When selling up, the first hurdle to cross is timing and a common mistake seen by Samantha Chaney, corporate partner at law firm VWV, is sellers not preparing early or sufficiently enough.
In her view, those looking to sell a business, in the next three years, should: ‘start tying up loose ends that may prevent or affect the sale. This includes making sure all paperwork is in good order. Once the sale is agreed, the buyer will be carrying out a due diligence exercise and will request various documents as evidence that the business is worth what they have offered to pay for it.’
Likewise, Dominic Watson, a consultant at broker Myers La Roche, thinks owners can never begin the exit planning process too early – ‘they frequently get so immersed in the day-to-day running of their enterprises that it can be difficult for them to see the wood for the trees.’ He thinks: ‘The exit planning process should help an owner to stand back and look objectively at their business, their role in it and where it is going.’ But some go wrong because they forget to look at it from a different perspective – that of a buyer.
Watson suggests that procrastinating and allowing a practice to run down can decimate its value: ‘Frequently, I see owners dither and end up working for another two years and walking away with less money than if they had sold earlier. In essence they sacrificed two years of their lives to their businesses for less than no return.’
Good organisation is a key trait of successful sale. As Chaney puts it: ‘The transactions that are most likely to complete smoothly are those that have been dealt with in an organised and efficient manner throughout the whole process.’ She recommends the use of an online data room ‘to facilitate the tracking and exchange of information’, to save time when preparing the documents that will need to be provided to the buyer on completion of the sale.
It’s all about value
Practices are, says Watson, valued over a three-year period, with slightly more weight given to the most recent year’s figures. Because of this, he says: ‘To ensure maximum sales value it is important to ensure that the financial performance – both revenue and profits – are as high as possible and ideally on a growth curve in the two or three years prior to sale.’
But ultimately, a practice is only worth what someone is prepared to pay. However, a potential acquirer may already own a practice in the vicinity. In this situation, it is possible the buyer may be prepared to pay a premium since they may, as Watson outlines, want to amalgamate the two businesses into a single highly profitable ‘super practice’. Alternatively, a local group ‘may be prepared to pay a premium to buy a neighbouring practice to keep out a new proactive competitor.’
The point he is making is that when setting a price, it is important to have an eye on the strategic, realistic, value of the business. But sellers should not be greedy; there is a finite point to which buyers will stretch.
Another concern is owners trying to sell a business themselves, often via online platforms. However, while it is an option, it is not one that Watson would recommend. He says that ‘a quick online trawl will reveal that only the smallest and least profitable practices tend to take this budget route. Often it is because the owners have not been happy with a valuation provided by a professional valuer and seek to ask a higher – often unrealistic price.’
More pitfalls
On to advisors, and a landmine waiting to detonate is either a party choosing to engage an advisor through misplaced historic loyalty, or a recommendation from a friend. ‘Some advisors,’ says Watson, ‘provide such a poor and unresponsive service that it can turn the whole transaction acrimonious, making it a hellish experience or, on some occasions, causing the deal to fall through with both parties having to pay legal fees with nothing to show for them.’
Chaney agrees, commenting: ‘The right firm for the transaction may not always be the cheapest and instructing advisers to carry out a limited scope of work to reduce costs can often be false economy.’
By way of example, Mark Jarvis, Chaney’s colleague and a partner and healthcare solicitor at VWV, notes that where a business involves an NHS contract such as a GOS contract, ‘it is important to obtain advice from a specialist who is able to advise on the nuances of the sector specific requirements.’ GOS contracts, for example, are not assignable and where these are held by individuals the most common method of transfer is by using what is known as ‘the partnership route’. Jarvis explains: ‘The NHS contract is transferred by adding or removing partners (adding the acquirer and removing the transferor) over a short transition period and needs to be carefully documented with relevant notices being obtained by the NHS commissioners.’ There’s a similar process for companies.
Fundamentally, Chaney thinks it ‘beneficial to instruct solicitors and obtain advice early on in the process, even if the actual bulk of the legal work may take place in the future.’ She sees the value of having advisers review a business and advising on issues that should be addressed before the sales process starts.
- Adam Bernstein is is a freelance financial journalist