M & A Rainmaker

After I wrote the main ” Selling a Business ” section of the M&A Rainmaker blog I came across the BCMS Corporate website here

http://www.bcmscorporate.com/

BCMS Corporate are a fabulous, family owned professional services  business focussed on the SMB sector and helping them acquire and dispose of businesses. They have a great downloadable book on thier website which I highly recommend.

They have considerable experience in the sector and I found that thier approach and sales process had many similarities with the one that I used and have advocated here.

There is no doubt that maximising the value of a business requires that you approach large numbers of companies, globally, many of whom would not have been in acquisition mode. If the potential acquirer( through skillful analysis and salesmanship ) is then convinced of the synergy and accretive nature of the acquisition they will be inclined to pay more than simple financial valuations indicate.

If, in addition, emotive considerations come into play, such as ” There will only be one chance to buy this company ” or ” I have to buy this company before my competitors do ” the the valuations will climb further.

So, I am entirely supportive of the BCMS Corporate approach ( and I might not have outlined all thier special processes here ) and the fact that it helps to maximise valuations.

What I try to get over to companies is the fact that you have to be thinking about maximising valuations well before you decide to sell. BCMS Corporate ( or any other M&A or Corporate Finance house ) basically do thier very best with the hand that they are dealt. They probably have about 6-9 months to ” clean-up ” the company.

This is not enough for real value creation and for addressing all the factors that can inhibit the value of your company such as lack of succession planning.

The conundrum is how to begin addressing these issues at least 3 years BEFORE you decide to exit. It is likely that if the business is an ” exit route business ” value creation ( and all that goes with it ) will be built into the strategic plan. Lifestyle businesses that decide to exit some time into thier business life are a different matter.

One of the reasons for creating this blog was to make business owners aware IN ADVANCE of the need to prepare a business for exit years before the event. Clearly this is a bit of a challenge because if you are not thinking of an exit you are not likely to be spending any time or money planning for it !!

Actually this is happening ! My colleagues and I are working with some businesses who are planning for an exit some years away. They have said to us ” What do we need to do to maximise the value of our company if we sell in about 3-5 years ” ??? Clever people eh ??

I am not going to describe all the things that can be done if you have that much notice but let us mention a few:

- One big one involves crystal ball gazing !!! There is general agreement that you want to sell before your business reaches the peak of it’s lifecycle so that there is life and growth in the business for your acquirer. To do this you need to understand your market and your business cycle.

- More crystal ball gazing is involved in attempting to predict what acquirers will be looking for 3-5 years hence and who those acquirers might be. This is just hard - it is not necessarily impossible !!

- You should try to be providing what the industry regards as ” sexy ” or ” fashionable ” products and services ( I keep my eye on Gartners predictions for the High Tech market )

- Ideally you need to show scalability and replicatability in your products and services

- Ideally you should have global possibilities for the sale of your products and services

- You should have clearly defined processes within your business eg dealing with support issues, forecasting sales

- You should ideally have Intellectual Property ( I.P. ) , something unique that you have invented

- You should have recurring business ( eg maintenance and support contracts )

- You should have a succession plan for all the main management ( I call this the ” If we all go down in a plane test ” )

There are many others but hopefully this gives a sample.

My colleagues and I spend our time helping companies with these and other ” business valuation drivers “.

When you combine these with the correct disposal approach you will almost certainly have a great result.

The original and still the most important purpose of the M&A Rainmaker blog was to impart the lessons that I learned in selling businesses, particularly High Tech businesses.

The process is discussed here

http://mandarainmaker.co.uk/wordpress/selling-your-business-2/

in some detail.

I use the sale of 2 of my businesses Voyager Networks and 5i as particular examples in the selling your business process. One of the reasons for this is that one, Voyager Networks, was sold at the height of the High Tech, Dot Com Boom in 1999/2000 and the other, 5i, was sold in the depth’s of the global economic recession in 2008/9. Yet they both sold and sold well.

A very similar process was used in both cases although there were differences other than the economic backdrop.

When we started Voyager we had no clear strategy for it being a lifestyle business or an exit route business. It only became an exit route business after my meeting with Investec and after innumerable approaches to buy us. This was something like 1996, 3 years into the life of the business.

