100609 M&A Seminar Presentation Version

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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Presenters

Dave Wilson– Corporate Finance, Booth Ainsworth LLP

– 0161 475 3911 [email protected]

Paul McKay– Taxation, Booth Ainsworth LLP


Jeremy Orrell– Corporate Lawyer, SAS Daniels LLP


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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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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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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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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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High level review

Trade sale

Financial

Management

Equity release

Flotation


routes?

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to purchasers?


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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to purchasers?


worth?


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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to purchasers?


worth?


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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4. Optimise timing




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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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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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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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4. Optimise timing




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Get pro-active

Your knowledge

Desk-top research

Trade sale– Competitors

– Overseas

Don’t forget your NOB’s

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4. Optimise timing




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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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4. Optimise timing




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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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4. Optimise timing




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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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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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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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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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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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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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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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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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4. Optimise timing




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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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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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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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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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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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6 – Objective:

Legal Process is Completed Quickly Without Issues Which

Could Derail The Transaction or Reduce Value

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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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Questions and Answers

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