10 December, 2019
Exiting a business can be fraught with complexities. Navigating those challenges while still maintaining ‘business as usual’ gives an added layer of complexity to the process. Steele Raymond Company & Commercial partner Nick Davies and Justin Levine, Managing Director at the ‘TheNonExec’, are no strangers to mergers and acquisitions, having each worked on many transactions in recent years.
We sat down with Nick and Justin to consider the highs, lows, successes and pitfalls of a transaction and just how a business exit works in reality…
Which type of client do you mostly represent? Sales, purchases, or both?
Nick: We have clients involved in both sales and purchases, but mainly sales rather than purchases. We act for a range of small to medium sized enterprises, and the owner/managers of those businesses. We also work with quite a few family businesses, and those who have grown from family businesses to the next level in terms of value.
In terms of the range of value of businesses that we help with sales, they range from the high street newsagent that could be worth between around £50,000 or less to the likes of Sunseeker who were sold for around £300m. We have acted for clients on sales in the past twelve months whose businesses have been worth up to £50 million, so it’s quite a large range. The total value of deals we acted on in FY 2018-2019 was in the region of £250m.
Could you tell us about the Sunseeker sale?
Nick: We represented the late Robert Braithwaite, the founder of Sunseeker. The business had experienced several different ownership regimes; starting with Robert and his family moving into Irish ownership with Robert continuing as a shareholder; then when the Irish owners sold the business to Dalian Wanda we acted for Robert in respect of his shareholding at that time to the Chinese owners. We weren’t acting for the Irish shareholders; we were solely acting for Robert.
Was it a complex sale?
Nick: Yes. It was probably one of the most challenging transactions we’ve dealt with. The buyer had legal teams in Beijing and London, so there were time zone challenges; there were also jurisdiction issues; the buyer was purchasing through a holding company in Jersey, and as it was an Irish company selling – it was complicated. Also as a business that has been established for fifty or sixty years, it experiences quite a few changes in its corporate life along the way, so there was quite a lot of work involved.
Are there typically many difficulties or problems on the ‘average’ M&A transaction?
Nick: Typically a buyer will conduct some due diligence, and what they are looking for is problems with the target. If there are problems that they think are going to cost them money further down the line, they look to either allocate that risk to the sellers usually via an indemnity or price reduction.
Justin – are your clients typically based in the UK?
Justin: No – they have been worldwide. For example, Nick and I were involved in a transaction last year for a client based in Hong Kong. That Hong Kong seller was selling companies based in the UK, Australia, South Africa, Ireland, Germany, Malaysia and China to an Italian buyer. It would probably be easier to list countries that we didn’t deal with! BUT, more and more of our transactions are coming from the UK; and we hope to deal with more in the Dorset region.
Is a transaction technically easier if both companies deal in the same currency?
Nick: Any transaction is typically conducted in a single currency but the buyer and the target may be using different currencies in their day to day businesses. Because of the effect of Brexit and the impact that it has had on the value of Sterling in the last twelve months, I believe that UK PLCs and assets are now perceived as good value internationally. We have completed two transactions in the last twelve months with American buyers and those transactions have been funded in dollars; in fact three of our biggest transactions in FY 2018-2019 were conducted in US dollars. We are able to deal with transactions in most major currencies. We have seen many and we will see more oversees clients buying businesses in the UK.
Have you seen changes in business because of the emergence of the Euro and the introduction of Eastern Europe?
Justin: From my side, no. I worked internationally and was based abroad, in Germany, for seven years. I witnessed the transition of Deutschmark to the Euro and economically speaking, the emergence of a common European currency has only improved the flow of deals in mergers and acquisitions in my view. If you look at the statistics over the last thirty years (through the ‘Eurozone’), there has been a wave of M&A transactions, of overseas companies buying UK businesses. Whether that’s because of the introduction of the Euro or just that Europe is open to do business, we don’t really know.
Nick: And also we have a reputation for generating good business in the UK; we have a great entrepreneurial culture. We have people that take risks, borrow significate sums and invest to build businesses. Quite often when people are doing that, it is a strategic decision to build wealth, and the only way to crystallise that wealth is to sell. As a nation we have a history of building businesses and selling, I am sure we shall continue to do so!
Justin: If you go back to the 1970s and look at British industry, we had a plethora of state-owned industries; over the past forty years, there has been an explosion in private business ownership with over 5 million SME’s! That has created considerable wealth in its own right – and with an ageing demographic, many company owners wish to naturally crystalise that wealth. Some European countries such as Germany for example, have tended to retain family ownership through several generations. But that in itself is changing, with many German mittelstand companies now selling to overseas buyers.
Nick: Cash is a great enabler. If you sell your business, you can give your kids the chance to start up and own their own business – or do something else with that cash generated. There can be challenges with family businesses, passing down a few generations – for example difficulties finding a role for all family members, or managing personalities, for example. Perhaps a re-structure or de-merger to split up the business is needed. You can avoid these kinds of problems by selling the business.
