Question 1

What is the process for selling a business?

Accepted Answer

Here is a link to a high level timeline of a typical business sale.

Question 2

What is an NDA?

Accepted Answer

An Non Disclosure Agreement is a document that business owners require potential buyers to enter into before disclosing any confidential information to the potential buyer.

It protects the seller by limiting the potential buyer to keep any information provided confidential.

Question 3

What does Due Diligence mean?

Accepted Answer

Due Diligence is a term used to describe the process to collect, investigate and audit information relating to your company prior to completion of sale. It is completed before the deal closes to provide the buyer with assurance of what they are buying.

There are 3 types of due diligence:
Financial
Legal and 
Commercial

The depth of Due Diligence depends on the buyer and the complexities of your business. A structure that includes leverage from a bank or financial institution will always have heavy reliance on Due Diligence as that banks need comfort of the strength of the company they are investing in.

A cash equity sale, asset sale or vendor finance equity sale typically requires a lower threshold of Due Diligence and therefore the process will be quicker and less stressful for both buyer and seller.

This part of the timeline is easily the most stressful for the seller and I highly recommend engaging a good Accountant and Lawyer to assist you through this process.

Question 4

What are Heads Of Terms?

Accepted Answer

Heads Of Terms (HoT) is a non binding document agreed signed by both the seller and the purchaser. It is the first document used in the sale process and details the main terms agreed by both.

It includes key points such as; 
1. agreed purchase price,
2. deal structure,
3. the mechanism used to calculate the price, 
4. confidentially agreement,
5. exclusivity period, and 
6. expected timeline.

The HoT document helps to shape the final Sale and Purchase Agreement (SPA) and ensures both parties outcomes are aligned before detailed legal work begins on constructing the SPA.

Question 5

What is a typical timeline for a business sale?

Accepted Answer

All transactions are different and timescales rely on many different situations.

Asset sales typically complete quicker as there is less due diligence to perform. 
Share sales are typically longer, anywhere from 2 months if all the information is readily available and banks are not involved in the transaction, to around 6 months if leverage is required.

Question 6

Who will buy your business?

Accepted Answer

There are typically 3 types of investors who will buy businesses;

Institutional Acquirers - these are typically interested in larger companies wth Net Profits above £1m per year. They are looking for a return on investment over a set number of years. Sometimes they will have their own management to bring into the company but often they expect the seller to stay for a number of years to aid transition. These investors will typically offer the most money up front but they will expect the greatest commitment and action the greatest change within the business. 
Trade buyers - these are typically your competitors, suppliers, customers, investors already in the same or similar industry that would like to swallow up and merge your company into theirs to benefit from economies of scale. Typically they are happy for you to leave after a short hand over period. They sometimes have cash to pay on day one and although the valuation may not be as high as an institutional investor, the involvement you would need to have would be less. Typically these investors look to cut costs by only retaining some of your staff or changing the culture of your business, your brand etc.
Private buyers - these are typical private individuals that would like to get into the industry for any number of reasons. They typically aim for net profits to be £1m or below. Their valuation will depend upon the assets inside the business as almost always these buyers will be looking at a Leveraged Buy Out (LBO). The bank or financial institution will set the maximum amount that the private individual could borrow against the assets of the company, which in turn sets the amount that they can value the company at. If the balance sheet has strong assets (new machines or property) or a large debtor book these can be used as leverage for a loan - much in the same way as your house asset is used for a mortgage. These buyers will look to retain your existing staff, management team, culture, brand and everything you have worked hard for over the years.

I am a private buyer. If you are looking for a safe pair of hands to keep the legacy of your business intact, retain your employees, and the company culture then lets have a chat. I will work with my investor partners, my lending broker and yourselves to get you the best possible outcome that is fair for both parties.

Question 7

What is EBITDA and adjusted EBITDA?

Accepted Answer

Adjusted EBITDA is the net profit before tax that has been adjusted to understand what the business cash flow looks like once the new owner has taken over.

EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) in simple terms is the business profit. This is then "adjusted" for add backs and take backs. This results in an amount used to value businesses.

Add backs means removing from profit all non cash entries, once off expenses and the current owner costs. 
Take backs means adding costs for the roles that the current owner performs (at market value).

Here is an example for a company with a Net Profit of £500k, where the owner pays himself £20k salary and £80k pension. There is a non business cost of £20k for house improvements and depreciation charge of £10k. A replacement manager for this business would be £40k at fair market value.

There are many adjustments that can be made in lots of circumstances. Agreeing on these forms part of the Heads of Terms document.

Question 8

How do I value a business?

Accepted Answer

This is often the first question business owners ask. The age old saying goes "it's only worth what someone else is prepared to pay". However there is a few methods that can be used to place an average value on a business.

For an asset sale the cost or market value of the assets should be used. This could be tangible assets which are quite easy to put a value on, or intangible assets like a website and goodwill that are harder to value.

For a share sale of a solvent business then a multiple of adjusted EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) is used. Adjusted EBITDA in simple terms is the business profit plus add backs, and less take backs to be left with an estimated cash flow value.

The multiple applied to each business depends on several factors. The more secure and stable the business with documented business processes, recurring revenue, modern tech and assets, effective middle management team and an offsite owner investor commands a higher multiple.

A business that is highly dependant upon a single owner, who has all the knowledge from years of ownership locked in their head, with high customer concentration and no capital investment or low value assets, will represent a higher risk to a buyer and therefore will attract a lower multiple.

Typically businesses in the SME space with revenue less than £5m will be valued at a multiple of between 2  and 4 times Adjusted EBITDA.

Valuation example;
Turnover £1m
Net Profit before tax £200k
Depreciation £10k
Adjusted EBITDA £210k
Multiple 3.5
Valuation £735k

There are many factors which can affect valuations and there are several methods to calculation. Please feel free to ask me any questions on how I would value your business.

Question 9

What is the deal with business broker valuations?

Accepted Answer

When discussing your business valuation, I will always encourage you to get a second and even a third opinion from a market expert. Typically these are Corporate Finance firms who are seasoned Merger and Acquisition leaders.

A word of warning around business brokers who are marketing their services, but are not attached to an Accounting firm or  professional advisors. My experience in talking to many business owners looking to sell, is that business brokers are offering a sky high valuation number based on 6 - 10 times multiples to entice new business into their books. They charge an upfront “listing fee” or monthly retainer initially, along with a % fee upon completion. The feedback I hear time and time again is that once signed up and locked in, the service levels are poor, frustrations are high with poor admin and the offers presented do not match the initial valuations quoted in the sales pitch.

Find a broker that takes all his fees on completion or alternatively speak to Ken Gorman at TransWorld Global. I highly recommend him as a sell side broker and advisor. Here is a link to his book which offers lots of free advice for selling your business.

Main Street
Investments

What is the process for selling a business?

What is an NDA?

What does Due Diligence mean?

What are Heads Of Terms?

What is a typical timeline for a business sale?

Who will buy your business?

What is EBITDA and adjusted EBITDA?

How do I value a business?

What is the deal with business broker valuations?

Tel: 07391036565

Email: louise@mainstreetinvestments.co.uk

Main Street Investments

What is the process for selling a business?

What is an NDA?

What does Due Diligence mean?

What are Heads Of Terms?

What is a typical timeline for a business sale?

Who will buy your business?

What is EBITDA and adjusted EBITDA?

How do I value a business?

What is the deal with business broker valuations?

Tel: 07391036565

Email: louise@mainstreetinvestments.co.uk

Main Street
Investments