Subsequent to the recent article, in which we looked at the selling and buying of hire businesses, we asked the the experts at The Hire Exchange - an agency specialising in brokering such details - to supply a few tips for others looking to do the same. Director Chris Harvey shares his wisdom...
The sale of your business is one of the most important decisions of your life and it pays to be well-prepared for the process. In the last two years we have sold eight businesses and, in all cases, we have not only met our clients’ expectations in terms of value but in most cases have exceeded them. This is because unlike most business sale ‘brokers’, we are the only specialist in the tool and equipment hire sector so, we really understand the market and what buyers and sellers need to achieve a successful transaction.
This article summarises some of the issues that you need to think about and includes some of the unforeseen situations that have occurred.
Why do you want to sell?
There are many reasons, but it is mostly a life-stage thing - age, retirement and ‘fatigue’ are among the most common. Lack of succession is another and reluctance to commit to further investment and growth.
For younger sellers, it is often a sense of simply wanting to take the cash and do something else. Whatever it is, think carefully about it and make sure that wives, family and business partners share your vision. We have had several deals that could have stalled because partners were not fully aligned prior to completion.
Then it is time to plan because selling takes time, between six and 12 months typically, and requires quite a lot of work from you, even though we make it as easy as possible.
What outcomes do you want?
The key issues here are what do you want to do when it is sold? and how much do you need to make it worth it, once costs and tax are paid. Think also about what conditions of sale would be acceptable, i.e. level of retentions, earn-outs, your continued involvement with the business. Employees should also be considered.
What is a realistic valuation?
This is obviously essential and it is where our specialist experience and knowledge of the market sets us apart from generalist brokers, who tend to be eternally optimistic. We had a prospect who had been advised that his £480k turnover local tool hire business was worth a £1m!! I am afraid not.
That said, it is true that worth is what someone will pay, which is why finding the right buyer and optimising ‘strategic fit’ is so important but, there are market norms and the market knows it, so realism is paramount.
We use a number of models and multiples to establish a range of values that buyers will recognise and understand. These reflect the ability of the business to generate cash and therefore potential growth, which is the key driver for most acquisitions. So, get a realistic valuation. We can help you with this assessment and you should talk to your accountant about value and about tax.
Is it the time right to sell?
Timing is everything in life and selling a business is no exception. As a rule of thumb, sell when the market is on the up and when your business is on the up. If there have been problems and there are good reason for them, an acquirer may be able to deal with these and see them as an opportunity.
Remember, accountants and buyers deal in ‘numbers’, so get the accounts up to date and organised. Polish up your admin - i.e. health and safety, the asset register with dates of assets purchased and price paid (Gross Book Value) and current value (Net Book Value). Spark-up the sales effort, improve cash collection and generally get the business into good shape. This will give a visiting buyer confidence in a well-run operation.
Understand the sales process
The sales process is straightforward but also quite involved - you need to understand it and plan for your involvement in time and effort because you still have a business to run.
Maintaining confidentiality is also very important and most clients prefer to keep the sales process under wraps until a buyer is found and a deal agreed. This makes good sense as employees and customers can worry unnecessarily. Suffice to say, that while we manage the process on your behalf, it is done in the full knowledge and sight of the seller, including what potential buyers we might plan to approach.
Preparing the Information Memorandum.
The IM is the essential sales document often 24 + colour pages with charts and numbers and suitable descriptive words. It is hard work to produce but well worth the effort as it contains most of the details a buyer needs to understand and assess the proposition. It is only sent out once the seller has agreed and an NDA is in place.
It does take some time and effort but presents a compelling sales case, engages the buyer, shows you are serious and in control of your business, avoids ‘tyre-kickers,’ sets realistic valuation expectations and ultimately makes the due diligence process easier.
Dealing with offers and preparing for disappointment
With a well-presented IM, a realistic valuation and a compelling sales case, offers will appear and ideally several of them to create some ‘competitive tension.’
It is tempting to take the first decent offer and sometimes it is the right move, but you must also consider the quality and reputation of the buyer. We have been fortunate in this regard because quality buyers have a habit of making sensible offers and most importantly have the necessary funding.
Of course, there are plenty of negotiations on price and terms, and it can get a bit sporty but it’s all part of the process, and sometimes you just have to walk away. It happens, you get over it and move on to another buyer.
Due Diligence - the search for skeletons
Once the deal is agreed and Heads of Terms are signed, the buyer and advisors want to know that they’re getting what they are about to pay for. They also want to know that there are no unforeseen liabilities that would become their responsibility on completion. It is perfectly reasonable and you would want it too.
It can be alarming when an 80-page Due Diligence document arrives asking for every detail including your inside leg measurement, but you will be prepared for it. Your solicitor will advise you and we can help too.
What is not helpful are the words: “Bo****ks “written across the first 10 pages, which has actually happened!! Priceless, but not ideal...
Appoint experienced and reputable professional advisors
Many hire companies have excellent accountants and legal representatives with the experience of dealing with business acquisitions. However, that is not always the case and you need to be aware that the acquisition process can pose different challenges to regular accounting and legal work. Make sure that your advisors are equipped to deal with these issues when in opposition to the buyer’s representatives, who will be experienced. Please note that The Hire Exchange does not take the place of professional financial and legal advisors.
A buyer is more like you than you may think
An acquisition can be hard work and stressful for both parties, but it is also exciting and of great value to both as well. Honesty, trust and respect must be maintained at all times, and by all, to make a good deal happen. There will be ups and downs along the way but with good faith, integrity and enthusiasm, the deal will get done to the benefit of all concerned.
