How to correctly prepare to sell your business

All entrepreneurs are physiologically called upon to think about their own business succession. Whether inside or outside the company, succession is a particularly important issue for Swiss companies. The importance of this issue for entrepreneurs is clearly illustrated by the data on mergers and acquisitions of companies.

According to IMAA Insititute data, more than 14.400 mergers and acquisitions with a known value of almost 1.300 billion EUR have been announced in Switzerland since 1991. Due to the changing economic and sociological scenarios, 2008 was a record year in terms of number of transactions, with more than 1.000 sales transactions of the company or its branches announced.

Whether or not to sell the company, and when to do so, are some of the most important decisions that an entrepreneur has to undertake. Some entrepreneurs start a business with a clear business exit strategy, while others end up considering this conclusion because they don't know other answers to the question "What happens now?".

A business exit strategy is the strategic plan of an entrepreneur to sell his property in a company to investors or to another company. In this way, an entrepreneur has the opportunity to reduce or liquidate his stake in a company and, if the company is successful, make a substantial profit. If the business is unsuccessful, an exit strategy or plan allows the entrepreneur to limit losses.

Realising the exit strategy and correctly preparing for the sale of the company is a complex process, which can take even a few years to complete, with advantageous conditions for both parties. Indeed, the success of a company sale can be decisively influenced in the preparation.

The better the planning, the greater the chances of a profitable and successful transaction.

The sales preparation process requires time, specific know-how and internal management skills, whose approach will decisively influence the transaction. The preparation of a corporate sale simultaneously involves "hard" factors, which refer to the corporate characteristics (such as, for example, the legal and organisational structures, the composition of the Management Team, the corporate strategy policies) and "soft" factors, which refer to the human side of the property, inherent to the emotional sphere of the owner, the situation of the real estate, up to the tax and inheritance optimisation. All these factors must be coordinated in the best possible way in order to ensure the success of the sale. There are many factors to take into account when preparing for the sale of a company or its branches, but there are mainly three aspects to consider.

Timing

Identifying when it is best to sell the company is a key aspect that takes into account both aspects closely related to the company, such as the life cycle of the company and its growth prospects, as well as aspects related to ownership: the individual future plans of the entrepreneur and/or of its partners, the personal situation (age and health of the entrepreneur), up to succession plans. All these factors can influence the timing positively or negatively, leading to influence the assessment of the company. A positive timing is characterized by the constant growth of the company and the development of the company's results and by a positive sector and market evolution. On the contrary, a negative timing, forced by external or internal problems of the company, can lead to under-budget results.

Buyer

The succession of a company varies greatly depending on the objectives of the buyer and seller. There are mainly two main cases, which depend on the nature of the buyer, whether internal or external to the company.

Family Buy Out (FBO) or Management Buy Out (MBO)

In this case, the buyer is internal to the company: whether he is a descendant of the entrepreneur (Family Buy out) or an internal manager of the company (even if outside the family circle), it is necessary to keep under control the emotionality, correctly assessing the profile of the candidates and, above all, their ability to finance. While this solution is more likely to ensure the continuity of strategic direction and skills typical of the company, it is also very delicate: internal conflicts, as well as family or hierarchical relationships, can put a strain on the outcome of the transaction. The role of an external consultant, in this case, is essential to supervise the transaction and avoid that it ends up with a price lower than expected.

Management Buy In (MBI) o Strategic and financial buyers

The Management Buy In or the intervention of third-party buyers, outside the company, requires a completely different approach. In this case, in fact, the role of the M&A consultant is crucial in identifying and searching for possible external investors, verifying their reliability, motivation to buy and evaluating their technical and managerial skills. Unlike the internal buyer, in fact, the transmission of knowledge is not ensured in the case of an external acquisition, but allowing the possibility to innovate processes or business skills.

Evaluation and financing

Calculating the value of the company is the most delicate stage in a company sale. The majority of entrepreneurs assign an excessive value to their business, justifying their assessment with:

  • Important historical value of the company: a long-standing company that has been recognised on the market for a long time
  • Trademarks, patents and valuable technologies: the possession of a registered trademark and exclusive know-how
  • Future potential and innovation capacity: significant investment in research and development or innovative methodologies
  • Long-term customer relationships: recurring and loyal customers with whom a relationship of trust has been established

However, the buyer is not always willing to recognise the same assessment as the seller, but rather focuses on the risks associated with the negotiation. These circumstances usually give rise to conflicts of perspectives and views. Different expectations in terms of value and price can be addressed:

  • Earn-out solutions: in this case, the buyer pays an additional price calculated on the yield, in addition to the fixed price whose success criteria and the calculation of the gain are fixed on the purchase contract
  • The seller participates again with the new owners (up to about 30% realistic)
  • Seller loan: the loan is a loan granted by the seller to the buyer, regulated by shareholders' agreements

In any case, it is in the interest of all parties involved that the negotiations be concluded on the basis of the most real value possible. Although the methods for calculating the value of the company are heterogeneous and do not follow precise and standardised procedures, it is essential to choose the most suitable method linked to the needs of the company. For this reason, the role of an M&A consultant is essential in order not to obtain substantial price variations with respect to the real value. The price obtained by the seller is - regardless of all valuation methods - always dependent on the type of transaction reached: in the case of an FBO, for example, the price obtained will be lower than the purchase by a strategic investor outside the company, making a lower price with "discount".

Fidinam & Ramus

Fidinam & Ramus SA, born from the collaboration between Fidinam Group Holding SA (Lugano) and Ramus & Company AG (Zürich), has a long and proven experience in the field of extraordinary finance transactions and in activities related to the research and implementation of strategic alliances. Fidinam & Ramus is able to assist the customer in the preparation and sale of the company, ensuring preferential access to domestic and foreign investors, thanks to a global network.

Andrea Nessi
Managing Partner Fidinam & Ramus SA
andrea.nessi@fidinam.com

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