Handing over the reins

After many heart-wrenching conversations and sleepless nights, you may have finally decided to sell your business. Or, perhaps, time has caught up with you, and you want to ensure the business you have worked hard to build up continues to prosper when you retire.

Early planning is crucial. This may seem obvious, but it is at this first hurdle that most people stumble. Most brokers are owner-managed businesses and the owners are invariably tied up in the day-to-day running of things.

Planning for retirement and/or a possible sale can seem time-consuming and is often a low priority. It is important however, to strike a balance between managing the current issues facing the business and looking after its future.

If time and circumstances permit, drawing up a practical plan has a number of benefits. It means an eventual sale is less likely to be rushed, there will be a better chance of successfully overcoming the obstacles that present themselves along the way and, ultimately, there is a greater likelihood of maximising business value. From the planning stage to a completed sale, a minimum of three years should ideally be allowed.

With a time frame in mind, start thinking about those people that will be most affected by your plans for sale or succession. Brokers are primarily owner-managed businesses, and may well have historically been a partnership or have a small shareholder base. In some cases, broker shareholdings can be quite disparate, including widows and orphans of previous shareholders who have passed away. You must consider all such parties and their expectations before a sale.

Family members, as well as your employees, can have a significant impact on your choice of exit strategy. Involving certain key colleagues early in the process - perhaps when you start talking to advisers - is more likely to achieve buy-in. Speaking to family members and possibly key managers could also reveal a willing and able successor to take the reins.

If this is a viable option, you then need to consider how exactly to go about preparing them to step up. Think carefully about just how many people you include in the early stages; casting the net too wide could result in the market - and your clients - hearing of your plans before you want them to.

Deciding on the right time to inform other employees of your plans requires judgement. Early involvement, when things are less certain, risks unsettling them and disrupting business. On the other hand, leaving it too late is less likely to achieve overall buy-in and could mean losing more people than you might expect.

Attracting a potential buyer

It is critical to ensure the brokerage is in a form that will make it an attractive proposition for a purchaser. A number of structural issues need to be addressed prior to deciding which route of sale to take. Speak to your bank manager to see what he would be looking for - financial covenants, changes to financial operational structure or increases in monthly cash flow - if the business needed to borrow money.

Owners may also need to consider reorganisation for tax efficiency's sake. Three years of audited financial accounts are often required if someone is buying into or investing in a business. Ensure that the profits reflect the true performance of the business and that the assets are those that only relate to trading.

It is also essential to consider whether you have the right people on board to make the sale a success. Can you involve individuals with the board in a way that will allow them to step up at a later point or does an outsider need to be brought in? Do you need to make radical changes to your board now? How long will it take to find the right people and for them to be in place? Are the key business producers adequately remunerated and, as far as possible, locked into the business?

Value

If you have not already done so, at the valuation stage third-party help should certainly be sought. Consultants can provide the objective viewpoint - based on their experience of transactions - that family, friends and colleagues perhaps cannot. More importantly, with third-party advisers on board, you can free up time to continue running the business.

The process has a number of steps, but the key consideration is to be clear about your financials and forecasts - they have to be achievable.

Look at valuations from both an historical and forecast (budget) perspective.

The usual starting point is the trading values of listed companies, particularly turnover, earnings before interest and tax and price earnings ratios.

However, comparisons with the public market can be troublesome. A private company is automatically discounted between 40% and 60% because of the illiquidity of the shares. The core concern is whether the business is sufficiently profitable - a valuation as a multiple of sustainable profits.

Adjusted profits must demonstrate sustainability, one year is not enough.

Buyers do look at brokerage multiples but are more likely to consider how well a business is being run and will adjust the profit multiple accordingly.

If you are confident about your forecasts and growth prospects, then a discounted cash-flow analysis will be the best valuation methodology to reflect growth, provided you can produce defensible cash-flow forecasts for at least a three- to five- year period.

It is likely that the buyer will want to have an earn-out so that he does not have to pay for the growth until it is achieved. Be careful not to use just one valuation methodology, as a buyer will have determined a range of values when arriving at an offer price. Of course, in the end, your business is only worth what someone is willing to pay for it. That might not be as simple as a profit multiple; there may be other reasons for buying, and you should consider where the value lies in your business.

