Acquisitions: Putting in the groundwork to maximise the yield

Failing to prepare for sale is preparing to take a low price, reports Barry McCall

Clear M&A documents: Buyers and sellers alike both benefit from good quality diligence materials, clear financial information and reports to give all parties confidence in the sale process.

Regardless of the item for sale, there are ways to maximise its value. Or at least to give the seller a better chance of getting what it’s worth.

After all, no one would dream of selling a halfway decent car without having it valeted first. And even in today’s overheated market, a deep clean and a lick of paint can make a significant difference to a house price.

The same is true for a business sale. It’s not a question of trying to pull the wool over anyone’s eyes. 

That’s nigh on impossible these days, and even if you did manage it the legal penalties make it a very unattractive proposition. What it does mean is addressing any issues which may detract from the value of the business being able to present it in the best possible light.

And that takes planning, according to Ronan Murray, EY Ireland partner and president of Cork Chamber of Commerce.

“It’s critical to spend the appropriate time preparing for an exit,” he says. “Early planning is key to a successful liquidity event. Our EY Transactions team works with clients to assess their exit or investment readiness and focus on the areas that will generate value from a buyer perspective.

Equally the seller should know what they want, be realistic and seek advice.” He points to some obvious areas of focus such as demonstrating recurring revenue in a business model, having longstanding customers and contracts and an ability to pinpoint margin growth.

“It’s important for the owner to reflect on their area of differentiation and be able to articulate the opportunity for any outside stakeholder,” said Ronan Murray. “Equally, one needs to evaluate tax considerations in advance of any sale process to preserve value.” 

A&L Goodbody Corporate and M&A partner Stephen Quinlivan emphasises the importance of those tax considerations.

“Obtaining good tax advice at an early stage is key,” he says. “Capital gains tax liabilities on the sale of Irish shares or assets can be significant, but good tax advice and structuring can help to mitigate or defer such tax liabilities significantly.” 

A&L Goodbody Corporate and M&A partner Stephen Quinlivan

Failure to address tax issues early on can store up future problems. “Attempting to implement complex tax structuring late in deal negotiations can be very problematic and can significantly delay completion of deals,” he explains.  

“We always advise sellers to go to market with their optimum tax structuring settled, so there are no late surprises for buyers. Clearly identifying and separating the assets you want to sell is also very important. So, get legal and tax advice at an early stage and carry out whatever pre-deal restructuring, or tax planning is required to house the assets you want to sell in an easily transferable corporate structure.” 

Insurance is also important. “These days we would also advise practically all sellers to consider warranty and indemnity insurance as a deal term for buyers at an early stage in the process,” says Quinlivan. “Such insurance can enable sellers to sell businesses with no – or at least minimised – post-completion risk for warranties and indemnities, which can give huge piece of mind to individual and family sellers in particular. The market for warranty and indemnity insurance in Ireland is now very sophisticated, with a number of local specialist brokers operating in the Irish market. We have seen such insurance used on deals where the consideration is a low as €1 million.” 

Maximising the price achieved is going to be top of mind for most sellers. Murray advises them to look at it from the buyer’s point of view.

“Take time to challenge the robustness of the value story,” he says. “What is the clear value growth story and what are the understandable drivers? Are the projections consistent with the market? It’s also important to be able to demonstrate a proven management track record.”

Identifying and extracting hidden value is also important. “Are there operational improvements that can maximise EBITDA (earnings before interest, tax, depreciation and amortisation)? A key function of value is what EBITDA a multiple is applied to and therefore it’s important to have clarity on what the maintainable EBITDA number is. It’s important to understand and challenge EBITDA including run rate versus prior year, together with potential one-off adjustments. Non-recurring items if any, sustainability, deliverability and visibility will also be key areas of focus prior to going to market.” 

There is a marketing element as well, according to Quinlivan.

“Good preparation for sale is key when it comes to securing the best price,” he notes. “There are some excellent local and international corporate finance firms operating in the Irish market who will be able to offer excellent advice in this regard. Producing strong teaser documents and information memorandums which clearly promote the existing performance and future potential of your business will help achieve the best price.

“Preparation for due diligence by buyers is also very important, so sellers should work with their legal, tax and financial advisers at an early stage to make sure they have all required information for a sales process that a buyer is likely to want to see. Good quality diligence materials will engender confidence in bidders on how the business is being run and will again help procure better bids,” said Quinlivan.

Murray agrees: “It’s important to have quality financial information readily available should there likely be a sale process which will require diligence from the buyer’s side. Often, it’s useful to complete a vendor due diligence or commercial due diligence exercise in advance. So, that when the sale process is advanced, these reports can be provided to the interested party.

“This should make the diligence experience more confirmatory and less exploratory which in turn will ensure a more stable ‘business as usual’ position for the seller and their customers during the sale process.” 

Another question which business owners must deal with is how they find potential buyers for their business. It’s not as simple as putting an ad up on Done Deal or in the property pages of a prominent newspaper. Proclaiming an intention to sell too loudly can have unintended consequences including shaking the confidence of suppliers and customers and undermining staff morale.

Quinlivan recommends appointing a reputable corporate finance firm to assist in finding and approaching prospective buyers. “While sellers may have a number of buyers or interested parties in mind, a good corporate finance firm will have a much larger network of potential buyers, and in particular will be able to approach the private equity sector,” he points out.

Having done all the preparations and identified potential buyers, it’s then a matter of getting the transaction done as quickly and smoothly as possible. Murray advises on a number of steps which can help to deliver that objective.

“Ensure a strong project manager is in place to bring all the work streams together in a coordinated way. It’s important to agree a timeline that reflects the level of diligence required. Set aside time each week to engage constructively in the process.

“Much of the information is exchanged within a virtual data room so having that information prepared in advance will assist with an efficient process. Consider preparing a vendor due diligence or customer due diligence pack prior to going to market. It can then be shared with an interested party at an appropriate time.”