Advisers tell me they are being inundated with company founders looking to sell up under the current tax regime — fearing a Corbyn government would make life much less attractive for entrepreneurs wanting to cash out.
But how are businesses actually sold? For private companies, the process begins when the owners decide they want to exit. They appoint an adviser — usually an investment bank, corporate finance boutique, stockbroker or accountant. Typically they arrange a beauty parade, where a few financial intermediaries pitch for the mandate.
The fees for this sort of task vary but tend to be 1% for a business worth £100m or more, and a higher percentage for a less valuable company. Most of the fee will be contingent on success, but advisers will often expect a monthly retainer as a sign of commitment from the client. And usually there is a top-up amount payable if the price achieved exceeds expectations.
Often vendors choose the adviser who suggests they can obtain the highest price for the business. But, as with estate agents, overvaluation to win an instruction is a dangerous game. Better to place your confidence in the hands of those best suited to the job. I prefer the less grand firms; they are hungrier, and my business tends to mean more to them. After all this, the seller appoints a corporate law firm.
Once the chosen advisers are confirmed, preparation of an information memorandum can begin. This document is the selling bible and will typically be 50 pages long, with various appendices of detailed numbers and statistics to support it.
A list of prospective buyers is drawn up. This will include financial buyers (private equity) and trade buyers. I much prefer 10 serious names to 50 who might have a vague interest.
They will all be circulated with a “teaser” — a single page or two giving a general outline of the opportunity. Those who are keen will sign a non-disclosure agreement and then receive the full pack of information.
A deadline is supplied for first-round bids to be submitted. These are expected to include a price, financing, any equity incentives for management, due- diligence requirements and any further conditions to which the offer is subject.
Meanwhile, the advisers will have prepared a data room, which is usually online. Access to this is normally only granted in the second round of the auction, when just a few bidders remain.
Increasingly a seller will prepare what is known as vendor due diligence — an accountant’s report that can be addressed to the buyer — and possibly commercial due diligence too, investigating markets, customers, competitors and so forth. There will also be a sale-and-purchase agreement prepared by the seller’s lawyers, which any prospective buyer will mark up.
All this work is done to enable a seller to grant exclusivity to a buyer when, and only when, they are almost ready to exchange on the deal. This prevents the vendor from seeing the price reduced by a sole bidder after all the other would-be buyers have stepped down.
The timetable for a sale can vary from a matter of weeks to a year, but a typical process lasts up to six months from the first adviser briefing to completion, and will depend on funding arrangements, market conditions and how competitive the auction is.
It can be very time consuming and distracting for the vendor’s management team, especially if the deal is in effect a management buyout. Moreover, there are always perils for a seller in such circumstances. The managers might feel their interests are better served by the company selling for a lower, rather than a higher, price. They may have to be financially motivated to ensure their loyalties do not shift during the bidding.
Public companies are bought in a very different way. In theory, anyone can buy shares in them via the stock exchange, while bidders for the whole company must adhere to the Takeover Code.
Plcs very rarely put themselves up for sale overtly, but in many cases they are available to a bidder at any time — usually provided a “bid premium” is offered. This can be anywhere from 10% to 50% of the prevailing share price before any takeover rumours. Suitors must show concrete proof of funds to carry out the transaction before any formal bid, and overall fees can be very high — especially for smaller plcs. There are no vendor warranties available to buyers, and during the takeover phase any rival can launch a competitive bid.
I think the coming 12 months will be a busy period for both buyers and sellers of businesses.