What happens if the business owner dies, and the executor would like to sell the company?
Nick: That executor would engage someone like Justin. They would perhaps discuss the fact that they have a good business but the owner is no longer around and they themselves would not like to run that business. They can either employ someone to run that business, or they can sell. If they would like to sell, Justin would go the market, and find that strategic buyer that would pay the highest amount to buy. Once the buyer has been located, Justin would come to me where we would work through the legal details and sell that business.
What can go wrong with mergers, sales and acquisitions and how can a client prepare for those instances?
Justin: It’s a big question with many answers. If we look at the different reasons that a business sale can go wrong, the most significant would be that the business isn’t prepared for an exit, or there is something structurally wrong with the company from a legal perspective. Steele Raymond has been involved with me in cases where the share history of the target is not clean, for example (issues such as void buy backs etc). In extreme cases, this can mean that it deters a buyer from completing the sale.
A business can also have tax issues; if they are not examined before a business goes to sale, sometimes it comes out further down the line in the sales process. A good analogy is this:
If you sell your house, a huge old creaky house that you have owned for 50 years, the buyer would agree to pay a certain price. But then the surveyor crawls round every inch of that house; gives you a never-ending report and the buyer turns round and says: “the place is riddled with woodworm, has dry rot and the foundations aren’t stable. I can’t pay the original amount.”
It’s the same with a company. A buyer will review the business in minute detail all the way back to its inception – we call that ‘due-diligence’. The buyer’s legal team will examine the legal structure and any changes over the course of its history, employee issues, health & safety record and so on. The buyers accounting and tax team will review the finances with a careful eye on tax. Ultimately the buyer is looking for ‘skeletons in the closet’ and reasons to chip the price.
The key is to make sure your business has been checked thoroughly before you sell.
The second largest issue is when the seller has a disproportionate value of their business in their head. The seller could be so connected with the business; his grandfather started it up, most of the family has worked there, it holds many memories for them. This emotional driver, together with perhaps a lack of understanding on valuing business, can occasionally lead the seller to believe the business is worth considerably more than it is.
We know how to drive the value of a business up through the sale process – and have delivered some quite extraordinary sale values. The ‘price’ of a company can be quite ‘elastic’. But ultimately there are limits depending on the industry, company size and overall health of the economy and investment appetite.
So, if the seller has a dramatic sense of the company value – if that mismatch is not handled early on in the process (and every seller wants the highest price), it can have devastating consequences. There needs to be a reality check early on in the sale.
Nick: Another issue (which can be avoided) is the under-estimation of time needed to be committed to a sale (by the sellers themselves). Selling a house is one thing – decorating and getting an agent in, you find a buyer and the process goes through. You don’t find a vast amount of hands-on work. In the sale of a business the questions can be so penetrative and so detailed from the buyer about every aspect of the company’s history, that it’s simply very very time consuming to answer them. Quite often you have to go to third parties to find those answers. Generally, the sellers are busy looking after the day-to-day running of the business – and then the buyer arrives and hands them all these questions, and they want answers to them in two weeks. Running the business and then the sales process on top, is like having two full time jobs!
How do you advise the client how to deal with that?
Nick: We advise to leave sufficient time, and to delegate daily responsibilities, etc. We have seen deals that go wrong for small structural reasons; they don’t own a piece of intellectual property that they thought they owned, and realise that the products are actually not protected. It’s a complicated process, and the smallest issues can set you back. The buyer will find a complication – and he will ask you to lower the price or indemnify against the issue. Sort your business with enough time to have everything in place, and thus avoid the indemnities and price chips!
Justin and I will try and find these points before the buyer does – and rectify them in good time. Then when the buyer arrives, they find a diligently run and clean business – and the seller will experience a much quicker process. We aim to simplify the entire process as far as is possible.
What advice would you give to those who would like to sell their business?
Justin: Start preparing two to three years before the time that you think you would like to sell. If it is a family business, emotion can make that decision longer! While you might be tempted to allow your accountant or a mass-business broker to sell your company, my advice is to hire a specialist M&A firm that will work with you to prepare for the biggest sale of your life. This is one time where specialism and experience really count.
Nick: What you don’t want is seller’s remorse; that a transaction was made too early, for too low of a price, because it just wasn’t thought through. My advice would be to take advice, and from those with experience. We have a very experienced team at Steele Raymond; we know what to expect and how to deal with each stage of a transaction as efficiently as possible.
Justin Levine is the Managing Director of ‘TheNonExec’, a specialist firm for mergers and acquisitions. Typical clients are companies with sales revenue of up to £30 million. They are generally owner-managed companies and when they come to sell, it is usually a very important ‘one time’ event for them. TheNonExec assists in ensuring companies are ready and prepared for the sale. They also specialise in finding strategic buyers for those companies and handling the sale through to completion.