5i, on the other hand, was started with the clear intention of exiting ( sale or float ) 3-5 years later.

In fact both businesses sold around 7 years after thier start and in conversations with other people who have sold High Tech businesses this seems to be a typical lifetime for a business before it is sold.

In both cases we conducted a ” Beauty Parade ” to find the right M&A ( Mergers and Acquisitions ) partner. In the first case settling on Ernst & Young and in the second Norton Corporate Finance. ( Actually it was probably thier Rainmakers and thier teams that we settled on aswell as the companies ).

I remember that in the case of Voyager we discussed who was going to sell the company ( after we had decided to sell ) and put into the pot Deloitte & Touche, Ernst & Young and one other ( who I forget ). To get to the short list the three partners each put out feelers amongst thier contacts and 3 were chosen for presentations. Our accountants and our lawyers were consulted ( D & T were our accountants ). We ended up using Ernst and Young and our lawyers ( from Leeds ).

With 5i the lawyers and accountants were consulted; board members and shareholders put forward suggestions and a process was followed which resulted in Nortons Corporate Finance being selected.

I have to say that in my opinion both firms were exactly the right ones for us. The Nortons process and culture was similar to the one at Ernst & Young and this was a factor in the decision to go for Nortons.

Now, there are a great number of Corporate Finance and M & A companies to choose from and it is very important to find the right partner with the right processes and capabilities.

It is possible that the right people to use are your own accountants and lawyers but probably not. Or, at the very least, you should look for alternatives. If you are very experienced at selling companies then you may well have lawyers and accountants that you have used on a number of occassions. My advice is directed at people who have not had these opportunities.

In an ideal world you want to have decided wether you are a lifestyle business or an exit route business as early as possible. Also in an ideal world, you want to give yourself time to select the right legal and accountancy M&A partners for you and your business.

The sale of Voyager at the height of the dotcom boom is sometimes dismissed as “ just lucky “. Clearly it was fortunate to have built just the right business to sell at just the right time.

The sale of 5i earlier this year is also regarded by some people with something close to disbelief. When you realise that the sale process was underway at the time that the banking system was close to meltdown ( mid 2008 to mid 2009 ) and that the bank funding for the purchaser came from RBS – probably one of the first deals that they funded in 2009 after becoming largely owned by the government, the sale begins to rake on mythical qualities !!!

Actually there is no mystery to achieving the successful sale of a company but we might look at the sale of 5i as an example of how to maximise value in the worst of all times.

It has to be said that in 5i we have a company that ticks all the “ P “ boxes. It has, for many years, been a highly profitable, cash generative business.

It has superb People starting with the management tean headed by M.D. Peter Howells ( formerly Sales Director at Voyager Networks and M.D. at Spider Networks – who Voyager bought in 2006 ) and F.D. Clive Orchard.

It has massive Potential , being positioned in the high growth Unified Communications market, working with Cisco and Microsoft. It’s influence extends globally and it is regarded by Cisco as a “ market maker “ and a facilitator in moving it’s channel toward a more solutions orientated model.

It has a Plan to achieve that Potential in a Profitable way. It has established proven Processes that were initially developed in Spider, Shiva and Voyager and then further honed in the early years of 5i’s life.

So, one of the reasons why a sale could be achieved at a time of dire economic crisis was that it was and is a very great company. The other reason is that it adopted the company sale process that I have outlined in this blogsite, which was also used in the sale of Voyager.

5i selected M & A adviser, Nortons, after discussion with key shareholders and other advisers. Nortons came out of the “ beauty parade process “ as being the most suitable M & A partner. The selection of the right M & A partner was very key.

The other key decision was that most of the sale work would be done by Peter and Clive working with Nortons whilst the other Directors concentrated on running the business, providing input where and when required. Even so, Peter and Clive had to contribute to the running of the business alongside the sale activity.

The M & A team at Nortons, as we have mentioned elsewhere, was an excellent combination of an accountant who had become an M & A adviser and a lawyer who had been involved in an Internet buy and build.

