Well advised to be well advised

Our panel of leading experts from the Birmingham professional community answer some of your questions about succession and exit planning.

 

I feel daunted by the whole process of change of ownership of my business. Should I be?

 

Adrian Jones, Gambit: In a word, yes. For many entrepreneurs this is a once in a lifetime event and opportunity, and it is critical to get it right first time as "marketing" your business second time around provides the wrong signals to the buyer or investor population, and often their views become jaundice. If your ducks are in a row, which means all necessary planning and preparation has been addressed, a smooth change of ownership will still take at the very minimum three months to make happen.

 

This will undoubtedly be the most stressful period in your business life, and you would be well advised to be well advised. A typical process for change in ownership takes six months to consummate.

 

And a point to note, there are no typical processes. No matter how well prepared you think you are, there will always be something in a change in ownership process which throws unexpected curve balls at you. The secret to getting through this is to address these curve balls calmly, and listen to the advice given to you – it is not very often situations arise where they are new to your advisers and haven't been tackled before. 

 

Alistair Pendleton, LDC: Business continuity is always a key issue for owners, but with a well developed approach to ensuring the smooth delivery of a deal transaction – including changes in ownership – from start to finish, LDC focuses on minimising disruption for both the business and its management. By fully understanding the company, a good private equity partner should ensure that a change in ownership is executed efficiently and effectively, providing invaluable support and advice to the vendor.

 

Private equity is a partnership that develops over time and is generally a three to five year relationship. Ensuring that you choose the right private equity partner with common objectives and strategy is paramount, as like a marriage, there will be ups and downs – building the relationship from a solid base should ensure longevity and stability for the duration and beyond.

 

In today's business market, the flexibility of private equity makes for an attractive funding source to support a change of ownership as the transaction can be tailored to the individual requirements of the business and vendor.

 

Adrian Cutler, Cobbetts: A change in ownership can seem rather daunting at times. However, having a team of advisers around you who are committed to working with you through the project rather than simply transacting your sale will go a very long way to demystifying the whole process. Having the right team around you can make the difference between a smooth, informed and stress free process and one that is protracted, confused and stressful.

 

Before engaging advisors to your deal you should see and speak to a few, preferably recommended by someone you know who has used them before. The relationship and chemistry you have with your team is important as you will be spending some time together over the process. You should take time to ensure that they understand your objectives and the areas of concern you have, and not just the professional parameters of the deal. Finally, it is often beneficial if the team you assemble have worked together before. Established working practices make project management much more successful.

How do you go about putting a value on a business?

 

Adrian Jones, Gambit: There are many ways of assessing the value of businesses. Some are driven by profit multiple, some by balance sheet and some by sheer business scale and scalability. But some important valuation measures are intangible such as market positioning, barriers to entry, niche products or services, management team etc. So how do advisers come up with an achievable and realistic valuation? We will do our research into deals done, quoted company comparisons and a whole other myriad of different measures to consider, but frankly, we judge a value of a business through previous experience and our gut feel. We are not often wrong.

 

Alistair Pendleton, LDC: Clearly, we all need to be mindful of the challenging economic environment in which we are currently operating when considering the value of a business.

 

It is important that management teams recognise that the value of their businesses may have inevitably fallen from the highs of the recent past and therefore, it is essential that owners have realistic expectations and ideals when it comes to the price and valuation of their companies.

 

What steps should I be taking to maximise the value I recognise from my business?

 

Ian Howey, Yorkshire Bank: Think of the business as the family silverware. Think well in advance and start to position the business for sale 3 or even 5 years ahead of the actual sale. A sound start point is to identify a short list of potential purchasers and then assess what it might be that makes the business attractive to them. It could be a product, a process, some contracts or intellectual property. They may want to preserve the business in its current location; they may want to subsume it into their own entity.

 

Being sentimental about the business or protective about the employees doesn't go together with maximising value. Don't overlook the incumbent management team as prospective buyers of the business. This may be the least disruptive exit route Remember that the business will be subject to rigorous due diligence processes when you sell so ensure that it will pass muster. Financial systems should be solid and produce timely and accurate management information. Eliminate commercial shortcomings like customer or supplier concentrations or reliance on a single product. Eliminate gaps in the management team and tidy up contractual relationships.

 

And finally, seek good advice to help you market the business for sale and run the actual process.

Having done all of the preparation no-one wants the wheels to fall off in the final strait.

 

Alistair Pendleton, LDC: When considering a sale, a management team should strive to deliver a simple, but strong business model alongside a clear forward-thinking strategy of how they intend to generate future profit growth and cash flow. A private equity partner will always look for a well-developed business plan together with clear evidence of a solid track record from the management team and articulation of business USPs – in turn, this should help to maximise the true value and potential of the business.

 

My children, although keen to take the reins, do not have the experience nor the commercial acumen to allow me to sit back. What can I do?

