Selling Privately Owned Businesses

Private businesses may be sold to an existing or new management team, trade buyers, institutional investors or indeed private investors through an initial public offering.

Oasis Europe can manage the whole sale process. This role normally encompasses comprehensive research into relevant industrial sectors, contact and detailed discussions with suitable acquirers, detailed negotiation of structure, price and other terms by our trained and experienced negotiators and then liaison between all parties and advisers to ensure that an agreed deal is successfully completed.

With a substantial client and contact base, powerful world-wide research databases and close connections with brokers, investment banks, private equity houses and professional legal and accounting firms, we are able to access the widest range of business opportunities for our clients.

However an opportunity may have been generated, we are retained to assist clients in the commercial negotiation phase of potential transactions.

We have commercial backgrounds with relevant professional qualifications rather than professional backgrounds with limited exposure to "the real world".

What buyers want

Generally acquirers buy businesses to further their strategic ambitions and to use their key features to increase the rate of growth of businesses that they acquire. They may pay widely varying prices for the same business dependent on the advantages they think the business could bring to them – but almost all will try to link the price to a formula based on net assets, past or future profits or a combination thereof.

Private individuals may need to seek private equity finance from banks and institutions to help pay for a business which they will then manage.

For example, the members of a management team may wish to buy the company in which they are currently employed, a Management Buy-Out (MBO) – or an individual or a group of managers may identify an opportunity to acquire a business that could benefit from their management input, a Management Buy-In (MBI).

Companies frequently seek to expand by acquisition as a faster alternative to organic growth – and whereas private companies, like individuals, may need private equity funding, publicly quoted companies can issue new shares to pay for the acquisition.

In view of the diversity of options, all potential buyers of businesses need to examine their needs and resources to properly determine their acquisition criteria and to realistically assess what they can afford to pay and how any necessary finance can be secured. Public companies will also need to consider the likely impact on share prices if a particular acquisition is to be made and the way in which the acquisition should be structured.

Why are you selling?

Businesses are made available for sale for a variety of reasons:

Personal – such as retirement, failing health or just tiring of the pressures and routine

Business – a need to grow faster, industry consolidation, it being a non-core activity or perhaps it is loss making.

Financial - additional funding may be needed, forced sale through licensed insolvency practitioner, or possibly a divestment to obtain capital gain for a private equity investor.

For most owners, selling their business is a "once in a lifetime" event and is frequently bound up with family and emotional issues as well as commercial and financial matters. Once an "in principle" decision to sell has been made, the aim is to maximise the after-tax proceeds. Professional advice and planning at this stage, or earlier, is vital. This is especially valid where personal and corporate considerations have previously gone hand in hand.

Detailed analysis may result in a sale being delayed or set aside in favour of a MBO or a part realisation through either public flotation or replacement capital from an institution.

Finding the ideal buyer

The stock market provides a visible intermediary-based facility for buying and selling shares in publicly quoted companies, but there is no such vehicle for those wishing to buy or sell private businesses.

Matching buyers and sellers of private businesses is usually undertaken on an anonymous basis with initial search and contact generated from investigative research, advertising and the use of both general advisers and specialist intermediaries.

From a seller's point of view the use of a specialist intermediary is vital – to preserve anonymity, to filter the interest of potential buyers and to allow the owner to do what he is best at – continuing to run his business. Competitors must be prevented from taking unfair advantage from knowledge that the business is for sale - for example by encouraging rumours, unsettling staff, customers and suppliers.

Specialist intermediaries normally market businesses in one of two ways:

the issue of a comprehensive report on the business (an Information Memorandum) which is used as the basis for inviting tenders – either generally or by way of a controlled auction
the use of an anonymous two or three page Data Sheet to secure interest on a confidential basis as a precursor to arranging meetings between potential buyers and sellers before names are revealed or private data is exchanged – circulation is by a "targeted" rather than a "scatter-gun" approach, following as it does comprehensive quizzing of each potentially interested party.

Although confidentiality agreements are obtained from potential buyers before they receive an Information Memorandum or Data Sheet, the second of the two styles provides greater control over anonymity since less detailed information is revealed at the outset.

The negotiation

Negotiations cover valuation, deal structure, payment terms, timetable and a host of issues in the detail of the transaction – the emphasis placed on the various aspects being different for buyers and sellers.

A prudent buyer will often want part of the price to be deferred and linked to future performance by way of "earn-out". However, the seller is likely to seek a large initial payment to minimise concern that the buyer may change the business style or its accounting policies if such could adversely affect the final price. There must be trust and good personal chemistry between the contracting parties so that the seller is both able and willing to assist the smooth transfer of ownership and management.

