Biggart Baillie Solicitors

Selling Up? Exit Strategies and the Credit Crunch

Monday, October 13, 2008

by Derek Ellery

The credit crunch is biting and people who want to sell their businesses are like everyone else feeling the squeeze.  Traditionally management buyouts (“MBOs”) afforded a popular exit route for many owners who were happy to see their life’s work continued by familiar faces.  However, MBOs have become more difficult to fund with banks looking more closely at gearing and security levels. Increasingly therefore, sellers are having to focus on preparing their businesses for a trade sale.

In a difficult marketplace, sellers need to make their business as attractive to buyers as possible.  Simple “grooming” can enhance a buyer's view of the business. For example, making sure that timely and accurate management information is available, keeping premises looking clean and smart and ensuring that the website is always up to date and fully operational.  Other “longer term” actions that can improve sale prospects include improving quality of staff, getting rid of non-essential assets and dealing with bad debts. Raising the profile of the business can also be extremely useful in the period prior a sale. A positive profile will enhance the perceived value of the company and in addition, will alert more potential buyers to its existence. 

In the current economic climate, many sectors are changing fast. Sellers need to be aware of market shifts in their sectors in order to assess the appropriate time for a sale to ensure they get the maximum valuation.  For example, you may have decided to look at selling in a  year's time. However, if consolidation is occurring rapidly in your sector, it may be prudent to sell sooner rather than later. Otherwise you might find that the market has moved on and that there are limited consolidation opportunities left.

Sellers need to invest as much time and effort in working on their exit strategy as they do on running their business.  Planning is vital and sellers consistently underestimate the effort needed to dispose of their businesses for the optimum price.  Appointing the right advisers is key in developing a strategy. Lawyers and accountants who are expert in this area will be able to assist in identifying strength and weaknesses within the business.  They can help to build on what gives the business additional value and minimise exposure to areas which make the business look weaker to potential purchasers. Purchasers particularly dislike surprises and a well groomed business which is appropriately advised should make what is the most important deal many will ever do in their lives, a less difficult process.

For all sellers value is key.  Although valuation is an inexact science, sellers should look to their advisers to provide them with an indication of a realistic value.  Inevitably, there is always something to be said for the old adage that something is only worth what a purchaser is willing to pay for it.  In many cases, in order to get the deal done in a difficult funding climate, sellers will have to accept that the price is a lower valuation.  During the course of last year, there was a significant slow down in sales of private companies. Many purchasers were of the view that the markets would continue to fall while sellers believed they would recover shortly – perception is everything!  Difficult funding conditions have now been with us for sufficiently long that people are starting to accept lower prices are here to stay and hopefully this will increase exit opportunities.  The difficulties in obtaining funding are also impacting on deal structure with earn outs, deferred consideration and share swaps becoming more popular.

Not all is doom and gloom, opportunities for exit are still there but getting a deal done is definitely more challenging.  A key question for all those considering a sale in the present climate is ‘Do I need to do it now?’ – if not, then working on improving financial performance during the downturn is the way forward.

For more information on selling your business, please contact Derek Ellery han on 0141 228 8000 or dellery@biggartbaillie.co.uk.