Trade Secrets of Business Disposals

THOROGOOD
PROFESSIONAL
INSIGHTS
A SPECIALLY COMMISSIONED REPORT
TRADE SECRETS OF
BUSINESS DISPOSALS
Barrie Pearson
IFC
THOROGOOD
PROFESSIONAL
INSIGHTS
A SPECIALLY COMMISSIONED REPORT
TRADE SECRETS OF
BUSINESS DISPOSALS
Barrie Pearson
Published in 2005
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To Philippa, Colin, Aisha and Caleb with much love…
a dedication I have longed to make
The author
Barrie Pearson is Chief Executive of Realization. The company provides world

class coaching and mentoring to entrepreneurs and chief executives in the two
or three years before their exit, to help them groom their business to realise
maximum value.
In 1976, he founded Livingston Guarantee plc, the first corporate finance boutique
in the UK, advising on acquisitions, disposals, management buy-outs and buy-
ins, fund raising and stockmarket listings. When he sold it, the company had
become the largest and most successful independent corporate finance house
in the UK.
After university, Barrie worked for Dexion Comino International, The Plessey
Company and The De La Rue Company, acquiring and managing companies
in the UK, mainland Europe and the USA.
He has written twelve books, including The Shorter MBA and the Book of Me,
a life coaching manual (both co-written with Neil Thomas). He has presented
seminars on corporate finance in the UK, Europe, New Zealand and the Far East.
He can be contacted by email on realization@eidosnet.co.uk or by telephone on
01296 613828.
THOROGOOD PROFESSIONAL INSIGHTS iv

Preface
This book distils over 30 years of my deal making, both as a principal and a corpo-
rate finance adviser, to reveal the trade secrets people are unaware of because
these are simply neither talked nor written about.
Group executives and business owners thinking of selling will gain invaluable
insights to help them achieve the best possible deal and to ensure that their profes-
sional advisers really are on their side. Similarly, ways are outlined to handle
private equity houses effectively, because many vendors feel they have come
off second-best with the benefit of hindsight.
Professional advisors will discover how to win and handle assignments more
effectively. Professional firms need to review their letters of engagement and
many should make changes to make them less onerous to their clients and more
user-friendly. A client recently obtained no less than 19 changes to a corporate
finance letter of engagement, and rightly so. The initial response from the adviser
was “just sign, trust us, and if there is a problem we will reach an agreement”!
The adviser came close to losing the assignment.
This whole book is laced with proven tactical advice, because tactics determine
whether there will be a deal or not. The reality is that tactical mistakes lose deals
which should have been won; an unforgivable failure.
The successful dealmaker has the ability to view the transaction from the stand-
point of the other side, so executives and professional advisers involved in
acquiring companies have much to gain from this book.
Life after exit is of the essence for private company vendors, yet many give it
little thought and often too late in the day. Equally, it is a subject which doesn’t
seem to be written about but this book provides relevant and down to earth
advice.
Once again, Claire Sargent has made time to word-process the manuscript whilst
doing a demanding full-time job.
Barrie Pearson
REALIZATION
Campbell House
Weston Turville
Bucks HP22 5RQ
THOROGOOD PROFESSIONAL INSIGHTS v

Contents
1 A FAILED ATTEMPT TO SELL WILL

DAMAGE THE BUSINESS 1
Current year performance is likely to suffer ............................................2
Customers and staff may be unsettled by a leak ......................................4
Owners and key directors may suffer lasting demotivation...................5
Abortive fees for advisers are costly .........................................................5
Management may make an opportunistic MBO approach.....................6
2 REALIZE A REALITY CHECK IS VITAL 7

How strong are buyer appetites in your sector?......................................8
Test your opinions by beauty parading corporate finance advisers......8
Be realistic about likely value and deal structure.....................................9
Obtain shareholder agreement at the outset..........................................10
3 WHAT BUYERS REALLY WANT…

AND WANT TO AVOID 12
Management continuity is often the big issue........................................13
Undue customer and supplier dependence is a concern .....................14
Major customer contracts due for renewal are a threat .......................15
Necessary relocation can be a plus or a minus ......................................15
Proven and consistent sales and profit growth......................................16
Forecast sales and profit growth .............................................................16
Tax and VAT affairs need to be clean ......................................................17
THOROGOOD PROFESSIONAL INSIGHTS vi

CONTENTS
4 RECOGNIZE FINANCIAL GROOMING

IS ESSENTIAL TO MAXIMIZE
SALEABILITY AND VALUE 19
Annual budgets and monthly management accounts are a must ........20
Take action to create an attractive sales and profit profile....................21
Sensible cost reduction and deferral will boost realizable value .........22
Avoid excessive provisions against profit...............................................23
Turn surplus or unwanted assets into cash ............................................23
Lay claim to surplus cash at the outset....................................................23
Ensure your accounting policies do not understate profit ...................24
5 COMMERCIAL FEATURES
NEED GROOMING 25
Take positive action to retain key staff ....................................................26
Assess land or property with hidden value ............................................27
Diversification and overseas expansion may
reduce shareholder value..........................................................................28
Publication Relations (PR) may be a double edged sword....................28
Separate out and retain a peripheral business.......................................29
Challenge the need for vendor due diligence.........................................29
6 UNSOLICITED APPROACHES – POTENTIAL

JACKPOT OR MAJOR DISTRACTION? 31
Recognize a random mail shot and act accordingly ..............................32
A letter from a professional adviser may be a mail shot.......................35
A phone call from a professional adviser might be serious interest.....35
A direct approach from a private equity house should be serious ......36
An MBO request is a potential minefield ................................................37
A direct approach from a strategic buyer might be a jackpot .............39
THOROGOOD PROFESSIONAL INSIGHTS vii

