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Mergers and acquisitions.
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SEMINAR – FRIDAY 11 JUNE 2010
HOW TO SELL YOUR BUSINESS FOR ITS MAXIMUM VALUE
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP2
Agenda
Presenters
The disposal process
How do you maximise value on exit?
Questions & answers
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP3
Presenters
Dave Wilson– Corporate Finance, Booth Ainsworth LLP
– 0161 475 3911 [email protected]
Paul McKay– Taxation, Booth Ainsworth LLP
– 0161 475 1559 [email protected]
Jeremy Orrell– Corporate Lawyer, SAS Daniels LLP
– 0844 391 5829 [email protected]
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP4
The disposal process
Planning&
Grooming
Research&
PreparationMarketing Negotiating
DueDiligence
Completingthedeal
Exitstrategy &
tactics
Ready tomarket
Appetitetested
Exclusivitygranted
Detailednegotiation
Salecompleted
Understand
shareholder
objectives
Valuation
Define likely
exit routes
Timetable
Address value
drivers
Purchaser
research
Prepare sales
memorandum
Refine exit
strategy
Make contact
and assess
interest
Distribute sales
memorandum
Initial meetings
Receipt of
indicative offers
Select short-list
Further
information
provision
Meetings
Second round
bids
Preferred
bidder selected
Detailed
investigation
– Financial
– Legal
– Commercial
Legal
documentation
Final
negotiations
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP5
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP6
1. Planning for exit
Often a once in lifetimes opportunity
Exiting is not a game of chance
Planning and grooming is often necessary
Significantly impact price achieved by careful planning
Iterative process
Three stage exit strategy review
Adviser will use findings to determine the strategy and tactics
to adopt
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP7
1. Planning for exit . . . contd
2. Will my business be attractive
to purchasers?
3. How much is my business
worth?
1. What are the possible exit
routes?
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP8
1. Planning for exit . . . contd
High level review
Trade sale
Financial
Management
Equity release
Flotation
1. What are the possible exit
routes?
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP9
1. Planning for exit . . . contd
2. Will my business be attractive
to purchasers?
1. What are the possible exit
routes?
Assess business through eyes
of a purchaser
Pre-sale due diligence
Not just a financial review– People
– Contracts
– Customers
– Value drivers
– Forecasting accuracy
– etc etc etc
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP10
1. Planning for exit . . . contd
2. Will my business be attractive
to purchasers?
3. How much is my business
worth?
1. What are the possible exit
routes?
Desk top valuation
– Typically earnings multiple
– Balance sheet considerations
– Future vs historic
– Gives a range of likely values
Sets a base expectation . . . but key is to
find the right strategic buyer
Low and high - can be 2x – 3x gap
CASE STUDY – Engineering Plastics
Does value meet requirements?
Current climate
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP11
1. Planning for exit . . . contd
2. Will my business be attractive
to purchasers?
3. How much is my business
worth?
1. What are the possible exit
routes?CONCLUSION
1. Clarity on likely exit routes
2. Identified factors which need
addressing prior to exit
3. Understand likely value of
business
4. Determine deal tactics and
approach
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP12
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP13
2. Grooming your business
Is any grooming required?
Two typical triggers– Current value not meeting owners aspirations
– Exit strategy identified a number of potential pitfalls which may deter a
purchaser
Timing can vary widely– Games developer – 2 years!!
– Print management - immediately
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP14
2. Grooming your business . . . contd
1. Profit enhancement Increase turnover
Review margins
Overhead reductions
2. Earnings multiple enhancement Quality of earnings
Build key value drivers
Reduce reliance on key customers and suppliers
Prove business has growth opportunities
Tie in key employees, customers, suppliers etc
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP15
2. Grooming your business . . . contd
3. Balance sheet improvements Reduce working capital
Timing of capital expenditure
Sale & leaseback of major assets?
