If you are considering selling your company, planning your retirement or succession plan, or seeking a growth or exit strategy, you have quite a few options. You can find a buyer and pursue a deal on your own.

Have you ever wished you could read minds?

At Benchmark International, our copywriters have pondered this possibility countless times. The idea of effortlessly extracting essential information from our clients' thoughts would make crafting the Information Memorandum (IM) a breeze. While we haven't quite mastered telepathy, the power of collaboration remains our greatest ally.

As industry experts, we recognise that our clients possess unparalleled knowledge about their businesses. Your insight, knowledge and experience are the driving force that propels us forward in creating a compelling IM that leaves potential buyers wanting to know more. To help you maximise your impact and contribute to the success of the IM bringing potential buyers to the table, I've compiled some valuable tips:

An important part of many deals is the agreement on what is referred to as Free Cash (or surplus or excess cash). In simple terms, this is the value of the cash held in the business at completion that can be added to the sale price for the seller's benefit. In the UK, we can often add this Free Cash to the overall deal value in a way that it is effectively extracted by the sellers at their marginal Capital Gains tax rate, although this requires careful tax planning and advice.

There are some related articles on this. Please see Extracting Free Cash and What Working Capital Is Not! in particular.

1 – Working Capital is Not Cash!

First and foremost, let’s be clear what working capital is not, it’s not cash! In fact, all things being equal, when working capital goes up, cash goes down, and vice versa.  You'll often hear the expression, "the business needs to fund working capital for growth", when what is actually meant is that the business needs extra cash to finance the increase in working capital that accompanies growth. Businesses that try to grow without sufficient working capital are said to be 'over-trading'. 

In most businesses, the basic components of working capital are stock, plus trade debtors, minus trade creditors. This working capital will have built up over time as the business has grown and, generally speaking, the longer a business has been trading, the more complex the components of working capital will have become. To explain this, we can consider a company that starts trading on Day One, wholly in cash and without holding any stock. After its first year of trading, all profits will be in the form of cash, so its balance sheet will be 100% cash, and there will be no working capital – i.e., no stock, debtors, or creditors. However, as the business starts to give credit to its customers (that become trade debtors), take credit from its suppliers (that become trade creditors), and invest in the stock, the constitution of the balance sheet will change such that its assets are cash, trade debtors and stock, and its liabilities are its trade creditors.

Introduction

There has been significant growth in the number of Employee Ownership Trusts (EOTs) in recent years, and in this article I explore some of the differences between shareholders selling to a trade buyer and selling to a trust set up for this purpose.

While you may be hearing that the M&A market is currently active, numbers speak volumes. A recent article from U.S. News cited that private equity (PE) has inked more than 2,300 deals for the first five months of 2021. Year-over-year, this is just over a 21% increase in deal volume. In fact, according to Pitchbook data, in the first half of 2021, PE firms closed on 3,708 deals worth a combined $456.6 billion. That’s almost two-thirds of the $711.6 billion deal value recorded in the entire year of 2020, and the two years prior. It is estimated that there is roughly $3 trillion of dry powder—also known as available funds—on hand for investment, with even a large amount of assets under management.

Historically low-interest rates and record levels of fundraising have left private equity with dry power that they must put to use. The combination of these factors has created competitive bid scenarios for many sellers. It appears that many private equity firms believe that this trend will continue for the coming months. According to S&P Global Market Intelligence, roughly 7% of private equity firms believe that the investment landscape will deteriorate in the coming months.

You may be asking yourself, “What is private equity?” Private equity firms obtain capital to invest in private companies. They have a set period of time to make the investments with the goal of optimizing return for their investors. Their investors tend to be institutional investors such as insurance companies, pension funds, endowments, etc.

The firms typically invest in mature companies with predictable, steady cash flow and a need for operational changes or growth capital. Private equity firms will utilize their capital, connections, and expertise to help improve the managerial, financial, and operational aspects of the business. Their goal is to increase the profitability of the company as this will help drive the value of the company upon exit. The firms make investments with a ‘buy and build’ mentality.

Private equity firms realize their returns when they sell the investment. The firms tend to have a goal of roughly 20-30% return on their equity. Private equity firms will use leverage to help maximize their return. They also charge a management fee, typically a percentage of total assets under management, also known as AUM.

Most deal valuations are set out as a multiple of earnings, plus surplus assets. Nick Hulme’s article, Valuing Companies, is a great read for more detail on this.

As he mentions in the article, surplus assets come in many forms, and can include lump sums of cash sitting on the balance sheet, the company’s premises/real estate (if the sellers are going to keep these personally post-close) and even the yacht or Bentley in some cases.

Below are some simple rules for sellers to keep in mind when considering Free Cash, the most common surplus asset we encounter on our deals.

Rule #1 – Have Realistic Expectations 

A buyer will only allow you to extract cash at completion that is truly surplus to the requirements of the business going forward.

Think, perhaps, in terms of how much cash you could extract yourself without affecting the ongoing operations of the business, and how much you’d ordinarily want to leave in the business to guard against mid-month and month-to-month fluctuations in cash requirements.

In some cases, this cash can be extracted in a tax efficient manner (for example, in the UK where Capital Gains Tax is presently significantly lower than Income Tax, subject to certain conditions being met).