CONTENTS
7 PROFESSIONAL ADVISERS NEED CHOOSING

AND APPOINTING CAREFULLY 41
Corporate finance advisers – their role and benefits.............................43
Corporate finance advisers – the risks ...................................................44
Corporate finance fees ..............................................................................45
Corporate finance advisers love ‘inverted’ fees – so beware................47
Negotiate corporate finance advisers disbursements ...........................49
Corporate finance advisers come in different shapes and sizes ..........50
Corporate finance boutiques....................................................................50
Accountancy firms.....................................................................................51
Investment banks ......................................................................................52
Business brokers........................................................................................52
Solicitors .....................................................................................................53
Tax advisers ................................................................................................54
Create an effective beauty parade ...........................................................55
Negotiate letters of engagement..............................................................56
8 VALUE YOUR BUSINESS FROM

THE BUYER’S STANDPOINT 58
Adjusted profits before tax are of the essence .......................................59
Major cost rationalization opportunities ...............................................62
Strategic significance or rarity value.......................................................62
Adjusted net asset value ...........................................................................63
Use your adjusted profits to value your business ..................................63
9 BENEFIT FROM EXPERT STREETWISE TACTICS 66

Timing really is of the essence..................................................................67
Sell the company and your management, not yourself.........................68
Outline the structure and type of deal you want....................................69
Telegraph any potential deal-breakers at the outset..............................70
Disclose unattractive features and events positively .............................71
Never reveal your asking price first ........................................................71
THOROGOOD PROFESSIONAL INSIGHTS viii

CONTENTS
Don’t be seduced by private equity players houses...............................72

Retaliate first to guard against a last minute price chisel .....................73
Sweetheart deals sometimes really are sweet ........................................74
Use win-win negotiation tactics...............................................................75
10 MANAGE THE DUE DILIGENCE

PROCESS EFFECTIVELY 77
Make sure collating due diligence information
does not delay legal completion...............................................................78
Due diligence information to be collated ................................................79
Presentation of due diligence information .............................................84
Stick close to the investigating accountants...........................................85
11 STEER THE DEAL SAFELY TO

LEGAL COMPLETION 86
Proceed towards a heads of agreement negotiation meeting .............87
A typical heads of agreement negotiation agenda ................................88
Earn-out deals need defining ..................................................................91
Warranties and indemnities included in the
share purchase and sale agreement ........................................................93
The maximum liability of the vendor.......................................................94
Joint and several liability for vendors .....................................................94
Negotiate the minimum value to trigger a claim ...................................95
Purchase consideration to be held in escrow.........................................95
Use your disclosure statement to undermine warranties .....................96
Prepare to announce the deal internally and externally........................96
THOROGOOD PROFESSIONAL INSIGHTS ix

CONTENTS
12 THINK AND PLAN YOUR LIFE AFTER EXIT 98

Who are you happy to know that you have suddenly
become rich (or even richer)? ..................................................................99
When will you leave your company?.....................................................100
How do you intend to avoid boredom and loneliness? .......................101
How will your spouse react and cope? .................................................102
Where do you want to live?....................................................................103
What do you want to do with your wealth? .........................................104
What inheritance planning will you do? ...............................................105
THOROGOOD PROFESSIONAL INSIGHTS x

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 1
A failed attempt to sell will damage
the business
Current year performance is likely to suffer ......................................2
Customers and staff may be unsettled by a leak................................4
Owners and key directors may suffer lasting demotivation.............5
Abortive fees for advisers are costly ...................................................5
Management may make an opportunistic MBO approach ..............6

Chapter 1
A failed attempt to sell will
damage the business
A failed attempt seldom happens, and even then only to other people, you may
well think. But you would be wrong!
Corporate finance advisers are usually appointed to sell a business, because they
are the ‘experts’. As a corporate financier for many years, I systematically collected
anecdotal evidence of the success rate of our competitors. Typically, they only
achieve a sale about one in three times.
I had a golden rule that unless I truly believed we would achieve a sale, which
meant negotiating a price that the vendors would want to accept, we should
decline to be appointed. In addition to damaging their business, our reputation
would suffer and we would be busy fools because corporate finance fees are
hugely dependent on completing a sale.
So why do other corporate finance advisers adopt a more relaxed approach?

They seem to play the percentage game on the grounds that you can never be
sure which businesses will be sold, so the more attempts they have to collect a
success fee the better.
I am not suggesting that you don’t use a corporate finance adviser, because a
do-it-yourself approach is likely to be even less successful, but it is essential that
you recognize the damage a failed attempt to sell will cause and then take a reality
check on your prospects for achieving a sale, as outlined in Chapter 2, in order
to maximize your chances of success.
Current year performance is likely to suffer

Selling a business is just as time consuming and as much an emotional roller
coaster as an acrimonious divorce. It would be entirely inaccurate to believe
you can sit back while your corporate finance adviser, your solicitor and a tax
expert do all of the work for you, because your involvement is essential.
THOROGOOD PROFESSIONAL INSIGHTS 2

1 A FA I L E D AT T E M P T T O S E L L W I L L D A M A G E T H E B U S I N E S S
Your personal involvement will probably include:
• beauty parading three firms of prospective corporate finance advisers

and negotiating their fees before appointing one;
• briefing your chosen corporate finance adviser and providing

background information to equip them to write an information
memorandum, which describes the business and the investment
opportunity;
• a meeting to edit and approve the information memorandum and to

agree a short-list of known serious buyers to be approached;
• preparing a presentation for you to give to prospective purchasers at

initial meetings, and then providing supplementary information
afterwards;
• beauty parading prospective lawyers and negotiating their fees;
• reviewing offers received and meeting your corporate finance advisers

to agree a response;
• attending a heads of agreement negotiation meeting with your

corporate finance advisers and the buyer;
• collating the extensive information required for the due diligence work
to be carried out on behalf of the purchaser;
• reading the lengthy share purchase and sale agreement provided by

the purchaser and meeting your solicitor to review it;
• taking specialist tax advice to minimize your capital gains tax liabilities;
• meeting with various members of the due diligence team to answer

their questions;
• attending a lengthy all parties meeting to resolve outstanding points

in the share purchase and sale agreement;
• providing the necessary information to enable your solicitor to

prepare a comprehensive disclosure statement designed to limit the
impact of warranties in the contract; and
• hopefully, attending a boring, long drawn-out completion meeting, as

a prelude to receiving the sale proceeds.
Transactions take unexpected twists and turns which consume more of your
time. The purchaser may pull out unexpectedly or attempt to chisel on price at
the eleventh hour, making it necessary to re-open negotiations with an alter-
native purchaser.

