the if the purchaser needs to raise finance complete and some fall by the wayside? Alternatively, issues may arise from the
allowing the payment of part of the accepted by the vendor. The acquisition vendor, moral or otherwise to progress or seek shareholder approval for the There can be a tendency for owners to due diligence process which cannot be
price from the future cash flows of track record of each purchaser must be with any of them. acquisition. feel that once the heads of agreement are satisfactorily resolved.
the business. carefully scrutinised. l Price is not the only factor relevant to If the purchaser attempts to signed with a purchaser, the deal is done. In Deterioration in the financial
Clearly an earn-out will only l Deliverability is of paramount an evaluation of an offer. Other terms of renegotiate a key element of the fact, often the stage between agreeing terms performance of the business can result in
be appropriate where the vendor importance. It may often be advisable to the deal, such as the terms of ongoing transaction, particularly the purchase and completion is the most difficult period the purchaser withdrawing or attempting
is both confident of future profits run with the number 2 or 3 bidder if that service agreements with the vendors and price, its exclusivity will lapse as a of the sale exercise. A whole new group of to reduce the purchase price. This may be
and where the business will remain bidder has a clear edge over the others the level of warranties or indemnities matter of course. This should be advisers become involved, including two or due to the general business climate or to
autonomous and independent after in terms of likelihood of delivering on the required are important and must be stated as a specific term of the heads more sets of solicitors, reporting accountants, the fact that the vendor and the rest of the
a sale. In many cases, this will not be terms agreed. fully understood before a final offer of agreement. as well as perhaps firms of stockbrokers and management team have ‘taken their eyes
possible as the purchaser’s rationale l P
 re-determine a bottom line figure before is accepted. other financial advisers. They will not always off the ball’ because of their involvement
in buying the business may be to Timetable have been party to the original negotiations, in the sale process.
combine the vendor’s business with From the heads of agreement stage
its own to achieve cost savings on the It is customary for the essential need to get actively involved in onwards, significant costs will start
other synergistic benefits. This may terms of that offer to be enshrined in drafting heads of agreement. This can to be incurred by both parties, and required to reimburse the purchaser a warranty claim can be settled. Such
make it difficult to identify the target heads of agreement. Although save considerably lengthen the process and senior members of staff may need to for any shortfall relative to the a retention account is designed to
company’s profit stream after the for provisions relating to exclusivity, result in a loss of momentum and a be advised of the potential sale. It is minimum figure and possibly being provide the purchaser with security
acquisition. costs and confidentiality, the heads loss of enthusiasm on the part of the therefore important that a detailed entitled to be paid any excess by of payment of any such claim and
of agreement is not a legally binding buyer. Having said that, it is important timetable is agreed, planning every the purchaser. will typically be placed in a separate
Reviewing offers document, it should cover all of the for a lawyer to cast his eye over the week up to completion. The vendor The alternative to a net assets test escrow account, often for the duration
No two offers will ever be the same. important points of the deal. It is heads of agreement before they are should insert a clause in the heads of is a cash free/debt free basis. Care of the warranty period.
Potential purchasers will make offers unwise to defer important issues for finalised as it is difficult to negotiate agreement that if the purchaser fails to needs to be taken, if this concept If the owner has established
in a variety of forms, including subsequent discussion for several away from a position entrenched meet key deadlines in the timetable, is used, to ensure that the parties a good relationship with the
cash, shares and loan notes or a reasons. First, the heads of agreement in the heads of agreement or to such as the production of the due have the same understanding of this purchaser, it is very helpful to keep
combination thereof. It is essential, stage is usually a honeymoon period introduce new elements after the diligence report by a certain date, its concept. A purchaser will often wish the dialogue going in this critical
in evaluating offers, to determine where good relations exist between heads have concluded. exclusivity will lapse. to deduct the following items from period as this can help to ensure that
the true value of each element of the the vendor and the purchaser. The any cash on the balance sheet to as and when they arise, problems
consideration being offered and, in relationship will often deteriorate once Key issues Net assets and surplus cash determine surplus cash: are resolved sensibly between the
the case of consideration other than the due diligence process starts and Exclusivity The typical basis of a sale is that l any actual corporation tax liabilities principals at an early stage.