4. Address potential deal breakers Quality and reliability of financial information
Budgets realistic and support price expectations
Onerous contracts
Clean up contingencies
General good housekeeping – records, regulation, health & safety etc
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP16
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP17
3. Find the strategic purchaser
Get pro-active
Your knowledge
Desk-top research
Trade sale– Competitors
– Overseas
Don’t forget your NOB’s
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP18
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP19
4. Optimise timing
Maximum shareholder
value near top of the curve
Best time = an art not a
science
Internal timing – you can
influence
External timing – monitor
and react
Current climateTime
X
X
Exit towards top of value curve
Value
Value drivers
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP20
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP21
5. Adopt the right process & tactics
One size doesn’t fit all
Tight process vs flexibility
Current environment
Adviser should ascertain the right tactics
CASE STUDY– Accident Repair
– Haulage
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP22
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP23
6. Minimise your tax bill
Background – Tax Rates● Personal
- Capital gains tax – 18%, but attractive rates for disposal of business assets
- Entrepreneur’s Relief 10% on life time gains of £2m
- Government have indicated that the rates for the sale of business assets will remain
attractive
- Income tax
- 40% on incomes of £37,400 to £150,000 but note 60% band
- 50% on incomes over £150,000
● Corporate
- 21% on profits up to £300,000
- 29.75% on profits between £300,000 and £1.5m
- 28% on profits over £1.5m
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP24
6. Minimise your tax bill . . . contd
Tax Rates – The Implications– Sell the company – capital gain – tax rate 10% / 18%
– Company sell the assets – corporation tax at 21% / 29.75% / 28%
– But then… how do you extract the post tax “profits”
– Dividends, tax costs 25% (40%) 36.11% (50%)
– Giving an effective overall tax rate of 40.75% - 54.00%
– Liquidate the company, giving rise to a capital gain, tax cost 10% /
18%
– Giving an effective overall tax rate of 29% - 37%
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP25
6. Minimise your tax bill . . . contd
Sell The Company / Sell The Trade And Assets● Tension between the needs of the purchaser /
vendor
● Typically purchaser will want to buy the assets
- Enhanced capital allowances
- Tax relief for acquired goodwill
- No history
● Vendor will want to sell the company
● Result
- A “horse-trade” but need to understand the issues
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6. Minimise your tax bill . . . contd
Deferred Consideration (Share Sale)– If a fixed part of the consideration is deferred
the final amount is taxed (capital gains) in the
year the contract is finalised
– Same rule applies if the consideration is
conditional upon a specific event
– Cash flow issues
– Computation only adjusted if part of the
consideration becomes irrecoverable
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP27
6. Minimise your tax bill . . . contd
Earn Outs– Typical structure
Fixed sum on completion
Further sum based on a formula e.g. share of profits for next three years
Continue as an employee for next three years
– Tax treatment of the earn out element Unquantifiable further sum regarded as a chose in action
Value of the chose in action treated as part of the consideration for the share sale
Gain qualifies for Entrepreneur's Relief
Further gain when receive deferred consideration
But no Entrepreneur’s Relief
Care needs to be taken to avoid characterising the deferred element as some form
of bonus, since HMRC may seek to tax as employment income
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP28
6. Minimise your tax bill . . . contd
Consideration In Shares– Share for share rules means that the capital
gain on the disposal can usually be deferred
– New shares treated as being acquired at the same time, and same amount as the old shares
– Election can be made to opt out of the share exchange rates
– This means that the benefit of Entrepreneur's Relief can be ‘banked”
– When part cash, part shares, consideration pro-rated
– But consider the cash flow issue
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP29
6. Minimise your tax bill . . . contd
Consideration in Loan Notes Overview
– Where the purchaser satisfies part of the consideration by issuing loan notes, an appropriate part of the vendor’s gain is deferred until the loan note is redeemed.
Qualifying Corporate Bond– Capital gains based on the seemed disposal of the shares at the time of the exchange is
held over– Will become payable when the QCB is paid or redeemed– ER is deducted in arriving at the gain held over– Potential problem if QCB not redeemed in full
Non Qualifying Corporate Bond– Treated as a share reorganisation (share for share)– NQCB inherit history of original shares– May not obtain ER on redemption– However, can “bank” benefit of ER by relevant election
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP30
6. Minimise your tax bill . . . contd
Pre sale due diligence● Will look at the company’s tax affairs for
the last 6 years:
- Corporation Tax
- VAT
- PAYE /NIC
● Benefit of “good housekeeping”
● Warranties & indemnities
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP31
How do you maximise value on exit?
1. Planning for exit
2. Grooming your business
3. Find the strategic purchaser
4. Optimise timing
5. Adopt the right process & tactics
6. Minimise your tax bill
7. Minimise value leakage through legal process
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP32
7. Legal process - minimise value leakage
1 - What Is The Legal Process? Not just tick boxing
Heads – the “road map” – exclusivity & confidentiality
Due Diligence Identify any issues
Is it worth proceeding?
Sale Documentation “War and Peace”
C. 40 documents
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP33
7. Legal process - minimise value leakage
2 – How Can This Affect Value? “Warts and all?”
Warranties and indemnities: Retentions
Price reductions
Claims
Delay: Price chipping
Goes off
3 – How Can Value Leakage Be Avoided? Pre sale due diligence
Get your “house in order”.
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7. Legal process - minimise value leakage
4 – Get House In Order: Statutory Books:
Where are they? Are they accurate?
Share Certificates: Where are they? Have they been issued?
Properties: Leasehold or freehold Term – break provisions Conditions Rent - reviews
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7. Legal process - minimise value leakage
Employment: Are there any contracts/terms?
Any issues – grievances, disciplinary, claims?
Contracts: Collate
Sort out any Issues
Continuation/transfer
Licenses and Consents: Collate
Sort out any issues
Continuation/transfer
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP36
7. Legal process - minimise value leakage
5 – Address Potential “Showstoppers”: Change of control restrictions - obtain
Key employees: Compete – introduce restrictive covenants?
Notice periods - extend?
Claims – settle?
Tax problems – settle
Lease – survey
Contracts – document
Poor Quality due diligence – spend time on this
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP37
7. Legal process - minimise value leakage
6 – Objective:
Legal Process is Completed Quickly Without Issues Which
Could Derail The Transaction or Reduce Value
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP38
Summary
Focused on key areas that help to maximise value– Make sure you properly plan and prepare
– Get your house in order
– Strategic purchaser
– Optimise timing
– Process & tactics
– Minimise tax bill
– Prevent value leakage
Selling is not a game of chance
Start early & take appropriate advice
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© BOOTH AINSWORTH LLP AND SAS DANIELS LLP39
Questions and Answers