The whole process is likely to take six months or more and it is unquestionably
a serious distraction. The net result is that current year profits may fall short of
expectation, and this could well have a significant impact on deal value.
If heads of agreement, essentially a letter of intent, have been signed and it

becomes necessary to tell the purchaser that there will be a profit shortfall or,
worse still, they discover it themselves during due diligence – their offer is likely
to be reduced significantly more pro-rata than the profit shortfall. This may seem
unfair, but it almost invariably happens.
Customers and staff may be unsettled by a leak

It is routine for prospective purchasers to be required to sign a confidentiality
document before the identity of the company for sale is revealed. In some cases,
the supply of information will be restricted to named key individuals in order
to enhance confidentiality. Nonetheless, leaks do happen. Furthermore, it is rare
for vendors to seek damages because often sufficient proof of the source of the
leak is lacking.
Although it is inexcusable, some prospective purchasers might deliberately

mention to your customers there is a rumor that your business is for sale. Another
possibility is that an employee in a prospective purchaser knows someone in
your company, perhaps because they worked together previously, and tells them
the company is for sale.
I believe you should deny the rumor, if necessary dismissing it as merely another
instance of speculation which has happened from time to time and has always
proved to be inaccurate. Ideally, you would tell the staff at the outset and keep
them informed, but we do not live in an ideal world. People would understandably
become unsettled, it would prompt some people to look for another job or to
accept an offer which otherwise they would have turned down.
In order to minimize the risk of an internal leak, avoid any visits by prospective
purchasers, or even frequent phone calls from an adviser, which could cause
speculation. It makes sense to have contact made only by mobile phones and a
secure email address. It may be necessary to involve your secretary or your finan-
cial director, but make it clear that any leak would be attributable to them because
they are the only staff to be aware of the situation.

Owners and key directors may suffer lasting

demotivation
A failure to sell leaves some owners, and many more than you may think, stressed
and dejected. It seems that the opportunity for financial independence and an
escape from the treadmill has disappeared. Furthermore, it is unrealistic to market
the business again within the next two years because prospective purchasers
would interpret this as desperation to sell. The only sensible response is to take
a holiday, to get the disappointment out of your system and then continue to
drive the business forward as if nothing had happened, but this is much harder
to do than to say.
Some owners unthinkingly risk demotivating key directors who are not share-
holders. In a specific case, the owner told his four executive directors that he
was to initiate a sale and on completion he would give each person £100,000
from the sale to reward their commitment for more than 10 years of loyal service.
48 hours before legal completion the purchaser pulled out because they had been
forced to give a profit warning and announced significant job losses. Conse-
quently, they felt that an acquisition would not be well received. The owner was
devastated because he was to leave the business after a brief handover period,
but he never imagined how his directors would respond.
The £100,000 was a substantial capital windfall for each of the other directors
and mentally they and their partners had already decided how to use the cash.
Disappointment turned to bitterness and within a few months three directors
left, despite being totally committed to the business beforehand.
Abortive fees for advisers are costly

Corporate finance advisers usually charge a commitment fee of about £30,000
or more, plus out-of-pocket expenses, payable during the sale process and a
completion fee payable on legal completion.
Lawyers may agree to reduce their invoice by, say, 25% if the deal is aborted,
but the amount payable will depend upon the point at which the sale collapses.
Fortunately, their work only commences in earnest when heads of agreement
have been signed. Specialist tax advice is likely to cost more than £10,000 and
will be payable in full. So, in total, a failed attempt to sell is likely to cost more
than £30,000, and up to £100,000 if the deal aborts close to anticipated legal
completion.

Management may make an opportunistic MBO

approach
This could be a good outcome, or the worst possible situation. If the manage-
ment team know you were disappointed not to achieve a sale and are really keen
to retire, they may suggest they buy your business, at a bargain price!
The failed attempt to sell, quickly followed by the inevitable stress of an MBO,
possibly one that becomes acrimonious, is a daunting prospect and the psycho-
logical advantage will be with the management team. Worse still, when a buy-out
attempt fails the rapport with your management team may have been damaged
irreparably and they may leave to pursue a buy-in opportunity elsewhere.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 2
Realize a reality check is vital
How strong are buyer appetites in your sector? ...............................8
Test your opinions by beauty parading

corporate finance advisers ...................................................................8
Be realistic about likely value and deal structure...............................9
Obtain shareholder agreement at the outset....................................10

Chapter 2
Realize a reality check is vital
Corporate vendors contemplating the sale of a subsidiary are just as likely to

over-estimate the attractiveness and realizable value of the business, as is any
owner of a private company. Countless times, I have seen people absolutely
convinced that a particular strategic buyer will pay a top price, only to find that
they are either not interested or make a disappointing offer. Any rose tinted view
must be tempered by tangible evidence.
How strong are buyer appetites in your sector?

