Selling a business in troubled times

Selling a business in the best of circumstances takes time and preparation. With the uncertainties brought about by the Covid-19 pandemic – and the seismic economic, social and technological disruption it has triggered – this is even more the case.

But despite the current uncertainty, at Cazenove Capital we're seeing a great deal of activity among owners readying for sales and other forms of exit.

Prospects have greatly improved – for some

As with publicly quoted companies, privately-owned businesses are faring very differently according to their sector and their customer base.

Businesses that benefit from the lockdown, in terms of offering or using technologies that deliver goods or services to consumers’ homes, are in many cases enjoying a surge in sales. Healthcare, biotech and other related industries are also benefiting. By contrast the abrupt shutdown in commercial and leisure travel, as well as end to commuting and office attendance in many major cities, has caused parts of the hospitality sector to suffer a cataclysmic drop in revenue.

We know of one business in the healthcare sector, for example, whose products are distributed mainly online, where revenues have increased over the past 12 months to the extent that its valuation has almost doubled in the period. That owner has an incentive to bring forward their exit plans while circumstances are so favourable.

Clearly, businesses in sectors hardest-hit by public lockdowns have suffered proportionately. Valuing a travel firm, for example – whose revenues may well recover strongly in coming months but which are currently extremely depressed – is currently tricky. Investors would understandably be cautious.

Tax considerations and other issues

Tax considerations may also play a part in motivating business owners to move ahead with exit plans sooner rather than later. While the UK Chancellor has yet to announce any legislation which may adversely affect business owners, a recent review of capital gains tax suggests this may be an area of future policy action.

And of course individuals and families have their own personal reasons that play a part in determining the ideal time for a sale. This is why at Cazenove Capital we believe the early involvement of wealth planners – who can draw together a complete picture of a planned sale and its full implications – is likely to result in the best possible outcomes.

How Covid-19 is impacting certain business sales

Cazenove Capital works closely with a large network of lawyers, financiers, advisers and other professionals in the course of providing services to business owners – particularly in the period running up to an exit.

Here Edward Lane of solicitors Harbottle & Lewis LLP provides his insights into how the pandemic is impacting transactions, including some recent examples.

Uncertainty is anathema to investment, and those involved in transactions have had to be fleet of foot and flexible, writes Edward Lane. Last year we advised on a sale in which the parties agreed to switch from a fixed price to one with an earn-out component. This helped to apportion the risk of doing the deal between buyer and seller.

On a joint venture transaction, the parties decided to include a walk-away right in the event that the pandemic made it uneconomical to proceed before the first investment had been made.

Other deals have not seen a change in structure but have taken longer to complete. It has largely depended on the buyer’s perception of risk and how willing the seller is to bear some of that risk in order to get the deal done.

The dynamics of any deal depend on the interplay of risk and reward. Sellers must be satisfied that the valuation represents a fair return for their time and effort in growing the business. They will also be keen to avoid any legacy liability for the business. Buyers have to be comfortable that the price paid reflects future potential returns but also the level of risk that it is taking on. The reverberations of the pandemic throughout the economy have led in many cases to an unbridgeable gap. Deals are also harder to do as parties have to conduct meetings remotely and key aspects of due diligence, such as site visits, are more challenging.

Deals are harder to do as parties have to conduct meetings remotely and site visits are more challenging.

Preparation and careful planning can help alleviate all of the above and bridge the gap. Lateral thinking is also important (for instance, site visits have been conducted by drone).

If it’s broke, fix it – the lawyer's view on preparing for an exit

In advance of a sale process, it pays to conduct a review of your contracts and operations to identify issues, writes Edward Lane. Many businesses will have done this as part of their response to Covid-19. If you are able to fix problems or be ready with reassurance for a buyer, you are less likely to have to shoulder the risk or do battle over a price deduction.

Consider preparing “vendor due diligence”, which sets out the key arrangements of your business and flags any issues, and how they have been mitigated, upfront. Certain issues, if they cannot be de-risked for a buyer, may derail a deal.

Bridging the valuation gap

Buyers will naturally look to manage any concerns over valuation by asking sellers to accept some of their purchase price in the form of an earn-out or deferred consideration. It is worth being open-minded, as these mechanisms can often help to make a deal possible where uncertainty over future performance would otherwise render it too risky for a buyer. Sellers should, however, pay close attention to these provisions to ensure that the relevant earn-out targets are clearly defined.

Foster competitive tension

Having a variety of interested buyers will help support the valuation of your business. An auction process is usually more expensive than a simple bilateral deal with one buyer, but you increase your chances of maximising the value of the business. Think carefully before granting exclusivity to a buyer as there may be other potential buyers out there. A good corporate finance adviser is invaluable here.

Lockdown-proof your sale process

It is essential to be ready in the event that restrictions are re-imposed. Ensure that any key documentation is located, scanned and uploaded to a virtual data room and key members of staff are able to operate fully remotely. Beware of material adverse change provisions and walk-away rights. Buyers will naturally ask for these in case something should happen between signing and completion. For a seller, they can mean a deal falling over at the eleventh hour.

Edward Lane advises on a broad range of corporate and commercial matters, with a focus on assisting entrepreneurs, businesses, private equity houses and venture capital investors active in the technology, media, entertainment and financial services sectors.