So, the main team, comprising of 2 people from Nortons and 2 from 5i, was of the very highest calibre. It was, therefore, no real surprise that the Teaser and the business Sale Proposal were a very high standard, as were the presentations and discussions with potential suitors.

It is probably becoming clear that, apart from the economic backdrop, which nobody could do anything about , everything else was exactly right – almost perfect.

Again, as discussed in the Selling a Business section here, a dynamic potential buyer list was established and maintained throughout the process. The net was cast wide initially – and this meant globally – India, China, the Middle East and North America.

In some cases middlemen, local contacts in each country, were established. In the end the buyer came from the U.k. but useful discussions were held with people from other countries. ( Actually what emerged from the global investigations was the fact that 5i’s model and it’s relationship with Cisco in the U.K. and E.M.E.A. was ground breaking and leading edge. Whilst we sometimes think that what happens in the U.S. happens here 6-12 months later, this is not always true. Often the U.K. leads the world in establishing new thinking. In many ways the rest of the world was only just becoming ready for the 5i model a year ago. Without going into detail the list of potential buyers was whittled down to a few, very suitable partners and Impera Group Plc ( now renamed 365iT Plc ) emerged as the most appropriate partner.

It is not at all surprising that 365iT is itself run by a very experienced team headed by Peter McLean ( formerly of Guardian IT ). 5i has become part of a Buy and Build strategy. 5i adds key technical specialisation to the 365iT mix. 365iT is for example a “ Virtualisation “ and “ hosting “ specialist and this goes hand in hand with 5i’s Unified Communications expertise. Overall 365iT has a business capability that covers many of the fastest growing areas of ICT. Hence the final result of the sale process was to find a partner that was an excellent strategic fit. 365iT Plc will be a company to watch as we approach 2010.

According to The Independant ( April 2009 ) , Julie Meyer, of Dragons Den and Ariadne Capital, has been retained to sell Ecademy as it is looking for a parent or partner to help it grow to the next stage. If true, as this report is now a few months old, this seems a very logical move to me.  These things take time though and particularly with the economic backdrop as it is.

I wonder what the selection process was to get to Julie Meyer and what the selection process is to get to the right buyer ??

It should broadly follow the Sales Process that I have outlined here at M & A Rainmaker.

http://www.independent.co.uk/news/business/news/networking-site-ecademy-looks-for-new-owner-1667406.html

During a sale process the Boards of the acquiring company and it’s advisers are typically involved in the detail of the deal and certainly there can be emotion involved in the respective Boards views.

Chairmen, Non-Executive Directors and other investors in the company may be able to provide useful objectivity during the process. Sometimes they are not objective as they are too deeply involved or affected themselves but other times they are experienced, objective parties – which is why they hold the roles that they do. They will, more than likely, have seen it all before. They can calm or highlight certain situations from a position of detached perspective.

It is useful to have people like this around if you can find them.

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This blog post is a part of a series of posts describing The Sales Process - you can access the other parts of the series from the links below:

• Making the decision
• Alternative Options to an exit by trade sale
• Getting ready to sell
  
• Timing
• Finding an M & A Adviser – The Beauty Parade !!
• Who/where are the buyers
• “The Teaser”
• Prioritising Interest
• The Sale Document – your greatest ever sales proposal
• Presentations
• Offers
• Negotiations and Heads of Terms
• Due Diligence
• Contracts
• Closing the deal
• Objective Parties

Given the allowance for the prospective buyers to digest what has been presented and then present back to you, you want to see indicative offers.

You should make it absolutely clear that there is a deadline time and date for receipt of indicative offers.

People may come back with a whole range of reasons why they cannot make that deadline, some reasonable and valid and some not.

It does not matter to you – you have a process underway and timescales that you are working to and if people can’t make it then they can’t make it.

He who hesitates is lost !!

