Many thanks to John Buxton, of Kingsworth Associates in London, for this excellent, comprehensive contribution.
Family business owners are often so focused on making their business a success that any ideas not directly related to this goal are put on the backburner or ignored completely. Set out below are a number of issues which can and indeed should arise for consideration prior to embarking on a formal sale process.
Pre-Sale Grooming
It is instructive to address any possible so-called ‘grooming’ issues which can help to make the company more attractive to potential purchasers. There is no definitive or exhaustive list but issues which commonly fall for consideration include:
Management: the nature and quality of second tier management, in particular whether it is of sufficient quality that will allow selling shareholders to walk away and enjoy a clean exit.
It is also very important to anticipate how the management team may react once they learn of plans to sell the Company, especially if they might wish to propose a management buy-out. Vendors and, indeed, the eventual purchaser will need to consider how to reassure and possibly incentivise the management team in order to avoid future disaffection.
Administration: ensuring that a company’s statutory and tax affairs are in order.
Accounts: issues which typically arise include whether the accounting policies are in line with generally accepted practice; whether there any excessive provisions which could be released; and whether there are any excessive costs or non-commercial expenditure (including so-called “lifestyle” costs) which a purchaser would not wish to carry going forward. It might also be appropriate, if a formal disposal process is anticipated to be some way off, to review rather more sensitive areas such as marketing budgets and staffing levels.
Pensions: whether, in the event that the company has a pension scheme, there is a deficit or there are onerous post-retirement obligations
Restrictive articles of association: whether there are restrictive conditions attaching to any share sales, such as pre-emption rights.
Intellectual Property: whether the company owns patents, trademarks and other IP and has taken appropriate steps to protect them.
Existing contracts: whether there would be any problems in relation to contracts with third parties in the event of a change of ownership of the company’s shares. Indeed, are there written contracts in place with principal customers and suppliers.
Litigation: whether there is any threat of pending litigation, for example, from former employees/directors, and whether any provision has been made for such contingencies.
Taxation: whether the shareholders have implemented beneficial tax-planning measures, and whether they will qualify for existing statutory reliefs, an obvious example being Entrepreneurs’ Relief.
Staff communication: whether due consideration has been given to what should be disclosed to staff, how and at what stage in the process, in order to avoid damaging staff morale.
Structure of The Transaction
Prior to embarking on a formal disposal process, it is necessary to consider and agree shareholders’ preferences as the structure of any eventual transaction. In the overwhelming majority of cases, private company shareholders will elect to pursue a share sale rather than an asset sale, whereas purchasers usually prefer to acquire assets instead of shares. The principal advantages to sellers of undertaking a share sale revolve around the relinquishment of liabilities and a simpler, more beneficial tax treatment, thus they comprise vast majority of family company sales, barring exceptional reasons for pursuing an asset sale.
Valuation
It is of course axiomatic that every company is worth what someone will pay for it, and that will be different amounts to different purchasers. Thus, notwithstanding any initial theoretical thoughts, clearly the real test as to the valuation range which purchasers are prepared to pay will only become apparent once a marketing exercise has been undertaken and initial, indicative responses have been received.
However, it is very important to discuss and agree with an adviser what would constitute a minimum “walk away” price before undertaking a formal sale process so that shareholders’ expectations can be properly managed.