cash or bank guaranteed loan notes, the legal negotiations commence. A purchaser will almost invariably there will be a minimum level of net of the company; The vendor should ensure
to make adequate allowance for risk. Secondly, the vendor’s negotiating insist on a period of exclusivity to assets in the company at completion. l an imputed tax charge in respect of that issues already agreed by the
Qualitatively, an offer which requires position is at its strongest at this stage enable him to conduct due diligence Alternatively, a company may be sold current year earnings; principals are not being renegotiated
the vendor to take a significant as hopefully he will have a number and prepare and negotiate the on a ‘cash free/debt free basis’. l any borrowings including bank and that advisers do not become
proportion of the consideration in of competing offers on the table to necessary legal documentation. If a net assets test is used, the debt, hire purchase obligations and bogged down over minor points
shares or in unsecured loan stock or which he can revert if he cannot get Engaging advisers for an acquisition minimum net asset figure agreed will finance leases; and which can be readily agreed
preference shares is inferior to an all the concessions he is seeking from is an expensive exercise and some typically be determined by reference l any substantial capital expenditure between principals.
cash offer. the preferred bidder. If a vendor is purchasers may first require an to the net assets of the company as requirements which are due in the Other key issues to be addressed in
forced to revert to other bidders after assurance that they will not be stated in its most recent set of audited immediate future. the heads of agreement include:
Heads of agreement negotiations have been terminated gazumped by a competing bidder. accounts. This figure might be subject The basis for determining surplus cash l terms of ongoing employment/
Once all offers for the business with the preferred bidder, at the very The length of exclusivity period is to an upward adjustment to take can be one of the key elements in consultancy agreements for the
have been tabled, the next step least his negotiating position will have always a matter for negotiation but account of the increased working negotiations with the purchaser. vendors;
is to negotiate the terms of those been seriously impaired. At worst, he is generally in the region of six to capital requirements of the business l the extent of warranties to be given,
offers. Assuming, at the end of this may find that the interest of other eight weeks. It is in the interests of since the last accounts were published. Retentions and escrow arrangement the length of the warranty period
process, one or more of the offers buyers has dissipated in the meantime the vendor to complete a transaction Often, the actual net assets of A purchaser will often request a and the identity of warrantors; and
is acceptable, it is then necessary to as they have moved on to other in the shortest possible time frame, the business on completion will be substantial retention from the l the length and extent of restrictive
choose the offer which best meets the things. not only because a transaction is determined by a set of completion purchase price, from which any post covenants which the vendors will be
objectives of the vendor. In many cases, lawyers do not disruptive to the business but also accounts with the vendor being completion processing adjustment or required to give preventing them

26 27
Guideline Selling a business
from competing with the business Tips for successful negotiation Management due diligence How to manage due diligence and keep your sanity
post completion. Financial buyers will generally wish
to carry out due diligence on the
11. The due diligence l A
 ll information that is provided to the l Use advisers to your best advantage. Let senior management team as well as l A sk your advisers to review all due l Keep duplicate records of everything
process and warranties purchaser should be correct. Bear in them pursue the hard points, possibly meeting them on an individual and diligence requests for reasonableness you hand over as well as notes of
Due diligence is, in essence, an mind that most purchasers will carry without the principals. The situation can collective basis. The due diligence – and make sure the buyer knows you everything you discuss. This will be
investigation of the business and the out rigorous due diligence to verify all always be retrieved by the principals if a generally involves taking up personal will be doing this. helpful if there is a dispute and in any
market in which it operates, designed that has been discussed in negotiations. compromise is necessary. references from former employees and l Unless your accounting systems are case will be needed for disclosure.