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This blog post is a part of a series of posts describing The Sales Process - you can access the other parts of the series from the links below:

• Making the decision
• Alternative Options to an exit by trade sale
• Getting ready to sell
  
• Timing
• Finding an M & A Adviser – The Beauty Parade !!
• Who/where are the buyers
• “The Teaser”
• Prioritising Interest
• The Sale Document – your greatest ever sales proposal
• Presentations
• Offers
• Negotiations and Heads of Terms
• Due Diligence
• Contracts
• Closing the deal
• Objective Parties

It may be possible to sell a business and walk away from it the day after completion but it depends on a number of factors e.g. How involved you are in the business – and it is often not possible to do so without considerably devaluing the business and reducing the price.

As we discussed earlier it is very important to have worked out very early in the process who wants to leave and who wants to stay and the purchaser will have stated quite clearly by now who they want to remain and for how long and who they don’t. This will depend on, for example, who they have and don’t have. They may not need your Financial Director or Sales and Marketing Director for example.

More than likely the key stages after Exchange of Contracts and any initial payments will be Completion Accounts, production of the Annual Accounts, first quarter numbers and then first and subsequent earn-out targets. This is where you have agreed stage payments for the business, after the initial purchase price and completion account payments, related to the performance of the business over a number of years.

It is possible that earn-outs are avoided but it is a great comfort factor  ( and therefore of value ) to the purchaser to know that he has key management personnel around for a couple of years.

One of the advantages for the business is that it has a very clear and well thought through business plan for the next few years( It is well thought through because it should be achievable ). This is always very powerful and gives clear direction to the whole company.

Often, as far as the employees are concerned, very little has changed ( and this may be a surprise to them ! ) except for a couple of the Directors and the fact that they are part of a bigger company.

Of course there can be circumstances where the acquirer wants to make more changes to the business. There certainly have been instances where acquirers have made changes that result in disruption, change and loss of jobs and sometimes, sadly and stupidly they end up destroying the value of the company.

However the whole point of going through this process is that you find the right purchaser and the right purchaser would have enough knowledge and experience to integrate an acquired business in a way that maintains and enhances it’s value and does not demoralise or destroy in any way one of it’s key assets – it’s people !!

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This blog post is a part of a series of posts describing The Sales Process - you can access the other parts of the series from the links below:

• Making the decision
• Alternative Options to an exit by trade sale
• Getting ready to sell
  
• Timing
• Finding an M & A Adviser – The Beauty Parade !!
• Who/where are the buyers
• “The Teaser”
• Prioritising Interest
• The Sale Document – your greatest ever sales proposal
• Presentations
• Offers
• Negotiations and Heads of Terms
• Due Diligence
• Contracts
• Closing the deal
• Objective Parties

As we have said although you might work on Heads of Terms with a couple of companies at some stage you are going to enter exclusivity with one and then proceed to agreeing the detail of the Sale and Purchase  Agreement ( SPA ) with them.

The detail of the SPA is not something that we will go into here but you and your advisers ( M & A and Legal ) will be involved in these discussions with the prospective purchasers advisers.

Depending on the particular scenario it is probable that the draft SPA will need to be reviewed by key shareholders and investors in the purchasers company and also any funders that they may be using i.e. banks, venture capital funds or private equity funds.

Hence you can see why this process may take some time as everyone involved checks that they are protected and getting what they should be getting.

The purchaser and their advisers may be negotiating with you and your advisers on the one hand and with their banks, shareholders and investors on the other. They will be very busy ! Remember – patience is a virtue !

——————————————–

This blog post is a part of a series of posts describing The Sales Process - you can access the other parts of the series from the links below:

• Making the decision
• Alternative Options to an exit by trade sale
• Getting ready to sell
  
• Timing
• Finding an M & A Adviser – The Beauty Parade !!
• Who/where are the buyers
• “The Teaser”
• Prioritising Interest
• The Sale Document – your greatest ever sales proposal
• Presentations
• Offers
• Negotiations and Heads of Terms
• Due Diligence
• Contracts
• Closing the deal
• Objective Parties

The prospective buyer will, more than likely, want to look at your companies books and records in some detail. You are only going to give this valuable opportunity to those buyers who have provided an acceptable indicative offer and who you think you can work with.

Typically the M & A Adviser will establish what is known as a “ data room “ at their premises. This is a room or rooms where copies of all your key books and records are held.