If you have not had a single unsolicited approach from a strategic buyer, even
informally, during the past two years, this should cause you to question just how
attractive your business really is. On the other hand, if you have received, say,
three approaches in the last six months, this could be a clear signal that you
should be considering a sale in the near future. Acquisition activity in a sector
may be quite pronounced for a couple of years, only to be followed by inactivity
as acquirers integrate the companies, having satisfied their appetite for the
foreseeable future.
Test your opinions by beauty parading

corporate finance advisers
Chapter 6 is devoted to choosing, appointing and managing professional advisers,
but corporate finance advisers can provide a valuable reality check for you free
of charge before you decide to initiate a sale.
Also they should be keen to meet you, say, two years before you intend to sell
because they will have the opportunity to keep in touch with you in the meantime.
You should arrange the meetings about three weeks in advance, so that the
advisers can prepare adequately, and tell them that the agenda should include:
• their opinion of how attractive your business is;

2 R E A L I Z E A R E A L I T Y C H E C K I S V I TA L
• a review of relevant acquisitions during the past two years to indicate

buyer appetites;
• the name of likely buyers, and equally importantly anticipated non-

buyers;
• the likely realizable value and anticipated deal structure;
• their deal experience in your sector; and
• the proposed advisory team members and fee structure.
A review of relevant acquisitions made in the sector will reveal which compa-
nies have been buying, the size of deals done and any particular type of business
which seems to be attractive. Equally important, the corporate finance adviser’s
knowledge of the sector should provide a valuable insight into likely buyers and
non-buyers. Also, the adviser’s view of both the attractive and unattractive features
of your business should provide an indication of some of the pre-sale grooming
which needs to be done before initiating a sale. Chapter 4 is devoted to grooming
your business in order to maximize saleability and value.
Be realistic about likely value and deal structure

The adjusted pre-tax profit for the previous financial year and the current year
are key determinants of deal value, unless there are valuable freeholds owned
by the company which would inevitably increase the deal value.
The adjusted pre-tax profit is a key figure for any vendor because it is the profit
the new owners would benefit from at the outset. In the case of a subsidiary
company, there may be allocated management charges to be added back. For
a private company, there could be significant add-backs such as:
• the excess of salaries taken by the owners, compared to the level an

acquirer would pay and the attendant employers national insurance
costs;
• any excess personal pension contributions made by the owners,

compared to the amount applicable for an employed executive in the
same role;
• any salary savings as a result of an owner retiring on the sale of the

business, where the person will either not need to be replaced or only
at a lower salary cost; and
• any salaries and benefits received by family members as a non-executive

director.

Quite often these owner add-backs may legitimately increase the profit by 50%
or more, and in some cases at least double the profits.
Corporate finance advisers will be able to estimate the multiple of adjusted pre-
tax profits which is likely to apply to your business, but the multiple chosen is
subjective and truly a matter of opinion.
Typically, distribution and sub-contracting businesses attract the lowest

multiple, often in the range of four to five times the adjusted pre-tax profits for
the previous financial year. Consulting businesses are frequently valued at only
a multiple of five or six, because there is the risk of staff leaving and setting up
in competition.
Only a small proportion of businesses command a value of more than seven to

nine times the adjusted pre-tax profits for the previous financial year. Sectors
which have commanded the highest valuations include specialist information
technology businesses, publishers and regional newspapers.
It must be recognized, however, that the actual amount paid at legal comple-
tion may be significantly less than the overall deal value for a private company.
The acquirer may insist that some of the purchase consideration will not only
be deferred but entirely contingent on the profit performance achieved in either
one or two years post acquisition. If the vendors reject this type of deal, it is
quite possible that a sale is effectively ruled out.
Obtain shareholder agreement at the outset

The majority shareholder cannot assume that other shareholders will agree on
the timing of a sale and/or the lowest acceptable deal value and minimum payment
at legal completion. Unless specifically provided for in a shareholders agree-
ment, a sale can be blocked by the owners of 25% or more of the issued shares.
Actual examples illustrate potential difficulties graphically. The founder of a

business was 62 and, as a prelude to selling the business, the three executive
directors had been given share options equivalent in total to 15% of the share
capital. The founder had gradually become part-time and largely non-execu-
tive in order to demonstrate to any purchaser that the other directors, aged around
40, had managed the business successfully for some time and provided
adequate continuity without him.

Significant profit growth was expected throughout the medium-term, and the
founder was shocked and wrong-footed by the reaction of the executive direc-
tors. They did not wish to see the business sold for at least three years in order
to maximize the value of their share options and did not want to pursue a manage-
ment buy-out as an alternative way for the owner to achieve an early sale. They
hinted that they could, and might well, undermine an early sale, which was used
successfully as a bargaining tool to gain them more share options for their support.
Private equity investors, still often referred to as venture capitalists, may have
a big say in any sale. They may set a minimum acceptable deal value which effec-
tively rules out a sale for the time being. If an earn-out deal structure is anticipated,
a private equity investor may demand that they should receive full value at legal
completion because the acquirer will only wish to incentivize continuing
owner-directors. Some hard bargaining with the private equity investor may
be needed, and it should be addressed in principle at an early stage of the sale
process.
On the other hand, a private equity investor may be keen to sell earlier than the
owner-directors, either because their investment fund is due to be closed quite
soon and monies have to be returned to the fund investors, or because they wish
to accept an unsolicited offer even though the management team may be keen
to continue.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 3
What buyers really want…
and want to avoid
Management continuity is often the big issue .................................13
Undue customer and supplier dependence is a concern ...............14
Major customer contracts due for renewal are a threat .................15
Necessary relocation can be a plus or a minus ................................15
Proven and consistent sales and profit growth................................16
Forecast sales and profit growth .......................................................16
Tax and VAT affairs need to be clean ................................................17

Chapter 3
What buyers really want…
and want to avoid
It is important to understand the features which buyers generally find attrac-

tive and the issues which cause them concern.
Management continuity is often the big issue