For their own protection both parties will seek certain assurances. The seller will wish to have confidence that the buyer can fund the purchase. Also, the seller may seek comfort as to how deferred payments may be guaranteed to the extent that they may be legally due. Equally, the buyer will ask the seller to warrant that the information provided (and on which any offer for the business may be based) is true and accurate. The guiding principle for warranties and indemnities in a sale agreement is that anything to do with the company up to the point of its sale is the seller's risk (unless disclosed to the buyer beforehand) whereas anything after the sale is the buyer's risk. This basic position can be slightly blurred when "earn-out" payments are involved.

The form of consideration payable by the buyer (cash, shares, loan stock etc.), the definition of what is to be sold (purchase of the share capital or net assets plus goodwill) and the structure of any "earn-out" or ongoing involvement by the seller in the business can affect the seller's overall tax position. These matters will play an important element in the final negotiation process.

Negotiation (particularly the emotive subject of price) can frequently be assisted by the involvement of advisers and specialist intermediaries to explore the position of the other side and to avoid the principals taking entrenched positions from which they cannot withdraw. Specialist intermediaries should be sufficiently entrepreneurially minded to separate "deal-breaking" issues from negotiating positions as well as to recognise the financing, tax and legal implications of a commercial deal.

The negotiating style adopted will depend on the circumstances and the strengths that a negotiator perceives are on his side (e.g. the need to do a deal versus the ability to walk away, or the existence of other potential buyers). Both parties to a potential deal will invariably wish to "keep their powder dry" at the outset – and will try to persuade the other party to name a price; if a buyer indicates an offer it can only normally be raised, whereas if a seller sets an asking price it is usually deemed to be in excess of the value that would be finally accepted.

At the end of the negotiation phase, there will normally be established a form of commercial agreement (subject to contract), essentially covering:

what is to be sold
for how much it is to be sold
when and how payment is to be made

The following matters must then be addressed:

buyer issues, for example:
- stock market requirements if a quoted company
- institutional finance
seller issues, for example:
- tax / personal planning
- finding the time to both run the business for sale and meet the information requirements of the buyer and his advisers

Getting the professionals involved

The buyer will normally seek comfort from professional advisers in relation to the acquisition. In addition to lawyers and accountants these can include:

Surveyors – valuation of properties and other assets

Consultants – examination of markets, production methods, intellectual property, management etc.

The reports from these specialists will either stand alone or be incorporated in the report of the buyer's investigating accountant.

The investigating accountant's role can be compared with that of a surveyor in a house purchase. His role is to check the soundness of the structure of the business and warn the prospective buyer of "what might crawl out of the woodwork".

At worst, the accountant's report independently confirms what the buyer already knows! It may uncover points which can be used in any re-negotiation of price, or help in the running of the business after acquisition. It could uncover significant undisclosed liabilities which may make an acquisition unacceptably risky. In general, it provides a level of information on the seller’s business which can sometimes only be obtained by an independent professional, as interested principals may not be given access to confidential sources of information.

At the same time as these investigations are being carried out, the buyer will instruct lawyers to draw up a draft agreement for the purchase of the seller's business and its underlying assets; it is the role of the seller’s lawyers to then comment on the draft.

A major part of the documentation drawn up by the buyer's lawyers will be a series of warranties and indemnities required of the seller by the buyer; it is inevitable that the seller will not be in a position to agree to give all of the warranties without qualification and, where this is the case, the seller's lawyers will prepare a letter of disclosure against those warranties. The buyer's list of warranties is frequently used as a means of procuring further information about the seller's business and therefore, in general terms, warranties are often regarded as "questions" and disclosures as "answers"

It is essential that both parties retain lawyers who are experienced in the purchase and sale of businesses so that they are able to properly and commercially advise their respective clients – while appearing to state the obvious our experience over 22 years is that both buyers and sellers still get this choice wrong in far too many cases.

Throughout this phase it is vital that both sets of lawyers co-operate with investigating accountants, auditors and pensions and tax advisers as well as the principals and their commercial advisers/specialist intermediaries – so as to correctly reflect the finally intended structure of the deal in both a tax efficient and an unambiguous manner.

It is equally important that timetables are set for all parties – and adhered to; potential transactions that are not "driven" remain as potential transactions and never happen! As a house, and in view of the due diligence costs that a buyer will incur, we favour exclusivity agreements provided the continuity of exclusivity is linked to the achievement of agreed timetable milestones.

The end or the beginning?

When contracts are "exchanged" there is a binding agreement to execute and finalise the sale on the "completion" date - these two events frequently being simultaneous.

It is normally in the interests of both buyers and sellers to properly announce the acquisition (arrangements for this may have been made some time before) and to ensure that management handover is carried out in such a manner as to ensure continuity with staff, customers and suppliers.

The buyer must then concentrate on the profitable growth of the acquired business in its new environment – possibly considering further acquisitions to complement the new business.