Going, going, gone

Nitin Joshi: A strategic purchaser can achieve value by combining their business with yours

Nearly all of us who own or have owned businesses at one time or another think of selling out and enjoying the proceeds of years of hard work. Obviously, how to go about doing this is something most of us know nothing about.

You could sell to the man you met in the pub last night. You could put your business on a brokers’ list and hope. Or you could engage a mergers and acquisitions adviser to conduct a bespoke sales process – ­ an option with three major advantages.

A specialist will fully test the market, meaning offers are likely to be the best available on the day. Part of their expertise is in finding the best purchaser.

The strategic purchaser can achieve extra value by combining their business with yours. The skill is to identify such opportunities and ensure the purchaser knows they must share some of this value with you. Specialists also will run a
controlled auction.

ChannelMoney’s strategic partner, Tangible Securities, is the only such organisation in the City that works solely for vendors. It knows how to assess business value and disposal strategy.

At the smaller end of the market, transactions range from £5m to £30m. At this size, it says, the nature of each deal differs and personalities play a large part.

Initially, an information memorandum (IM) is produced that fully describes, and sells, your company and a list of potential purchasers is compiled.

Then a pathfinder letter is prepared, giving an anonymous outline of your business. With careful drafting, even close competitors often fail to correctly identify the business for sale.

This is sent with a confidentiality agreement to targeted purchasers. If interested they sign and return it, then receive an IM with a covering letter describing the rest of the process. In essence, an indication of value will be sought based on the IM.

Visits are arranged and offers refined. Eventually, final offers are presented.
Because small companies can be worth varying sums, the difference between the highest and the lowest offer can be a ratio of two to one.

A typical engagement fee might be £15,000 to £25,000, paid out from the sale proceeds at three per cent to five per cent, depending on size and complexity.

Next year will see continuing consolidation and acquisitions. Many of those who founded their businesses some 25 years ago – ­ the length of my time so far in the channel ­ – will want to exit.

Now is a good time to plan ahead.

Nitin Joshi is co-founder of one-stop credit and corporate finance provider for the UK channel, ChannelMoney.