Selling up

Posted on 10 Feb 2010 by The Manufacturer

The sale of owner-manager businesses is discussed by Nicholas Sealy, managing director and the co-head of European Investment Banking at Robert W. Baird.

Many UK-based privately owned companies have grown from small, local businesses to become companies that sell world-class products often to a global customer base. These companies were typically either originally founded by or acquired early in their development by their owner-manager chief executives.

The last few years have shown a rising trend in Europe of sales of manufacturing businesses by their owner-managers. In the UK, the owner-manager community continues to provide a significant proportion of merger and acquisition (“M&A”) opportunities for deals up to £100 million. The factors driving this trend differ from those of a more conventional sale by a larger parent company or a financial investor.

Why Sell?

The factors which drive an owner-manager to sell a business they have spent years, or even their entire career, building up are various. They range from personal reasons (retirement, health or family issues), perhaps a desire to de-risk from an investment that may represent all, or much of their personal wealth or the absence of a natural successor within the family. The trend to owner-manager succession within families has fallen sharply. This reflects the trend to professionalise management in businesses which are often competing in global markets where the best candidate is unlikely to come from within the family. Tax issues associated with transferring shareholdings between generations have also been a powerful driver of company sales. Pressure to sell can also originate from minority shareholders such as family members no longer active in the business or professional investors such as growth capital or private equity firms that have a shorter term, financially driven perspective.

The decision by an owner-manager to sell their business is often a difficult and emotional one. Frequently, they will have been completely focused on the business for many years and a sale represents a major change in their lives. Mid-sized and large manufacturing companies are often among the most important employers in their local community. The continuation of the business at the existing location, local employment and community participation are often critical concerns to owner-manager sellers of businesses.

The majority of manufacturing businesses have suffered during the global economic downturn. Even historically stable and conservatively run businesses have faced the prospect of an uncertain future. This has caused many owner-managers, often for the first time, to consider a sale of their company in order to reduce their exposure to a single business.

In the case of many niche manufacturing businesses, the successful development of the business itself can be a driver for a sale. Many such businesses have been successful in a national or regional context but have an opportunity to become international or global players. This may require capital, further research & development, international sales or just more people; resources that a new owner or partner could provide.

The Right Buyer

Choosing the owner or partner for a business that accounts for the factors mentioned above is important and makes the selection of the future owner more complex than just the highest price or best contract terms. Frequently, the “right buyer” will have identifiable synergies – they may be able to provide new customers or markets, help with purchasing or speed up the launch of new products. These often represent exciting additional growth opportunities for the business going forward and can provide new experiences and opportunities for employees in the business. Synergies also potentially increase the price that a buyer is able to pay for the business. Identifying synergies and getting a buyer to factor them into the valuation is an important part of the process of selling a company performed by mergers and acquisitions advisers such as Robert W. Baird Ltd (“Baird”).

Frequently buyers will look to integrate an acquired company into their own organisation. Integration generally involves the acquired company changing the way that it performs tasks to fit in with buyer. The benefits of doing this are (i) cost savings – rarely do companies need, for example, duplicate accounting or human resources departments, (ii) to streamline the operations and (iii) to harvest the synergies referred to above. Integration is difficult to do well, but offers significant benefits if successful. Too often it is poorly conceived and executed and results in frustration, misdirected effort and damage to the performance of the acquired company. It is important, therefore, that owner-manager sellers of businesses understand what the post acquisition plans of the buyer are, particularly if they intend to stay on after the company is sold.

Often potential buyers are keen to keep the management team in place to leverage their knowledge and experience. In these circumstances, compatibility in culture and a shared vision for the company’s future will be critical to ensure that both the buyer and seller achieve their objectives.

Moving Forward with a Sale

Sales processes of owner-managed businesses can be an illuminating and extremely educational experience for the owner-manager as well as being stressful but, hopefully, financially rewarding. Preparation is key and other than for very small businesses, having an M&A adviser who knows the ropes makes a huge difference. A good adviser will take the workload of the transaction off the owner-manager so that the business can still perform well during the sale and the adviser should make a material difference to the price and terms achieved.

The adviser will help prepare the marketing materials and due diligence materials that the buyers demand, will identify and contact potential buyers and handle negotiations on the seller’s behalf. In cases where the seller has no prior experience of the buyers, we at Baird have found that properly controlled early potential buyer meetings before any sale process commences can be useful in terms of assessing buyer interest but also to build an understanding regarding potential buyer fit, synergies and cultural compatibility. The seller should choose an adviser with knowledge of and access to the most relevant buyers on a global basis. Many clients have commented that meeting and exchanging views with other industry players is one of the most interesting parts of the sale process.

The decision by owner-managers to sell their businesses is one which cannot be taken lightly. Both internal and external preparations are vital steps in ensuring that a company for sale is marketed appropriately and finds a home with the right buyer.

Owner-Manager’s Checklist for Preparing a Company Sale

■ Decide whether you wish to stay as an employee after a sale or do you wish to leave? If you wish to leave, is there a natural successor in the business? – some buyers may have someone from their company who might fulfil this role.
■ Has your business been successful and achieved the plans and goals established in prior years? If so, it is likely to be more attractive to potential buyers.
■ Are your products / services up-to-date and are you winning share in the market? Have some case studies available of successful sales / projects. Are your product brochures / sales materials up-to-date?
■ Do you have a documented growth strategy / business plan?
■ Are you able to produce accurate and reliable financial information on your business? Potential buyers will require large amounts of data as they evaluate your business as an acquisition.
■ Have your accounts been audited with unqualified audit opinions in recent years?
■ Are your tax matters up-to-date?
■ Make sure that the business can function as a standalone entity once sold or that any transactions with people who are not independent third parties (e.g. directors or shareholders) are identifiable and on market terms.
■ Write down the names of all the potential buyers who have already approached you – this is a start to producing an extensive list of potential buyers.
■ Appoint an M&A adviser at an early stage who you respect and trust – interview several. Ask them for references and follow these up!

Owner-Manager’s Checklist for Identifying a Successful Buyer

■ Why do they want to buy my business? – do I expect that they will achieve what they are looking for?
■ Do they want me to stay on afterwards? – do I want to do that? If so, do we have the same values and vision for the future of the business?
■ Have they bought other businesses before and were those acquisitions successful? Did they pay sensible prices for those businesses?
■ Do they have the financing?
■ What will happen to my employees?
■ Will this be good for my customers?
■ Will they keep the business in the same location or move it somewhere else?
■ What degree of integration of my business into their business will be required? Have they thought about this – do they have a plan?
■ Do I trust them?

Nicholas Sealy is a Managing Director and the Co-Head of European Investment Banking at Robert W. Baird Ltd, the London based operation of Robert W. Baird & Co, Inc., a leading US headquartered middle-market investment bank. Baird is focused on merger & acquisition transactions in the £30–300 million size range specifically in the industrial technology, business services and distribution sectors. Robert W. Baird Ltd is authorised and regulated in the UK by the Financial Services Authority.