Why 80% of businesses fail to sell – Part 1

 

It is a sad fact that across the UK SME market 4 out of 5 private companies will fail to sell, meaning only 20% of those taken to market achieve a successful outcome.

When selling a business, it’s crucial to have an experienced advisory team working with you.  In this series of articles, we will look at the way EvolutionCBS and our professional partners work with clients to maximise sale value, achieve the best deal structures and significantly increase their chances of a successful transaction.

The results speak for themselves, as, in stark contrast to the market average, 73% of businesses taken to market by EvolutionCBS in the past 2 years have sold successfully. In addition to this success rate, over the past 6 years our average multiple is an industry leading 8.1x EBITDA with over 63% of all deals completing without any earn out.

 

So how can you benefit from professional advice?

M&A Advisers

The real skill of an M&A adviser is to ensure that you receive the best possible price for your business in a deal structure that meets your specific requirements. For example, ensuring that the price isn’t dependent on an “earn out” where a portion of the value is performance related and paid over a longer period during which you have little or no control. It takes a huge amount of time (not something that’s generally available for business owners), needs a lot of resource (to find and research potential buyers to assess their viability as an acquisition target), writing the critically important sales prospectus, handling buyer negotiations and dealing with the difficult and contentious issues that always arise.

When we first start working with a client we carry out an in-depth assessment of their company. This encompasses the legal, financial, commercial and operational elements of the business and the client’s expectations in terms of sale value, deal structure and timing.

This gives us an intimate knowledge of our client’s business, enabling us to have an informed discussion with our clients about any areas that need special focus and any specific issues that need addressing.

In our experience, getting expert professional advice at this early stage of the sale process significantly increases saleability and reduces the time spent in the due diligence period.

Commercial lawyers

By way of example, we often find that clients prefer to appoint corporate lawyers later in the process, once they have received initial offers and are feeling more confident of a successful sale. Whilst this is an understandable perspective, we do stress to clients the importance of appointing an experienced professional at the appropriate time.

An experienced M&A lawyer can be of great benefit earlier in the process. They can prepare a pre-due diligence report for their clients and take time to fix any potential issues that may arise from a full due diligence process. Issues that come to light during the latter stages of a project are highly likely to adversely affect valuation and can potentially be “deal breakers”. Shareholder agreements are an example and we know of several business owners who had no such agreement in place and were unable to proceed to a sale.  As with most things, the earlier any potential issues are addressed, the less risk those “fixed” problems will represent to an acquirer and therefore the more value we can achieve for our clients.

In looking at the entire portfolio of legal services, as the due diligence process will, a client may discover they have an issue in another field such as HR or Property.  This, therefore, is an area in which lawyers can add value for their clients and help them achieve a better exit from their business.

Tax and Trust advisers

Tax and Trust advisers work in an area where it usually takes time, sometimes years for the benefit of their advice to be fully felt by a client. Again, the earlier clients seek advice from an exit planning perspective the more value will be derived from the advice given.

In the current taxation climate, HMRC are extremely vigilant when it comes to trusts being utilised to minimise personal taxation. We have seen several examples recently of trusts being contentious issues which have derailed the sales process. It is important to note that schemes that were acceptable in the past, may not be so today.

Intellectual Property protection

Intellectual Property is often something that clients believe they have and that it has significant value. Unfortunately, if the client has not taken significant steps to protect their Intellectual Property then an acquirer will rarely attribute any value to it as that IP and any associated value are deemed to be at risk. Getting advice from an experienced IP lawyer at an early stage will enable a client to decide whether to obtain legal protection of their intellectual property assets.

Wealth Management

Wealth Managers are often not even considered until the client is looking at realising the significant asset that their business represents. However, with adequate preparation, clients are far better able to understand the value they need to derive from this asset in order to be comfortable post-sale. We have known business owners withdraw from a sale because they were not fully aware of how much they need to “bank” from the transaction.

Summary

Depending on a wide variety of a factors it can take several years to prepare a business for sale but those owners that do prepare in advance achieve higher prices and better deal structures.

Without properly preparing your business for sale and arming yourself with information about the sale process, you may well find that there is a huge business valuation gap between what you expect to receive and what a reasonable buyer sees as fair market price.

We run regular, free events on preparing for sale where we and our professional partners provide invaluable advice. Details of all events are available on our website – www.evolutioncbs.co.uk/events.

The next article in this series will cover the importance of financial preparations in the sale process.

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