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Selling up?

1 Dec 08

Catherine Feechan looks at exit strategies and the credit crunch

by Catherine Feechan

Over recent months, the words “credit crunch” have become too familiar to us all. We have seen the financial headlines in the media, felt the acute effects of that turmoil on the financial markets around the globe and seen the impact on governments, global financial institutions and now individual consumers.

As the credit crunch really bites, people who want to sell their businesses are feeling the squeeze like everyone else. 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 now become much more difficult to fund with banks rigorously scrutinising gearing, security levels and risk profiles. Consequently, many potential sellers have to focus on preparing their businesses for a trade sale.

In a difficult market, sellers must make their business as attractive to potential buyers as they possibly can. Simple “grooming” can enhance a buyer’s view of the business – for example, making sure timely and accurate management information is available, keeping premises looking clean and smart and ensuring that the website is fully operational and always up to date.

Potential purchasers particularly dislike surprises, and other longer term actions that can improve sale prospects include disposing of non-essential assets, improving the quality of staff and reducing or removing bad debts. Raising the market profile of the business and its brand can also be extremely useful in the period prior to a sale, as a positive market profile can significantly enhance the perceived value of the company. A positive market and brand reputation will also help alert more potential buyers to its existence.

In the current economic climate, many sectors are changing rapidly and sellers need to be aware of shifts in their market sectors in order to assess the appropriate time for a sale to ensure they get maximum valuation.

For example you may have decided to consider selling in 12 months. If the market is consolidating rapidly, however, it may be prudent to sell sooner rather than waiting to find that the market has moved on and that there are limited consolidation opportunities remaining.

Value is key for all sellers. 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 buyer is willing to pay for it”.

Sellers need to invest as much time and energy 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 an effective and workable strategy. Expert legal and financial advisers will be able to assist in identifying strengths and weaknesses within the business and will help build on those core strengths that generate additional value and minimise exposure to those areas that make the business look weaker to potential purchasers.

A well groomed business, appropriately advised, should make what is the most important deal many business owners will ever do in their lives a less difficult and more rewarding process.

Completing the deal in a difficult funding climate means that in many cases sellers will have to accept that the price will reflect a lower valuation. During the course of last year there was a significant slow down in sales of private companies as many purchasers took the view that 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 that lower prices are here to stay, and hopefully this will increase exit opportunities.


The difficulties in obtaining funding are also influencing deal structures with earn-outs, deferred consideration and share swaps becoming increasingly common.

Not all is doom and gloom however, as 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 the financial performance of the business during the downturn is the best way forward.

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