Shrewd acquirers recognize that a business is vulnerable in the first two years
post-acquisition. Customers which have been thinking of switching supplier,
or dual-sourcing, may be prompted to do so. Perhaps unfairly, a previously satis-
fied customer who suffers a relatively minor supply problem may be tempted
to look elsewhere. Some customers, even multinationals, may have remained
loyal largely because of a long standing friendship and outstanding personal
service from the owner.
Staff retention may have been high because of loyalty to the owner directors,
and some will decide to move on or respond to an approach from a headhunter.
Business founders and owner directors often bring more passion and have more
impact than an employed executive will. Consequently, the wish for one or more
of the owners to leave after a brief handover period will cause concern to an
acquirer. The response may be to insist that the key people are effectively ‘locked
in’ for a couple of years with an earn-out deal.
If you really want to leave quickly after the sale has completed, it is important
to demonstrate that you have been working only part-time and largely in a non-
executive role for some time before initiating a sale. Simply appointing an
‘employee’ director as managing director shortly prior to sale is unlikely to
convince an acquirer, especially if you continue to be fully involved in the business
and play a demonstrably key role such as winning new clients.
In some cases, however, there is good news. In a management buy-out, both

the private equity investor and the management team are likely to want you to
leave quickly because they will be keen to implement changes. Even if you agree

3 W H AT B U Y E R S R E A L LY WA N T … A N D WA N T T O AV O I D
to retain a significant equity stake, perhaps to help the financing of the buy-out,
your role is likely to be limited to a non-executive director.
If the business is to be absorbed into an existing subsidiary, the owners will quickly
become surplus to requirements and other redundancies may be inevitable.
The finance director is often regarded as an optional extra post-acquisition. The

finance function may be partially absorbed into an existing department and the
finance director will become redundant. Alternatively, the acquirer may be keen
to inject their own finance director to help review the business and to introduce
group accounting policies and controls.
Undue customer and supplier dependence

is a concern
It is surprisingly commonplace for business-to-business service providers to find
that their top ten customers may account from 50% to over 90% of total revenue.
Worst still, the largest customer may account for between 25% and 75% of total
revenue. For most businesses, the loss of even 25% of turnover would plunge
the business into loss or, at best, break-even, because the majority of overhead
costs are fixed in the short-term.
Undue customer dependence is rarely ever planned, it develops gradually as a

result of delivering superior quality, service and value for money. The antidote
should be that before a customer reaches 20% of total revenue, strenuous efforts
should be made to win at least one other major customer. This is categorically
not merely a counsel of perfection. A specialist printing company performed
so well for a major pharmaceutical company that it eventually accounted for
over 80% of total revenue, and the available capacity was fully utilized so they
gave up trying to win new business and made key sales executives redundant.
Then the unthinkable happened. The customer merged with another major
company and soon afterwards concerted supplier rationalization was
commenced. Shortly after initiating the sale of the business, the customer informed
them that they were too small to be considered as a future supplier and purchasing
would be phased out within 12 months. Company profitability and any hope of
selling the business were wrecked, not because of unsatisfactory performance,
far from it, but substantial job losses inevitably had to follow.
Some successful private businesses are built on selling branded products, sourced
from a single ultra low cost supplier in a far away country such as India, parts

of West Africa, Thailand or China. Often there is no formal contract, no exclu-

sivity of supply and only an exchange of emails. Whilst the arrangement may
have worked well for several years, it represents a large vulnerability to an
acquirer. At the very least, the vendors should seek to have dual sources of supply
prior to selling the business.
Major customer contracts due for

renewal are a threat
Facilities management providers are just one kind of business where three and
five year contracts are commonplace, although often the customer has the right
to give only three months notice of termination if performance becomes unsat-
isfactory.
Acquirers warm to these medium-term contacts, especially when the company

has a proven track record of successfully renewing contracts even when faced
with a competitive tender process. Nonetheless, acquirers become nervous when
key contacts are due for renewal shortly after legal completion. Whilst there
will always be some contracts due for renewal, the sale process needs to be timed
so that the key contracts are renewed before heads of agreement are signed.
Otherwise, legal completion is likely to be delayed until the contract(s) is renewed
or a tough earn-out will be imposed so that the overall deal value is dependent
upon renewal.
Necessary relocation can be a plus or a minus

For a manufacturing business with demonstrable growth potential, a purchaser
would prefer to have available capacity for expansion or at least room to extend
the premises. If there is no scope to expand a purchaser is likely to reflect the
cost of relocation, or creating another location, in their offer because they know
how disruptive this can be.
Office premises may present an opportunity to both the vendors and a

purchaser. If the business is likely to be brought under an existing regional
management structure, which often happens when, say, a contract caterer is
acquired by a nationwide competitor, the offices will be unwanted. So the prospect
of a lease due for renewal fairly soon will be attractive.

Proven and consistent sales and profit growth

Whilst the past is categorically not necessarily a reliable guide to the future, it
is an important comfort factor for any purchaser. The three most recent years
of sales and profit performance should ideally show uninterrupted growth.
If consistent sales and profit growth have not been achieved, then a strong
performance compared with the sector is important. For example, travel related
companies were hit hard by the aftermath of 9/11. A company which success-
fully pursued other sales opportunities and quickly trimmed backed costs would
be viewed favorably, even if there were a profit setback.
Vendors must take legitimate opportunities to show adjusted pre-tax profit

growth. In addition to adding back any excess directors salaries or pension contri-
butions, any one-off events should be quantified and added back to maximize
the adjusted pre-tax profit growth. Legitimate items to add back include:
• the relocation of premises;
• a major bad debt, say, caused by a totally unexpected business failure;
• significant litigation costs; and
• a redundancy program.
Some vendors are tempted to include as one-off events situations which should
be more accurately described as management mistakes, but these will be
dismissed as a try on by a purchaser and may undermine other legitimate claims.
One vendor added back the headhunter’s fee, relocation package, the salary up
to dismissal and the termination payment to a managing director who was
dismissed after only six months. This was a costly management mistake, which
was rejected as an eligible add back.
Forecast sales and profit growth