to ensure that the assumptions Always assume that all information l Always consider the discussions from the business associates and checking for very primitive or specialised, you l Where there is sensitive information in
underlying the purchaser’s offer concerning the business will be other person’s point of view; negotiations any previous bankruptcies or criminal should generally not be creating the business, consider only providing
are correct. Vendors often fear the unearthed by due diligence. are never one-sided. records. Increasingly, management new data. Always check to see if this at a later stage when you are more
due diligence process but, provided l It may be advisable not to reveal all of the l Have realistic expectations and stick due diligence is conducted by your existing information is in fact sure the transaction will go through.
the vendor has not withheld any business’s attractions initially, but to keep with them; instruct advisers to follow the external consultants employing highly adequate. l Always put the business first. If the
crucial information concerning the something back for later to counteract same line. sophisticated methodologies which l Make sure that the purchaser’s advisers business is suffering because of the
business, it should not give rise to any any attempt by the purchaser to l Be prepared to withdraw if your may include psychometric testing share the information you provide, demands of due diligence, request
unpleasant surprises. renegotiate the terms of the transaction. objectives are not being met. and other forms of psychological type rather than each asking you the a period of time to just focus on the
That said, the extent of the aptitude testing. same questions – a data room can be business.
purchaser’s knowledge of the business invaluable here. l Consider increasing your resources
and its market is an important factor. which forms the essence of what the Customer due diligence Legal due diligence l Keep as much due diligence as possible to deal with due diligence, such as
There is always the possibility that at the purchaser is buying. Almost invariably, a purchaser will Legal due diligence focuses on off site. seconding in accounting personnel.
time heads of agreement are signed, wish to speak to the company’s major key contracts and other legal
the purchaser has not adequately Market due diligence customers to assess their level of documentation of the company. The
understood the business or its market, If the purchaser is not already familiar satisfaction with the company and company’s exposure to litigation competing bids as there will be are agreed and understood
thus the vendor is in a vulnerable with the market in which the vendor the prospects for their continued or other contingent liabilities and inevitably some matters covered by by all of the company’s
position. The extent to which the is operating, it may undertake some patronage. Clearly there are ownership of assets including its the warranties which are outside the shareholders;
purchaser needs to conduct detailed market due diligence either in- considerable commercial sensitivities properties and intellectual property vendor’s knowledge or control. l identify the appropriate route to
diligence to supplement his existing house or by commissioning external involved in customer due diligence rights will also be reviewed. The key areas covered by meet the vendor’s objectives;
knowledge of the business is, therefore, consultants. Commercial due diligence as if the deal does not proceed after warranties include the following: l start preparing for a sale exercise
a relevant factor in the vendor’s choice of this nature is not only concerned the customer interviews have taken Other due diligence l the company and its affairs; well in advance;
of preferred bidder. In particular, a with the future of and underlying place it may impact adversely on In addition to the above it is likely l the company’s financial accounts; l set realistic targets, both for timing
purchaser which does not require to trends in the market in which the the company’s ongoing customer that a buyer will require specialist l material changes in the financial; and price, and regularly review
undertake market due diligence might company operates but will also relationships. There are a number reviews of areas such as intellectual presentation of the company since the position;
be favoured over one which does, all assess the company’s position within of ways to overcome this problem. property, employment, pensions and the latest accounts; l never underestimate the
other things being equal. its market and how competitive One is to persuade the purchaser to insurance, as well as an assessment of l undisclosed liabilities; detrimental effect that a sales
influences are likely to impact on its conduct an anonymous customer any particular risks or pricing issues l litigation; process can have on staff morale,
Types of due diligence future performance. survey whereby market researchers identified. l property matters; energy or contribution. A decision
There are several types of due are engaged to elicit the opinions of l environmental matters; to undertake a sale exercise should
diligence, as follows: Environmental customers on both the company and Warranties l tax; never be made lightly; and
Depending on the sector and activities its competitors under the guise of a Many vendors get extremely l insurance; l be prepared to walk away from
Financial due diligence of the target business, a buyer will general market review. If this is not agitated about the prospect of l employees; the deal if the objectives are not
Financial due diligence involves a often require environmental due acceptable or appropriate, the vendor having to give warranties on the l intellectual property and being met.
