The current M&A market has recovered well since last year and is currently strong with a good level of confidence. As a result of less activity for much of last year you have on the one hand larger corporates needing to achieve their growth targets and on the other hand an increase in the number of business owners considering an exit. The availability of debt from both banks and private lenders is good and private equity backed companies continue to drive a considerable amount of activity in the mid-market.
Although following the last Budget the short term risk of changes to Capital Gains Tax rates and reliefs has been removed, there remains uncertainty about what the medium to long term outlook will be here.
So for business owners considering their options, how can they make the most of the current market opportunity?
Be prepared. The sale of a business is one of the biggest single events in a business owner’s career. Planning ahead and making sure you and your business are ready for sale is key to a successful exit or succession strategy.
If you get this right then when you go to market you will be in a better position to ensure:
- a quicker, smoother and less stressful sale process
- your personal tax position is understood and optimised
- confidence from your buyer is maintained; and
- purchase price erosion is avoided
What does being prepared mean?
Make sure you are ready to do this. This may seem obvious but the decision to sell is a big one. And it is not just a business decision, it is a very personal and often emotional one. In many cases a seller will be selling a business they have spent much of their working life building and also retiring. Is this really the right time for you to start this process?
Have the right team to support you. It is important to work with financial and legal advisers who have real experience of delivering successful transactions and preferably who also understand your sector. This means they will understand how buyers work, what they look for and how deals are structured as well as current market practices and any relevant regulatory requirements. If your current advisers don’t meet these criteria they can still play an important part in the process given their knowledge of you and your business.
Get your management team on side. This may not always be possible, but if you have people who you work with that are key to the future success of the business, then a buyer will usually want to make sure they are supportive of the proposed transaction. If they aren’t, then your business may not be as attractive and your ability to get the best price may be impacted.
Many business owners also put in place incentives to ensure key individuals are rewarded on completion of a successful sale and, if some of the price is deferred and linked to the ongoing performance of the business, when the deferred payment is made. Tax is a major consideration here and putting a structure in place well in advance of a transaction increases the options for ensuring it is tax efficient.
Make sure you and your business are organised. All buyers will carry out detailed financial, tax, compliance and legal due diligence before they complete an acquisition to make sure any issues or concerns with the business are identified in advance. There will always be something that needs to be addressed and, in many cases, it is possible to do this without a real impact on the price or the risk to the seller. That is not always the case though so investing time and money on a pre-sale due diligence review (even if it just covers the high risk areas) will flush out any issues which can then be rectified or managed before a transaction starts.
It is also important for a business owner to understand what his or her tax position is likely to be when a sale completes. There may well be options to help ensure that the sale is achieved tax efficiently and with their personal affairs structured properly.
Current market conditions present an opportunity for business owners looking to exit. If the time has come for you to seriously consider a sale, being prepared is key to finding the right transaction for you, your business and your employees.
James Beatton and Salim Somjee, both partners at law firm Cripps Pemberton Greenish