The current financial year performance is important to a purchaser to allay any
concern that the business is suddenly suffering a downturn, despite recent sales
and profit growth. If the year to date performance is significantly lower than
budget, a mere assertion by the vendors that the full year performance will achieve
budget is unlikely to convince a purchaser. Tangible evidence will be needed to
explain the reasons for under performance to date and, more importantly, why
the shortfall will be overcome by the year-end. Any statement that customers

have delayed placing some orders which will lead to over performance against
budget for the next financial year, will not readily convince a purchaser.
In addition to current year performance in line with budget, a purchaser will

expect to see a forecast profit and loss account for the next two years. Even if
the vendors have never done this before, it needs to be done.
Vendors must recognize that purchasers expect a picture of rising sales and profits,
preferably at a rate of 10% a year or more. Any picture of flat sales or profits
is unattractive enough to deter many prospective purchasers.
An anticipated loss in the current financial year will rule out most prospective
purchasers, because many companies have a policy not to acquire a loss-making
business unless it is to be absorbed in an existing subsidiary. Also, rightly or
wrongly, purchasers are likely to interpret the sale as a hurried attempt to exit
because the vendors are not confident of their ability to restore profits.
An actual loss in the previous financial year will unsettle purchasers, even if the
current year performance to date and the full year forecast show a strong profit
turnaround. The concerns will be that the loss was exaggerated in order to benefit
current year profit and the business may perform erratically again in the future.
When sales or profit are forecast to grow at, say, 15% a year or more, prospec-
tive purchasers may regard it as unfounded optimism. So the vendors need to
outline the business development projects already in progress which will underpin
the forecast.
Tax and VAT affairs need to be clean

A purchaser will insist upon a comprehensive indemnity from the vendors, as
part of the share purchase and sale agreement, regarding all tax liabilities up
to the date of legal completion. As the Inland Revenue has six years in which
to make a claim retrospectively, this is the minimum length of indemnity a
purchaser will seek. It may be possible, however, to negotiate this down to two
years on the grounds that the auditors will actively look for any problems on
behalf of the acquirer and should find them by the second annual audit at the
latest.
It is important to understand exactly what the indemnity means; namely that

the acquirer has a contractual right to recompense for any tax liabilities which
arise, even if the vendors were unaware of them, and the costs of sorting them
out with the Inland Revenue. Furthermore, the purchaser may insist on some

cash to be held in escrow, in an interest-bearing account maintained by both

solicitors, to ensure that cash is readily available to meet indemnity claims.
There could be a much greater problem for the vendors, however, if tax evasion
has taken place. I heard about one case involving a manufacturing company
where the owner and three employed directors decided to pay all overtime in
cash, net of tax, to avoid income tax because “the company was in financial crisis”.
The situation was compounded because the vendor did not disclose the
problem to the acquirer, even though a seven-figure payment would have to be
made as a result of what had started out as a routine Inland Revenue PAYE inves-
tigation. It was only discovered by the acquirer during due diligence and they
immediately withdrew from the transaction for obvious reasons.
Another problem for vendors may arise out of benefits in kind not disclosed to
the Inland Revenue. It could involve a boat or an overseas home, bought and
maintained by the company, which is used almost exclusively for the benefit of
the company owners. The acquirer may insist that a full disclosure is made to
the Inland Revenue at legal completion, with adequate cash held in an escrow
account to cover the anticipated liability, because they will not be party to a failure
to disclose a known tax liability, even though the payment of running costs ceased
immediately on acquisition.
The only conceivable advice I can give to any business owner is to handle all
tax affairs impeccably from the outset.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 4
Recognize financial grooming is
essential to maximize saleability
and value
Annual budgets and monthly management
accounts are a must.............................................................................20
Take action to create an attractive sales and profit profile .............21
Sensible cost reduction and deferral

will boost realizable value...................................................................22
Avoid excessive provisions against profit.........................................23
Turn surplus or unwanted assets into cash ......................................23
Lay claim to surplus cash at the outset .............................................23
Ensure your accounting policies do not understate profit .............24

Chapter 4
Recognize financial grooming is
essential to maximize saleability
and value
It is not enough simply to recognize what buyers really want, and want to avoid,
as outlined in chapter 3. Systematic action to groom the business should be taken
before initiating a sale. This may require from three months to up to two years
depending upon the state of the company.
Annual budgets and monthly management

accounts are a must
Some sizeable businesses, and successful ones to date, do not produce budgets
or monthly management accounts. To a prospective purchaser, however, this
creates sufficient uncertainty about current year profit performance to become
a real deterrent.
Budgeting and monthly managements accounts are essential for effective manage-
ment. Suitable software packages are readily available. Alternatively, the
auditors should be asked to prepare an annual budget and monthly manage-
ment accounts for a fixed fee, but the work should really be done in-house.
Effective calenderization of an annual budget is essential in order to give a reliable

benchmark of progress during the year. To create a monthly budget by dividing
annual figures by twelve is unacceptably crude. In most businesses, sales have
a definite seasonal bias and one-off costs distort an averaging approach to cost
budgets. A simple starting point for accurate calenderization is to review the
monthly pattern of sales and overhead costs for recent years, which should then
be adjusted to reflect any differences anticipated for the budget year.
A much better guide to progress than relying only on monthly accounts for the
year to date, is to produce an up-dated year end forecast each quarter by adding
together the actual results in the year to date and the latest forecast for the
remainder of the year. This guards against false optimism when although the

4 RECOGNIZE FINANCIAL GROOMING IS ESSENTIAL TO MAXIMIZE SALEABILITY AND VALUE
year to date is in line with budget, the remainder of the year is expected to result
in a shortfall.
When there is an anticipated shortfall against budget, I strongly object to

producing a revised budget. This legitimizes underperformance. Whereas an
up-dated year-end forecast should prompt management action to improve the
forecast result by taking prompt and tangible action in order to do everything
possible to achieve the original budget.
Vendors need to be aware that a common feature of due diligence is to compare

the original budget and actual sales and profit performance in each of the past
five years in order to assess the reliability of future projections. If budgets have
been regularly revised downwards then confidence will be undermined.
Take action to create an attractive

sales and profit profile
Ideally, sales and profit performance will show consistent growth for the previous
three years, continuing through the current and next two years forecasts. By a
grooming process commenced two years before initiating the sale of the business,
sales and profits can be shifted from one year to another to achieve the desired
profile by:
• either invoicing everything possible before the financial year-end or

delaying some invoicing until the next financial year. A 2% movement
of invoiced sales from one financial year to the next may alter profit
before tax by 6% or more.
• making a specific provision against redundant stock or a potential bad

debt before the year-end, or alternatively not making some provisions
until the next financial year commences.
• spreading large revenue expenditure items across the financial year-

end to smooth the impact, e.g. a major advertising campaign.
Clearly, any adjustments made to enhance the profit profile must not be overdone.

