Roundtable: Are You Prepared For The Single Largest Transaction of Your Life?

Joel described what he does as helping those who are approaching a transaction, whether buying a business, selling a business, or making an investment, he helps clients from the beginning of a transaction to identify the objectives, and then take it from idea to execution. Chris stated it makes sense to protect the value associated with a business, and to make sure that with decent planning the owner is making the most of it. He added that they might be looking to grow it before their exit, and he is able to help build those growth expectations in his clients' financial plans. Peter then spoke about how hgkc’s work is to prepare the individuals who own and run these businesses, helping them to make the right decisions about what happens to the business when they step away.

Peter opened the discussion by pointing out that exit planning doesn’t necessarily mean selling your business, it can refer to the business owner just stepping away and figuring out what is next for them.

The discussion ranged over four key questions:

• How much do you want/need?
• How much do you value a business?
• How ready is your team?
• What options do you have?

Peter started by asking Chris the first question. He responded by saying that often when he is speaking to business owners, he asks how much they need and a lot of the time they haven’t given much consideration to the answer. It's often a number with no real context behind it. It's about figuring out where the need number comes from. It may be that they want to generate an income. The want is often the higher number. But how did they get to that number? Planning must consider the individual’s circumstances, what assets the individual has and what other sources of income they have. This makes understanding what is needed, and comparing it with what is possible more accurate, so that an exit plan can be put into place with more confidence. Planning is key, and Chris recommended that the group speak to an adviser if they can, so that they can get the right plan in place. 

Peter then pointed out that people exit at different stages of life and depending on their age they will have different things to consider, to which Chris added that people need to think about whether they want to use the business as a source of income after exiting, and they also need to think about what they want their lives to look like. Joel then added that when you consider an exit transaction as a lump of cash, there will be some responsibilities that come with this. The reality is that an exit, whether to internal candidates or a third party, involves a large number of transactions, many different roles and a lot of responsibilities, and they all form a part of the negotiation that you have.

Peter then mentioned a past client that opted for an MBO as they didn’t want to sell to a third party. The owner had run the business for 40 years and wanted his management team to carry on. hgkc were bought in to help him to make sure they was ready. Joel said that you should start by identifying the who. Once you identify the who, you can work backwards, and figure out what the implications could be.  

The question when is enough, enough was asked. Peter answered that to answer this you need to consider what you are going to do next; some people take money from their business and invest it into another business after they exit. This led to the second question, which Peter directed to Joel: how do you value a business?

Joel responded by asking how do you value any instrument, car, property, or asset? In markets that are mature, you can easily benchmark its value. When you’ve got a frequently traded instrument, it is relatively straightforward to come up with a value for it but every business around the room is unique. There are factors that will affect the valuation, but when you are having these conversations, there will be a large amount of subjectivity. So that can be difficult when you are trying to answer the how much do I want vs how much do I need question. So, you need to think about working this out from a financial point of view. EBITDA, or earnings before interest, taxes, depreciation, and amortisation is a measure of a company's overall financial performance and is a universal way of measuring your business before you have to consider any takeaways.

Peter then asked, as Joel also acts on behalf of buyers, what does the process look like when working with buyers? Joel answered stating, the starting point is to get the historic evidence of the numbers. He will test the presentation of the seller’s numbers as there can be a lot of grey areas within the numbers. So, understanding and testing the earnings is key. This would be the benchmark rather than vague plans of how the business can grow without the numbers to support this. These numbers would be based on the last 12 months especially if the business is growing. However, it would also be sensible to look at a 3-year history. Joel added that if your business is run by the management team then the buyer is more likely to want to buy. If the business depends too much on the owner to run successfully, then there are too many risks to the business and the buyer may back out, or at the very least insist on an earn-out period where exiting owner will be employed in the new combined business.

Peter mentioned that there was also the option of selling to a trust, so that it is run for the employees. He added that if your management team isn’t capable of managing the business like you are, then you are taking on a lot of risks. All of these things are manageable, but these are often the things that will determine how long it will take you to exit. 

Joel also wanted to add to the discussion the difference between internal and external buyers, the main difference being funding. He said that if I’m looking to buy a business, I am able to leverage debt against both the business I am trading and the business I am going to be acquiring. Over the last 10-15 years, there’s been much more interest in consolidation. A lot has been about a buyer looking at buying something that does the same thing. Now, frequently buyers are looking for something different that will help them stand out in their industry.      

Joel was then asked what he would put into a pack for a potential buyer. The information. he would recommend talks about people, customers, management, suppliers, capabilities, opportunities, and risks, as well as numbers. The adviser says this is the value of the business and these are the reasons why, and this is how you are going to fund it. He emphasised the importance for both buyers and sellers to have professional advisors.

The conversation then turned to the third question: how ready are your team?

Attendees shared their feelings and many stated that they were not yet confident that their team could handle the responsibilities after their exit, particularly with those really hands-on companies. It can be difficult to identify the right responsibilities to pass on. The main problem that the business owners seemed to share is that their people aren’t as invested in their organisations as they are. Employees will do the job but will not push further and won’t always work late hours etc. It is about recognising which employees have the drive to do more. Peter also added that it is about how much you are willing to invest in those particular employees, how much you want to help their personal development.

Peter reflected on some of his past work with clients, and the wide range of options they had – from trade sale to VMBO (vendor initiated MBO) to employee ownership. Each option requires its own approach to due diligence. Most business owners think of legal and commercial due diligence, but often overlook people and culture. Yet deals will often stand or fall on how well the work forces are integrated into the combined business, whether they are physically located together or not. Where hgkc were engaged to evaluate the proposed MBO team, it was clear that more than one were not ready to run a business themselves. There are many ways to evaluate the potential of a business, whether you are looking to buy or sell, and the option you favour will impact everything from valuation to funding, as well as its future potential.

In attendance was:

• Shane Hewart and Roy Netto from Hewnett Precision.
• Phil Arnold from WPA.
• Rhoda Brain from Miint Marketing.
• Tony Redondo from Cosmos Currency Exchange.
• Rich Gundry from Wonderland Communications.
• Stuart and Helen Jeffries from Nautilus.
• Lee Adams from Open 24 Hours/ Green Feathers.
• Sam Talby from Undebt.
• James Geldert from Nuvola.
• Andy Farmer from My Oxygen.
• Ejetavwo Mukoro from Total Energies.

If you have any more questions about your exit plan, feel free to get in touch with Chris, Joel, or Peter, or you can join us at our next Exit Planning roundtable at Square Works Bristol on the 10th October.