detailed examination of the financial diligence. This can range from a should at the very least insist that: business to the purchaser. In reality, information technology; and
affairs of the company with particular simple desk survey to full-on ground (a) c ustomer interviews are left until the number of occasions when l compliance with applicable Other reading
focus on the historic, current and testing. Environmental risks can have the very end of the due diligence a claim is made by a purchaser legislation. The following best-practice
projected performance of the substantial price implications (and process; against a vendor for breach of guidelines may also be viewed at
business. Financial due diligence will in some cases may deter purchasers (b) a ll questions to be asked of warranty is comparatively small. 12. Conclusions
generally take the form of a lengthy altogether) and so should be customers are first approved by Again, if the vendor has been Each business is unique, and each Issue 30 Selling a family-owned
accountants report on the business. considered well ahead of a sale. the vendor; and honest and forthright in his dealings vendor has their own characteristics business – process and pitfalls
One of the critical roles of the (c) t he purchaser gives an assurance with the purchaser he will generally and objectives, but certain key rules Issue 44 Financial promotion – the
reporting accountants will be to test Property that subject to the satisfactory have little to worry about. Having nearly always apply in achieving a exemptions framework under the FSMA
the assumptions underlying the profit Any premises used by the business, outcome of the customer visits, the said that, the extent of warranty successful sale: Issue 46 Valuation issues – issues
projections of the business as it is the whether freehold or leasehold, will be deal will proceed on the basis of cover sought by a purchaser l determine the objectives of the that corporate finance practitioners
future profit stream of the company the subject of property due diligence. the terms agreed. is a consideration in reviewing sale exercise and ensure that they will encounter in their work

28 29
Notes Authors
Peter Gray Cavendish Corporate Finance LLP
Partner, Cavendish Corporate Finance LLP
T +44 (0)20 7908 6005 Cavendish Corporate Finance is the UK’s leading independent specialist
adviser to vendors of businesses.
Founded in 1988, Cavendish has
advised on some 400 company
Peter Gray is a Partner with Cavendish Corporate Finance LLP. Peter joined Cavendish in 1995 since sales with clients including private
which time he has been personally involved in the sale of over 50 companies including a number companies, financial institutions and
of household names such as Avent Baby Products. fully listed public companies.

Prior to joining Cavendish, he worked as a lawyer with Clifford Chance in its management buy-out Typical transactions fall broadly within
group. Peter has degrees in Law and Economics from the University of Melbourne and an MBA. the £10 million to £200 million ‘mid-
He is a frequent lecturer on the subject of selling private companies. market’ value range.
Cavendish is unique in that it has
only ever acted for vendors of
businesses and as a result has built up
an unrivalled specialist expertise in
Jonathan Buxton managing the company sale process.
Partner, Cavendish Corporate Finance LLP
T +44 (0)20 7908 6004 Cavendish is a member of M&A International Inc., the world’s leading
alliance of specialist mergers and
acquisitions advisers and investment
banking firms.
Jonathan Buxton has over 20 years’ experience in mergers and acquisitions. For the past 12
years he has specialised in business sales at Cavendish Corporate Finance LLP, where he is a Cavendish Corporate Finance LLP
Partner. He has advised on a wide range of transactions, from multi-billion pound government 40 Portland Place
disposals to the sale of minority stakes in small family businesses. London W1B 1NB
+44 (0) 207 908 6000
An Oxford graduate and Chartered Accountant, he was previously employed at PwC and
Hambros Bank and has also worked in industry. He has particular expertise in public-to-private
company transactions and heads the consumer group at Cavendish, which specialises in
consumer-facing businesses in the retail, leisure and consumer sectors.

30 31
ICAEW Corporate Finance Faculty ISBN 1-84152-384-4 REF:TECPLM8014 Designed by Bladonmore T. +44 (0)20 7631 1155