 

Ian Howey,Yorkshire Bank: Prepare to make some tough decisions. This is a valuable asset and the decision to realise the value or pass it on to the next generation is vital. No experience and no commercial acumen on the part of the kids is not a great start point. Decide quickly whether they are capable of picking up the necessary skills to run and develop the business.

 

If they are, set timescales and the targets they must hit. Keep their progress under review and don't be afraid to draw a line under the exercise and change the strategy.

 

If, however, the entrepreneurial genes have not passed from one generation to the next then don't even contemplate using the children as the succession plan. Instead build the best management team possible for the business in order to sell it. There are other ways to provide for the family and selling the business for maximum value could be it. Even if the business is sold to a third party it may be possible to ensure that family members still have a role – with the safety net of the proceeds in the Bank. If the kids still fancy themselves as budding Alan Sugar's then back them in a small start up with some of the proceeds and see how they get on. See it as damage limitation.

 

Adrian Cutler, Cobbetts: Unfortunately, if the children do not present a strong management to the proposed funder of the buy out, it is likely to impact on their appetite to support the deal.

 

Ensuring that the business is not solely reliant on you as owner-manager is a key part of planning for exit. Unless you want to spend the requisite time in the business training them up to a standard to which you are comfortable to hand over to them, there are several practical options available.

 

Firstly, you can agree a phased handover where you continue to work in the business for a period post-deal (although this may impact on the buyer's willingness to pay you all of the consideration on completion).

 

Secondly, you can look for a 'buy in' candidate with relevant sector expertise to sit alongside them.

 

Thirdly, you can promote people from within with the requisite skills to augment the board. the current tax rate I would pay on selling my business likely to change? Adrian Cutler, Cobbetts: The current discrepancy between the rate of capital gains tax for individuals (currently 18 per cent) and that of higher rate income tax (currently 40 per cent but rising to 50 per cent from April 6, 2010 for certain individuals earning more than £150,000 per year) has led many commentators to speculate that an increase in the capital gains tax rate is likely. The budget deficit means that the next government has no choice but to raise taxes. Any change in the capital gains tax rate is likely to be widely condemned as discouraging entrepreneurship and job creation, therefore it could perhaps be more likely for other taxes to be raised. However, it may be prudent to assume that a modest increase in the capital gains tax rates will occur with perhaps some targeted reliefs or extension of the Entrepreneurs Relief to appease smaller business owners. It is unlikely, however, that the rate would be increased significantly as this would damage the UKs competitiveness.

 

Amrit Uppal, Credit Suisse: With the impending election later this year and weak government finances this is an uncertain and challenging issue for many. How long do you need to prepare for a change in ownership? Adrian Jones, Gambit: It is never too early to think about it. There are many aspects of succession planning that can be addressed over a prolonged period of time, and most of the action points are for the owner entrepreneur to action themselves. The missing link is guidance in being able to identify what actions need to be taken. Whether your advice comes from a good non executive director/chairperson, or whether it’s from your advisers, a steady guiding influence over a period of time to prepare the business for a change of ownership is always advantageous." This also depends on shareholder agenda. If the clear goal is to pass the business to the next generation, there are a completely different set of action points to those which involve succession planning by looking at the outside world with different future potential stakeholders. The constant, though, is seeking advice from a trusted source should be as early as possible, so at the very minimum there is a general framework to work to.

 

Adrian Cutler, Cobbetts: As with anything, the longer you have to plan and prepare for exit the better. From a lawyer's perspective, a longer lead time not only gives us the opportunity to prepare the business for sale thoroughly, but also allows us to anticipate those legal areas around which a challenge to value may arise. Protecting against value erosion through negotiation is far easier if we have been given the opportunity to remedy any legal issues around contractual relationships, employees, property and environmental, and so on. That said, each deal is unique and at times, lengthy lead times (particularly in the current economic environment) are not available. In those circumstances the period from heads of agreement to closing can be very short indeed. Normally you could expect anywhere between two to three months to close your deal once the broad parameters are agreed, but where there is a real requirement to accelerate this process due to cashflow or other financial issues then deals can be done in as little as a couple of weeks.

 

I want to protect the value that I recognise when I eventually bow out from my company, and I am very risk averse. How can I achieve this and where would I look for minimum risk?