Exit route

The various exit routes can be grouped into two categories: an external buyer (trade or equity); or an internal buyer (management or family).

Both types of transactions can be conducted on a phased or earn-out basis (possibly including an earn-out). This may be because of a lack of available finance to the purchaser or because the business requires continued involvement of the vendors. Each route has different issues and results in varying amounts of equity being retained. The common feature, unfortunately, is that they are time-consuming. The key is to identify all opportunities upfront and weigh up the option that is best for you. There is neither a right or wrong answer - nor a 'cookie cutter' approach.

In the broker sector, it is traditionally difficult to bring in an external financial buyer to buy you out, as a deep understanding of the market is required. Public listings are more difficult as few brokers are large enough to justify the necessary corporate governance, although any brokerage could seek to implement this within a three-year time frame.

Listings on a recognised exchange such as the Alternative Investment Market are also not necessarily a good option for a full exit - rather, they can provide development capital for a business ready to move to the next stage of its growth (and ultimate sale). Trade sales and management buyouts, therefore, are the most common exit routes.

A trade buyer, in theory, is usually willing to pay more than a financial buyer as they will recognise synergies - and thus ways of enhancing profit from the combined business. There will be certain central costs that will not be necessary going forward, as they represent duplication of resource.

There is also the possibility of cross-selling new products between the client bases. In a trade sale there is always likely to be a human cost - usually in the form of redundancies - that must also be considered.

The fit between your company's culture and that of your purchaser's is important. The stronger this is, the smoother the transition period following the sale will be.

In many brokerages the management is the key producer and is essential for making sure the business runs efficiently and maintains the desired income levels. In this sense, they are often best placed to buy out your shares and take the business forward. The traditional avenues for raising funds to do so are through venture capital houses and/or a bank, with some additional personal cash investment from the acquirers as the 'hurt factor'.

Currently, there is plenty of money looking to be invested in the broker market, but only a small percentage of the market is right for venture-capital investment. Venture capitalists look for solid businesses, with a sustainable profit stream, that are well run and enjoy a good name.

It should be remembered that, ultimately, a venture capitalist will be looking for its own exit route and this will, in all probability, be a trade sale or possibly a listing if the company is sufficiently large.

Due diligence

Regardless of the route to sale, at the due-diligence stage, prospective buyers will be looking to turn over every stone to ensure nothing exists that will cause the business not to run properly after the transaction.

The golden rule of due diligence is, again, to be prepared. All numbers must be traceable and all papers in order. The process can take just a matter of weeks, but will often extend into a month or more. Lots of questions will be asked and the quicker you can provide the answers, the smoother the procedure will be. A positive outcome of Financial Services Authority regulation should be that brokers are no strangers to such documentation and procedures.

At the point of sale, any director who is a major shareholder and integral to the business will be asked to remain in their role post-sale for a consultancy period, or where the transaction is phased over the period of the earn-out. This handover can last for anything from six months to four years. The buyer's offer is likely to structure deferred payment accordingly, thus, they have a vested interest in staying with the company and helping it enter its next stage of development.

Brokers seeking to capitalise on an increasingly acquisitive market have got a lot of work on their hands. Selling a business can be a painful, demanding process, so it is never too early to start thinking about an exit. The old adage of 'no pain, no gain' couldn't be more valid, and preparation is a vital metaphoric aspirin in reducing that pain.

- Mark Grice, Partner, Mazars

TIMESCALE FOR SUCCESSION

For someone wishing to retire in three years' time, putting together a robust plan and setting a realistic timescale now allows vital flexibility in the long term:

- Up to six months - draft retirement plan

How much money you will need and what you want to do with it? If you have a key client-contact role, you may not be able to move out that quickly as the purchaser may require a handover period to secure the client base.

- From six months to end of year one - speak to advisers

Make sure they have the appropriate experience and knowledge to smooth the process.

- Years two and three - implementation of your succession plan/exit

All transactions take longer to complete than people initially expect. Early preparation allows you to cope better with the unexpected.