Selling your business is a paramount moment in your life. It’s something you absolutely want to get right so that you can extract the most value out of the deal—and so that you are protected from being swindled by a savvy buyer. It also takes a great deal of time and energy to sell a company, which can be rather difficult to spare when you are trying to focus on running a business. Most people simply do not have this time, energy, connections, or expertise that is required to put their company on the market. This is where the importance of an experienced M&A advisor comes in. By partnering with an M&A expert, they handle all the details of a deal, including due diligence, negotiations, marketing, vetting, and ensuring that you get the most value for your business. They also know how to navigate bumps in the process, and manage the expectations of all parties involved.

If you are considering selling your company, you should be aware of a certain menace that could have you in its crosshairs. There are direct buyers out there who intentionally prey on business owners, attempting to acquire a company by blindsiding its owner with big promises and, more importantly, taking advantage of their lack of guidance from a seasoned M&A professional. These buyers purposely look to avoid competition for a company because competition drives valuations higher, and they want to make an acquisition on the cheap—in addition to other shady maneuvers.

Bait & Switch
Some buyers will attempt to pull “bait & switch” tactics. To initially intrigue a seller, the buyer will present a high dollar amount. As they conduct due diligence and get the target more and more committed to the deal, they begin chipping away at the value until they reach a price and terms that are far more favorable for the buyer. This is typically an exhausting process for the seller and can lead to plenty of regret. If the deal falls apart, the seller may be reluctant to restart the process with another buyer, thinking the process will just be the same. In reality, it could have been completely different for the seller if they had a reputable M&A specialist on their side from the beginning.

Entering into a merger or acquisition is one of the most important decisions a business owner can make, so finding the right M&A advisory firm is equally important. In the news, we frequently hear about massive M&A deals happening between big corporations. Big investment banks typically broker these large-scale deals. These same banks usually cannot be bothered to represent companies in the lower to middle markets because it’s not enough of a moneymaker for them.

Why Do I Need an M&A Advisor?

While you are an expert in your area of business, you likely do not have access to the connections and experience to identify opportunities that will result in the best strategic M&A solution. Partnering with an M&A expert will afford you many advantages. Selling a company is a complicated process and you will be relieved by how much they will tend to the many details and constant requests. A high quality M&A firm will:

• Have established networks that will get you access to the right type of buyers.
• Be skilled at managing expectations on both sides.
• Know how to improve your business and market it appropriately.
• Maintain the highest levels of confidentiality throughout the process.
• Know the right timing for taking a business to market based on experience in that sector.
• Appoint legal and financial services where needed.
• Perform comprehensive due diligence and data management.
• Conduct extensive negotiation and create a competitive bidding environment.
• Finalize a fair and premium valuation of the business to get you maximum value.
• Structure the transaction in terms of legal issues, payments, contracts, shareholders, debt restructuring, warranties, and indemnities.
• Keep you informed at all stages of a deal while keeping you out of unnecessary minutia.
• Assist with any necessary strategic decisions regarding integration, employees, timing, and announcements.

Finding Quality M&A Representation

As an owner of a small to mid-size business, where do you start when you are seeking M&A representation? After all, this is a major life decision and you absolutely want to get it right. M&A advisory services range from big investment banks to small boutique firms. You need to assess what is right for you in several aspects. These are some key considerations for your search:

• Many M&A advisory firms do not have varied expertise that spans local, regional and global levels. Look for a firm that will expand your options through the farthest geographical reach.
• It’s okay to be discerning. Talk to multiple firms and create a shortlist. This is going to be a long process so you should feel comfortable and have a liking for the people you are working with, while you should also feel confident in their abilities to get the deal done right.
• Study the reputations of the M&A firms and look for one that is well known for getting maximum value in deals. Look at what types of deals they have done in the past and if their experience is applicable to your business regarding markets, products, services, and regions? Also, seek out any available testimonials from their clients and look for a firm that has proven strong relationships.
• Pay close attention to the initial discussions you have with them. Do they seem aligned with your goals and motivated to get you exactly what you want or do they seem stuck on going their own direction? You want your M&A advisors to be as aligned as possible with your vision and aspirations for the future. You should feel confident that they are in your corner and not just there to make a buck.
• Assess their ability to create a competitive bidding scenario among multiple parties. Are they known for doing this? Do they have a large enough network and the right resources to make it happen?
• Consider how their fees are structured. Some firms may take a percentage based on deal size. Some may have upfront fees, monthly fees, and registrations fees. You don’t want to be met with surprise costs. Make sure they are transparent about their fees and that their justification for them makes sense. While you do not want to get ripped off, you should also keep in mind that selling your business is a once in a lifetime opportunity and you want to get it right, so this probably isn’t the time to cheap out.
• Look for an M&A advisor that you know will work with you as a true partner. A good firm will offer you constant engagement and welcome active contributions from you. They will make sure you do not miss any details and that you never feel left in the dark. They will also make sure that zero communications are sent to a buyer without your consent and input.
• Make sure you are getting an M&A advisor and not just a business broker. A broker is less likely to offer a comprehensive partnership that details long-term plans and integration strategies that are important to the process.

Are You Ready to Sell?

If you are seeking an M&A partner, we kindly ask that you include Benchmark International in your search. We believe that our award-winning team can offer you all the qualities you desire while getting you the most value possible for your company. We look forward to hearing from you.