Honesty is the best policy

Owners preparing to sell their company often try to inflate its value. However, the buyer’s due diligence checks will soon uncover any dishonesty.

It is amazing how vendors differ. There are those who have their heads in the clouds and others who are attempting a cover-up. Some are just plain interferers and some are so keen to ensure their corporate finance advisers are earning their fees they become totally uncooperative throughout the sale process.

Owners with their heads in the clouds have inflated ideas of what their business is worth, and then they compound it by insisting that they won’t sell for a penny less.

But competitive bidding produces the highest possible deal value. Without telling buyers there is a business to sell, your adviser can carry out worldwide research to identify the serious purchasers. When the offers come in, the highest is likely to be at least 50% more than the lowest, and could be 100% more.

It’s important never to disclose price expectations to prospective purchasers until they have made a written conditional offer. Otherwise a ceiling — not a floor — is created on the price to be achieved.

Sometimes the vendor draws up a shortlist of prospective buyers ‘who will be desperate to buy the business’. It’s usually a rosy view; those ‘desperate’ buyers are never quite so keen.

Act of madness

Some vendors can be tempted to deceive. They realise there is a problem in the business, or one will arise shortly, yet hope to be able to sell the company before it becomes apparent. This is madness. Any self-respecting acquirer will carry out commercial due diligence, as well as financial, legal, environmental checks, and so on. They will look closely at current-year profit forecasts, as well as any factors that could affect future profits.

Current-year profit forecasts must be realisable. If you have to reduce the profit forecast or, worse, due diligence reveals it will not be achieved, you’ll pay a heavy price. You’re giving the buyer the upper hand when it comes to renegotiating the deal. Deceit never pays when selling a business, nor does interference by the vendor.

Allow your advisers to run the rule over the business — and the current-year profit forecast — at the outset. This way they can sort out any problems before marketing the business.

There’s a big difference between an owner selling a company, and a large group selling a non-core subsidiary. Big groups tend to take a dispassionate, hands-off approach. Owner–managers, on the other hand, wish to be intimately involved. This is understandable and can be an advantage.

However, there are clients who are determined to show that they can manage the sale better than their advisers.

We recently lined up three initial written offers of £11m, £9.5m and £9m for a client’s business. We were in discussions with the second and third highest bidders, intending to negotiate with the highest bidder once we had extracted improved offers. Our client, however, decided, without our knowledge, to meet the highest bidder to ‘see what he could do’.

Our client then turned up at our offices waving a revised offer letter, like Chamberlain returning from Berlinjust before World War II. He reported proudly that he had managed to ‘improve’ the best bidder’s offer from £11m to £12m, but had had to accept a reduced up-front price of £10m, plus a suspect earn-out of £2m. He had ‘shaken’ on the deal as he didn’t think we could better it.

His enthusiasm dipped when he heard we had negotiated the second and third offers from £9.5m and £9m to £12m and £11.75m, both 100% up-front. Fortunately we were able to extricate him from his commitments.

It is surprising how often corporate finance advisers have to rescue a situation that has arisen because of the client’s stance. This is particularly the case when a busy chief executive of a corporate group is keen to offload a non-core business without its sale interfering with his daily schedule.

Short-sighted attitude

This is rarely a problem for the owner– manager involved in the biggest sale he is likely to make in his life. But the attitude from the corporate chief executive can be ‘I am paying you handsomely to sell my business, so get on with the job’.

But an input from the vendor is essential. Decisions which only the seller can make do have to be taken at critical stages during the process.

If an adviser is denied access to the vendor at a critical time seeds of doubt are sown in the mind of the potential purchaser. Even worse, an adviser might manage to take the process through to its final stages, without the input that should have been forthcoming, only to be told by the vendor that the deal on the table is unacceptable.

The key reason for a client to retain an adviser is to have the workload removed from his or her shoulders and have the process managed by professionals. However, to achieve the best results we require their trust that we will achieve the best deal for them; their honesty in declaring a ‘warts and all’ picture; and their co-operation throughout the process.