ON NEGOTIATING THE SALE

A lot has been said in previous sections about making a company ready for a sale.  Assuming you have done your preparation correctly and you have a buyer or preferable several buyers with whom you are talking to seriously about the sale of the company, here are just some of the things that you should be thinking about and taking into account.

It’s all about price – At the end of the day, that is what it is all about. You want the maximum price you can get; the buyer wants to get it for the lowest price. You don’t know what the buyer is really prepared to pay for it and they don’t know what your bottom line acceptance figure will be. That’s where the game starts and your objective is to get as close to the maximum price the buyer is willing to pay, provided it’s above your minimum.

Do your own valuation – What is the company worth to you? The company will have been providing a very good income to you over the previous years and that will be replaced by a capital sum.  Are you able to maintain and improve your lifestyle with that capital sum over the period required? So in your own mind, put down the absolute rock bottom price at which you would definitely not sell.  Next, estimate what you feel the company is realistically worth. Again the experts can provide a lot of guidance here.  A valuation can be based upon net asset value or on a multiplier on profit or on the sale price received for similar companies. The third estimate of your calculation will be based upon how much your company could be worth to the potential buyer. This will depend upon why the buyer is looking at your company in the first place.  A company which is just looking to add another company to its portfolio is not going to offer too much over your annual earnings times the average sector p/e ratio.  However, if you are a key strategic acquisition for the buyer, i.e. you have a part of the jigsaw that they don’t have, they could potentially consider paying very large multiples over annual earnings.  Although you will have gone through the range of valuations yourself, you can be certain that the potential buyer will also have gone through the same exercise as well.

The Ritual Dance – There then starts the ritual dance, everybody dancing around the issue, trying to get each other to put a stake in the ground to start negotiations.  As to who should put the first stake in the ground depends upon the individual situation.

You own state of mind – At this stage of negotiations, the psychology of the situation, you own state of mind and your ability to remain cool are key to you getting the best deal.

  • Always be prepared to walk way.
  • Don’t even think about how you might spend the money if the deal goes through.
  • Think only about how you are going to get these people to pay the maximum price for the company.
  • Think tough, they need you more than you need them, the more that you have done to prepare for the sale the stronger your position.

 

Get a good team on board – As with a management buyout, the key to success is to get a good team on-board with you.   An adviser or deal maker, your accountants and a good corporate lawyer acting on your behalf.   As I have said before though, these guys don’t come cheap and if the deal falls through you could be left with hefty fees. Knowing when to bring them in is very important and establishes the basis of their fees before they start.  You might be able to negotiate a no deal- no fee basis.

Consider the type of deal you want – There are many different ways a deal can be structured involving earn-outs, share exchanges, loan notes, etc. and the buyer will do everything they can to minimise the amount of cash they give you. However, in my book, as I have said before, cash is king. You need to think very carefully whether or not you want to stay on after the deal with the possibility of getting more money from an earn-out. This may well be a condition of the sale, but bear in mind working as an employee in the company in which you have had total control is very different. Also when calculating the value of an earn-out, consider the fact that statistics have shown that 80% of all companies perform worse after an acquisition than they did before it.

The sale process will de-focus you from the business – It is important to be aware of this, so make sure that your team is organised. You may have to hand over the running of the business to somebody else during this period or bring somebody on-board to work with you during the sale process. The deal may not go ahead and you do not want the process to set the company back a year.

Managing staff insecurity – Even though there may not be a ‘For Sale’ sign up outside the company, the staff will very quickly get to know, rumours will abound and they will become very insecure about the possibility of impending change. This situation must be positively managed. Staff should be reassured and sold the advantages that a potential company sale could bring. This could be in the form of increased security or better career opportunities. At the end of the day, your people are the most valuable asset the company has, and if the buyer sees key individuals walking out of the company during the negotiating process, it could significantly weaken your position.

The offer – Eventually an offer will be made and agreed to by the shareholders. The offer though will be provisional and subject to contract and due diligence. This is where the work really starts, at least for the lawyers and accountants on both sides. This is also, unfortunately, where the balance of power changes from seller to buyer. Through the development of the contract and through the due diligence process the buyer will attempt to find reasons to reduce the price, specify warranties and indemnities and place restrictive covenants on your future activities. Your only real negotiating card is to say, ‘No, I don’t accept this condition’, and be prepared to walk away from the deal, but by which time it becomes increasingly hard to do so.


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