Sensible cost reduction and deferral

will boost realizable value
Profit performance has a major impact on deal value, especially the adjusted
pre-tax profit for the previous and current financial years. If an earn-out deal
is likely, then the forecast profit for the next two financial years will affect the
amount and formula used to calculate deferred purchase consideration.
The impact is tangible and substantial. If the purchaser values the business at,
say, seven times pre-tax profit, then every £100,000 of annual cost reduction will
increase the deal value by £700,000! So the golden rule is to implement cost reduc-
tion in sufficient time to create a full-year benefit in the financial year prior to
selling the business.
A distribution company naively spent over £250,000 improving the appearance

of the premises and on a new vehicle livery because they believed that first impres-
sions count. First impressions do count. For individuals physical appearance
counts a lot, but when selling a business the vital first impression is the amount
of profit achieved. These make-over costs could not even be treated as a legit-
imate one-off expense which could be added back for adjusted profit purposes.
For many companies, staff costs are the major overhead expense. Surplus staff
should be made redundant. Under-performing staff should be helped to reach
the required standard, but then removed if necessary. Best human resources
practice should be followed throughout, with staff being treated generously and
helped to obtain new employment where appropriate. If you don’t take action,
the likelihood is that the acquirer will do so and probably treat staff less gener-
ously, whilst you will have suffered a lower purchase price.
Whenever someone leaves, make every effort to avoid the need for replacement
or reorganize so that a less experienced and lower cost person will suffice.
Other overhead costs which should be reviewed and reduced as appropriate

include:
• the use of temporary or agency staff.
• corporate hospitality – which events are no longer proving effective?
• advertising – which items have become a costly and largely ineffective

habit?
• research and development – will major new product development

projects yield sufficient benefit soon enough, or merely benefit the new
owners?

Avoid excessive provisions against profit

Subsidiaries of listed companies are usually under such pressure to achieve
demanding budgets that excess provisions are unlikely, whereas owners of private
companies generally seek to reduce the reported profit in a ‘legitimate way’ to
minimize corporation tax payments.
Generous provisions against profit are widely used, relating to stock and work-
in-progress, doubtful debts or completed contracts which may be subject to
rectification claims. As the business grows, the level of provisions increases.
Anecdotal evidence suggests that acquirers merely regard excessive provisions

as ‘a bit of insurance against overpaying for the business’, rather than an under-
statement of underlying profit which merits an increased valuation. If the excess
provisions are suddenly released, due diligence will reveal what has happened,
so the release should take place gradually over more than one financial year
and extend into any earn-out period in order to maximize realizable value.
Turn surplus or unwanted assets into cash

Both subsidiaries and private companies are often slow to turn surplus or
unwanted fixed assets into cash. The attitude seems to be ‘we’ll keep it just in
case’. Effective grooming requires a different attitude. The disposal of unwanted
fixed assets creates vacant space for expansion by the new owners and even
modest disposal proceeds improve the cash flow.
Surplus or redundant stock and work-in-progress should be sold for scrap value,
because it has to be assumed that due diligence will effectively scrutinize the
inventory and the acquirer will expect adequate provisions to be made against
profit and asset valuation. Furthermore, the existence of surplus or redundant
stock and work-in-progress is tantamount to parading management mistakes.
Lay claim to surplus cash at the outset

A demonstrably and consistently cash generative business is attractive to
purchasers, but it is not necessary to have an excess of accumulated cash on
the balance sheet to prove it.
The vendors should present the balance sheet to prospective purchasers at the
outset of the sale process without any surplus cash. Private equity houses usually

structure deals and value businesses on an assumed debt-free, cash-free basis.

If you allow prospective trade buyers the opportunity, they will simply assume
that any cash on the balance sheet belongs to them, and should you point out
subsequently that you intend to remove surplus cash before legal completion,
their response is likely to be that their offer will have to be reduced by the amount
of cash to be removed. Even when told at the outset that cash will be removed,
some streetwise acquirers will insist that sufficient cash is left in the business
to avoid the need to use an overdraft during the first twelve months post-acqui-
sition. Clearly, this is a point for negotiation but it is a reasonable stance for an
acquirer to take.
Ensure your accounting policies do

not understate profit
A purchaser should compare the accounting policies of a prospective acquisi-
tion target with their own to ensure that the profit is not overstated for valuation
purposes, and adjustments will be made in their calculations as necessary. If
your accounting policies are conservative by comparison, however, you should
assume this will be ignored. So, at the outset of the grooming process, you should
obtain the Annual Report for a cross section of likely acquirers and compare
their accounting policies.
The period used to depreciate each type of fixed asset influences the profit
reported. If you adopt shorter periods for depreciation, this will understate profits
compared to other companies.
A less obvious difference in accounting policies is the valuation of stock and

work-in-progress at the financial year-end for continuing contracts or projects.
These differences, coupled with a different approach to interim invoicing, may
make a significant difference to reported profit levels.
Ideally, changes to overly conservative accounting policies should be introduced

before the financial year prior to sale commences, so that the full year impact
of the changes is reflected in the most recent actual profit performance.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 5
Commercial features
need grooming
Take positive action to retain key staff ..............................................26
Assess land or property with hidden value ......................................27
Diversification and overseas expansion

may reduce shareholder value ...........................................................28
Publication Relations (PR) may be a double edged sword..............28
Separate out and retain a peripheral business.................................29
Challenge the need for vendor due diligence...................................29