 

Ian Howey, Yorkshire Bank: Few people would not wish to manage the risks associated with receiving a substantial capital sum, whilst wanting to achieve a commercial return and capital growth. However, you can not avoid risk completely. The key to achieving the right combination is to seek the early advice and input from an Independent Financial Adviser. Within the Yorkshire Bank network we have an embedded team of IFA's who are on hand to advise existing and prospective members on all aspects of wealth management. Practically, you should probe the Liquidity Risk of a financial organisation and avoid the risk of another Northern Rock fiasco. Once with a secure provider, consider the interest rate on offer. If it seems 'too' attractive, question whether the provider is being too maverick! When interest rates are offered to entice the saver, consider 'fixing' the rate. Legislative Risk could impact the return that you receive on savings through future tax increases. So, maximise the tax efficiency from your National Savings & Investments and ISAs. Finally, try to avoid the ultimate risk that, ironically, you live too long and run out of funds! An IFA will provide you with a bespoke portfolio of investments, providing exposure to cash, fixed interest, property and equity assets. A diversified, managed portfolio tailored to your individual risk appetite is required with regular reviews of personal circumstances and perceived changes in the marketplace. Risk is inherent, but can be minimised and expectations can be managed by seeking professional independent advice.

 

Amrit Uppal, Credit Suisse: In the first instance we would have to determine the time frame for investment and also ensure that our colleagues from our wealth planning team were actively involved in the discussion. It is essential to have an initial conversation before the client makes any investment decisions. There has been much said about the inability to raise bank finance. Is it true?

 

Ian Howey, Yorkshire Bank: Only partly. Most business sales are financed in part by bank lending, especially management buy-outs. Recent market turmoil has impacted on some Banks ability to lend as a result of capital adequacy issues. Yorkshire Bank has remained open for business throughout the last 18 months but still good transactions have been hard to come by. Bank lending for acquisitions or MBO's is driven by leveraging on sustainable profits, built up over a number of years. The recession of the last 18 months has tested the ability of businesses to maintain the quality and visibility of earnings that support both bank debt and the purchase multiples that business owners want. It is this that has impacted on the number of transactions far more than a scarcity of bank debt. If vendors and purchasers have different ideas of value then deal volumes fall. Even if purchasers do try to meet aggressive valuation multiples then the amount of debt may not be achievable. When economic conditions deteriorate, businesses with the highest levels of bank debt suffer first and if those businesses fail the resulting losses are greatest. Reluctance to over gear businesses at the current stage of recovery is therefore understandable but bank debt is available for good sound businesses at prudent and sustainable levels.

 

Alistair Pendleton, LDC: Although it is true to say that credit is now more expensive and harder to come by, debt is still readily available for the right deals across the regional mid-market. This trend is certainly true in terms of our recent transactions and current work in progress both locally here at LDC in the Midlands and also on a national level. Due to the supportive local banking community in the Midlands, we have found that there is debt available for mid market transactions. We believe the market has stabilised and sensible levels of debt funding are available appropriate for the current economic environment. Furthermore, unlike most private equity providers, LDC is a captive fund backed by a major bank – we are a wholly owned subsidiary of Lloyds Banking Group. This enables us to structure transactions more flexibly than most, including equity-only deals. By successful.ly securing investment from a reputable private equity partner such as LDC, a business will receive so much more than just an injection of cash. A company which boasts an impressive management team, a robust balance sheet and strong prospects for future growth, should have a solid foundation on which to seek private equity funding. All of this, together with the added strategic advice, network and input from an experienced private equity team should enable an ideal framework to be established upon which the company can further build. Does anyone have the liquidity to buy businesses at the moment?

 

Adrian Jones, Gambit: We are seeing many larger corporate entities with cash piles waiting for either the right time or the right bargain. So yes, liquidity in the corporate acquirer market is there, maybe not to the extent of the heady days of a couple of years ago, but for the right deal it is available." Much has been made of the "credit crunch" and government backed bailouts of our banking sector. Billions of pounds have been made available through our banks to invest in the economy in an attempt to kick start business recovery and growth. We have seen an upturn, but it is in comparison to what it was 12 months ago so the time for excitement is not yet here. Individuals within banks are only human, contrary to some peoples' opinion over the last 18 months, and what cannot be avoided is a natural cautious approach to investments, whether they are for existing businesses looking for loan extensions or new business to the bank, driven by the financial environment we have all, globally, talked ourselves into. Is there a desire to lend by the banks? Clearly, yes. Are there additional barriers to securing this lending driven by our economic environment? Absolutely. So the best approach to securing appropriate lending is to deliver a solid and well-considered proposition to the bank which is then easily presentable to their credit committees. Needless to say, there are advisers who are very well versed in doing this. Private equity providers who three years ago were considered through politically driven motives to be the rapists of the UK economy, have both the power and the desire to invest in the future of mid-market enterprises. The ability to complete deals, however, is more difficult whether this be driven by ill prepared businesses for venture capital investment or by vendor expectation of his or her business valuation. The influence and benefit that private equity providers bring to the UK economy should not be underestimated, and the ability of these investors to inject different skill sets and a fresh pair of eyes into businesses is often unrecognised by those who have not historically had exposure to this market.

 

Amrit Uppal, Credit Suisse: At Credit Suisse, through our integrated bank, we have the opportunity to work with clients who have sufficient liquidity to buy businesses. We have found that over the past few months there has been an increase in clients looking to buy businesses.

 

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