You do not want prospective buyers walking all around your business premises at this stage – unsettling employees for what may be no reason. This is why you do the presentations and meetings off-site and why you also establish a data room offsite.

The prospective buyer and their advisers – usually, mainly accountants – are given access to the data room on agreed dates and at agreed times. This will enable them to verify that they key aspects of your business are as you have indicated in your Teaser, Sales Proposal and Presentations.

As this process progresses your Adviser will also be advancing discussions on the Heads of Terms agreement.
As things progress it is likely that the prospective purchaser is going to seek “ exclusivity “. This means that they are the company leading the race to purchase you at that time and you are only giving exclusivity to the company that you believe is the right one and is capable of following through on their offer.

This means that you and your adviser must do “ Due Diligence “ on the prospective purchaser. You want to know if their financial situation is as they say it is. Again, this is a very complex and often sensitive area. Often prospective purchasers are happy to trawl through your books and records asking ever more detailed questions but they are not so happy when you start doing the same to them ! You must do it though because a possible outcome is that you are “ bought “ by a company that cannot actually raise the money to complete or even bought by a company that subsequently goes bust. Make no mistake about it – this can happen and it is a legal, financial and emotional nightmare. Emotionally it is absolutely devastating to believe that you have sold your company to a solid company only to find out later that they are basically insolvent.

Typically sellers of businesses do want to get a good price for their business but they also want it to
“ go to a good home “. You will have many loyal employees, some of whom will have been there from the beginning of your business and you want them to be protected and happy as you hand over your business to someone else. Again, if you sell your business to someone who subsequently fails you will be unhappy for them aswell as yourself.

In all likelihood there will be a phase where you are juggling a small number of very serious prospective buyers who are all pushing for exclusivity while you are trying to get Heads of Terms and progress on the Sale and Purchase Agreement with the most suitable. Again, you need a very experienced M & A Adviser at this stage.

——————————————–

This blog post is a part of a series of posts describing The Sales Process - you can access the other parts of the series from the links below:

• Making the decision
• Alternative Options to an exit by trade sale
• Getting ready to sell
  
• Timing
• Finding an M & A Adviser – The Beauty Parade !!
• Who/where are the buyers
• “The Teaser”
• Prioritising Interest
• The Sale Document – your greatest ever sales proposal
• Presentations
• Offers
• Negotiations and Heads of Terms
• Due Diligence
• Contracts
• Closing the deal
• Objective Parties

An M & A Adviser can say things to your potential future boss that you probably could say but probably don’t want to !! Remember this !!

Earlier on we mentioned that ideally your M & A Adviser should be a good salesperson and a good negotiator. They are laying out the key dates of the process to prospective buyers and cajoling and encouraging them to keep to the process. The threat of competition is, subtly, ever present. Not rammed down people’s throats but always there.

Your Adviser has a sensitive and complex role. It takes practise to manage multiple buyers ( perhaps with intelligent buying teams – perhaps not ! ) and you.

You do not want to be going through a learning curve in negotiating and handling multiple buyers whilst trying to achieve the best outcome for the sale of your business.  Although in general M.D.’s of companies are good salespeople and good negotiators that does not mean that they are good sellers of companies.

When the offers come in they will come in in a range of formats and a range of actual offers. An experienced M & A Adviser will help you analyse them and compare them. Again you will be amazed at the variations that come in. Potential buyers almost never value the opportunity in the same way and to the same value.

As discussions progress your M & A Adviser will seek a “ Heads of Terms Agreement “ from the potential buyer. This is a development on from the Indicative offer and a firm step towards the “ Sale and  Purchase Agreement “.

——————————————–

This blog post is a part of a series of posts describing The Sales Process - you can access the other parts of the series from the links below:

• Making the decision
• Alternative Options to an exit by trade sale
• Getting ready to sell
  
• Timing
• Finding an M & A Adviser – The Beauty Parade !!
• Who/where are the buyers
• “The Teaser”
• Prioritising Interest
• The Sale Document – your greatest ever sales proposal
• Presentations
• Offers
• Negotiations and Heads of Terms
• Due Diligence
• Contracts
• Closing the deal
• Objective Parties