The hard sell

Underestimating just how tough the process of selling a business can be is common. Feeling tired, that it seems like weeks since your last decent night's sleep and that this has definitely been the most stressful period of one's whole business life - despite having been through the mill a bit over the past thirty years - is also common.

These reflections are typical of someone who thought selling their broking business, carefully developed over many years, would not be all that difficult - after all, good deals are happening all the time aren't they? Regrettably perhaps, it seldom is that easy.

Private sale transactions are normally entirely life-changing events for selling shareholders and senior management. Two or three decades of independence are over - usually overnight - so how to find the best deal with the right party? Having found the seemingly ideal new owner and negotiated the perfect deal, how can one be sure it will all actually happen as carefully planned? There can only be one real chance to get everything right on a sale, so how can one be sure to achieve this?

Usually it seems that good businesses should be in a strong negotiating position and this is partly true. Perhaps, however, it is only half the story, as accidents do regularly happen. Vendors where prospective deals have fallen away are unlikely to be open about how or why, given the potential damage to their business if all came out in the open (see box for examples).

However, all of these accidents could probably have been avoided. If a deal fails, the vendor will always be vulnerable as the buyer can usually act as if nothing had ever happened. If a prospective deal begins to be discussed in the market but then fails, the buyer can always indicate it "just could not get happy with the due diligence". The market will always naturally assume the issues were with the seller.

That is probably enough on the negative front. Being totally positive time spent in preparation is rarely wasted. It is probably never too early to be thinking about your exit, from day one of a new business start-up it is a good idea to start thinking about the eventual exit - even a decade or two, or even three, ahead. In the early stages maybe the basic rule is to develop the business in such a way that it does not become overly dependent on the founder or founders - even if this was a major reason to set up afresh in the first place. In later stages of business life the questions inevitably become much more complex but early preparation and advice will deliver solutions.

Critical timing

It is a cliche that at an antiques auction a successful buyer hopefully emerges but his price is set by the underbidder. With this in mind, it is crucial that well in advance of any business sale process, the vendor must commit time to working out who all the possible buyers might be, rather than who the ideal purchaser is. One strong bidder is not enough, but two or more can usually make a party.

Potential vendors also worry about their employees and their reaction to a proposed sale and this is usually perfectly reasonable. However, it is not unusual to find the middle management quite supportive of a deal, once it has been explained to them. Real opportunities may arise and career progression plans can develop that simply may not have existed before. It is actually more likely that plans need to be made to tie in the senior staff with shorter career time horizons.

As with many things in life, timing is of course critical. Advisers are continuously asked about the right time to sell and the questions affecting this key decision but this will always be something of a balancing act.

In terms of market conditions, it is usually hard - as most market participants will know - to call the market. Inevitably, once it is clear that business returns are at a peak then they will not be once deal terms are negotiated, perhaps three or more months later.

Vendors inevitably need also to think hard about their own personal timing constraints and requirements. Some may not have fully thought through how long it may actually take to move on from their own business. Typically it may take six to nine months from commencement to completion of a deal, followed by at least a two year earn-out period and then a further few months for payment of final consideration. Around three years may be the minimum normal period for complete 'extraction'.

Developing the optimal degree of competitive interest may well also require careful timing and some patience. The more specialised a business, the more important it is that the appetites of at least a small group of buyers are whetted at the same time. One of our clients was just such a specialist business with one clear logical buyer, however, only when we identified that another strategic buyer had gained sufficient financial strength to contemplate the acquisition did we advise our client to start a sale process. It was the latter party that was ultimately the successful buyer.

Healthy prospects

For UK brokers market prospects remain healthy. There is some evidence of the rule of unintended consequences applying in the new regulated arena, where it had been argued that the increased costs of compliance would force many out of the industry. At IMAS we have long argued that since the cost of compliance is not an optional expense, these costs have been passed on to consumers, protecting industry margins. In fact, Financial Services Authority regulation requirements have probably increased the barriers to new entrants, underpinning the values of existing market participants.

Additionally, while rates may have softened, putting pressure on commission income, certain insurers have been determined to secure or improve their distribution by becoming buyers themselves, or have provided attractive financing to acquisitive brokers.

As a broker you will be a natural negotiator and so you probably will not have too much difficulty being confident and feeling you are in control. More is required, however, in that you have to be sure you are talking to the right suitors - and only to them. We find that what really matters is the opportunity to talk to the most attracted three parties, and not necessarily the full 13 that have expressed some interest, nor even the three close competitors that have regularly been in touch in the past, waiting for their opportunity to move.

Vendors who encourage their businesses to be marketed too widely will almost certainly be distracted from continuing to focus on pushing their businesses forward at a critical time when setbacks could prove very costly. They are also of course running a much greater risk of breaching confidentiality, which may also risk the sale process and their business itself. Perceptions of business quality may also suffer as some ex-participants will confirm that they looked but ultimately did not pursue the opportunity. Critically, once it is well known in the market that a business is available, it may become impossible to walk away from a deal and retain independence - so a bad deal may be the eventual outcome.

Alternatively, simply flirting with the limited number that may have over time flattered you with a direct approach also has unforeseen hazards. Such buyers may well be in general discussion with a wide range of possible targets and are probably opportunistic and primarily price driven. They are also unlikely to put full value on all parts of your business, as only part may really interest them. Further they may well have already gained much experience in doing deals which suit them and they will see little reason to break this habit.

Completing the deal

The ideal buyer in terms of both fit and price may well be someone who has not approached you. One of the highest exit multiples IMAS has helped a client achieve was paid by a buyer they had previously never heard of and which had never previously made an acquisition but they matched each other perfectly. The right adviser will enable you to look further and fully at your options and then negotiate from real strength - without the whole market looking at you.

Of course it will not even be all over once the deal is completed, as an earn-out will be most likely. Many times, vendors fail simply to realise that things will inevitably change after a deal. Obvious, maybe, but seeing your creation be slowly dismantled after many years' work will not be easy and fighting the change will make all parties unhappy. The rapid journey from boss to hired hand takes adjustment but accepting that your own well meant advice may well not be listened to, is a critical bridge to cross.

The moral is, while careful planning and advice may not eliminate your sleepless nights it will dramatically reduce them. Fail to prepare and it will be a lot more than sleep you may be losing.

POTENTIAL DAMAGE

- Management disconnect: CEO from favoured buyer holds initial meeting with target's lower tier management, ending in a slanging match.

- Idle talk: Visit from due diligence advisers, explaining that their client is buying the business. Before they depart, senior staff are already demanding explanations.

- Strategy rethink: Main board of major buyer changes tack - after unit CEO has negotiated a suitable purchase - and then lets that CEO go (and the target too).

- Money problems: Even major buyers may find the equity or debt acquisition funding they assumed would be available is just not there when needed.

- Nickels and dimes: New issues and spurious problems arise at the late stages of negotiations, leading to demands for price reductions.

- Two timing: Buyer negotiates almost to contract, only to pull out in favour of another opportunity, being negotiated simultaneously.

- Gazundering: New and onerous transaction or settlement conditions arise at or just before the final contract meeting.

- Chicken counting: Evening celebrations are held in advance of deal execution planned for the following day, which never happened.