Chapter 5
Commercial features
need grooming
Several commercial features of a business need grooming in order to ensure

the shareholders realize the maximum value from the sale.
Take positive action to retain key staff

The loss of key staff may reduce the realizable value of a company and could
even mean that the sale has to be delayed for sometime. For example,
headhunting of close-knit teams happens in some business sectors such as
management consultancy and investment banking. Alternatively, a team may
leave to start their own business, and the reality is that the company will be fighting
a rearguard action to prevent them, despite restrictive covenants contained in
contracts of employment.
High salaries, even exceptional ones, and the share of annual profits are not
enough to avoid the loss of key people. There is always the risk that a
competitor will make someone a better offer. In subsidiaries of listed groups,
key people are likely to have valuable share options which would lapse on leaving
and this can be a deterrent.
Private companies should consider the introduction of a share option scheme,

but care is needed. I see little merit in a company-wide option scheme for a private
company; the reality is that many staff attach little value to them because the
reward seems so distant. For most people, a personal bonus scheme or a share
of annual profit is more attractive. Share options should be restricted to those
whose departure would detract from shareholder value. Another trap to avoid
is the opportunity to cash in share options on leaving the company. This is actually
incentivizing people to leave, and perhaps giving them the cash to pursue a
management buy-in or start up a business in competition with you. Worse still,
the company will have to find the cash to allow people to exercise their options,
whereas a listed company merely sells the shares via the stockmarket.

5 C O M M E R C I A L F E AT U R E S N E E D G R O O M I N G
Be wary of accountancy firms and other professional advisers which sell ‘ready-
made’ share option schemes for private companies. The odds are that you may
need a bespoke scheme to achieve the motivation and protection you seek.
Assess land or property with hidden value

It is important to recognize any alternate use or future development potential
for your land and property, and to make sure you benefit financially.
An acquirer values a company on the basis of profit, cash flow generation and
strategic rationale. Development potential will not enhance the offer, unless the
vendors have highlighted the opportunity and the acquirer intends to exploit
the benefit straight away. Development value which may become available at
some future date, will not attract an increased offer.
Worse still, the acquirer may have recognized the potential and remain silent.
An MBO team approached a major house builder, agreed a deal in principle
for them to buy the site for housing development and to find another site for
the business and finance the building of new premises for them – which was
negotiated before the buy-out was completed and without the knowledge of the
vendors. Afterwards, the vendors were furious but perhaps they should have
been furious at their own failure to recognize and to seize the opportunity.
When the vendors wish to benefit from future development potential, the land
and property should be extracted from the company in the most tax effective
way available, shortly before legal completion. The acquirer should be offered
a lease of suitable duration, but it should not be less than three years unless they
wish to relocate the business as soon as possible. Three years gives an acquirer
ample time to plan and execute a relocation, but a one-year lease would be
unattractive because it would create undue pressure to relocate swiftly. Vendors
will appreciate that the profit and loss account will need to be adjusted to reflect
the anticipated annual lease and service charges, which will replace the depre-
ciation and amortization charges.
Sometimes a particularly valuable freehold may dwarf the value of a business,

when calculated on the basis of profit and cash generation, and acquirers may
be unwilling to increase their offer to reflect the property value. Vendors need
to recognize this and present the acquisition opportunity with the property
extracted, and offer a suitable lease, to benefit fully from the value of both the
property and the business.

Diversification and overseas expansion

may reduce shareholder value
Timing is vital if diversification and overseas expansion are to increase the realiz-
able value of the company. Diversification, such as a recruitment consultancy
creating a legal staff division, is likely to be loss making for at least 12 months
and so could reduce profits during two financial years. Overseas expansion may
take two or three years to break-even and the management distraction involved
in the start-up may cause the existing business to under-perform. Even if the
vendors show the losses as an add-back for adjusted profit purposes, the acquirer
is likely to reject this.
Some vendors believe that an acquirer will pay considerably more at legal comple-
tion to reflect the future opportunity they will benefit from, but this is
improbable. At worst, overseas expansion which has not achieved break-even
may be viewed as an undesirable vulnerability, and at best would only be rewarded
as part of an earn-out deal.
The deal is to ensure that diversification and overseas expansion are sufficiently
advanced as to demonstrably benefit the vendors or it may make more sense
to put the plans on hold and present them to prospective acquirers as a valuable
opportunity they may wish to pursue.
Publication Relations (PR) may be a

double edged sword
Many private companies make no attempt to gain media coverage in the trade
or national press or via the Internet, and some actually deliberately avoid media
coverage. I believe that PR, despite the advisory costs and management time
involved, can be used to boost profits by enhancing the reputation of the company
to prospective customers, generating enquiries which lead to new business and
as an employer to assist recruitment.
I am much less convinced, however, that vendors should initiate a systematic

PR campaign as part of grooming the business for sale, despite the fact that some
corporate finance advisers recommend it. The company may be a hidden gem
at this point, with potential acquirers unaware of it as a really attractive business.
The requisite awareness amongst prospective purchasers can be achieved by

researching to find serious buyers worldwide and then sending them an infor-
mation memorandum under the protection of a signed confidentiality agreement.

Although the trade press and websites are hungry for news about companies
of all sizes, the PR may not succeed in creating awareness amongst overseas
acquirers. In addition to the advisory costs and management time required, twelve
months are needed from finding suitable PR advisers to achieving a worthwhile
amount of media coverage.
Separate out and retain a peripheral business

Some private companies may have diversified into a quite different business
activity, as a result of entrepreneurial flair rather than strategic focus, which
could be a subsidiary company, a separate division, or merely a unit. This adjunct
may be unwanted by a potential acquirer or of no value to them. If this is the
case, the vendors should consider excluding it from the sale to provide a contin-
uing, and non-conflicting, business activity for them or it can be sold separately
to maximize the value realized.
Challenge the need for vendor due diligence

For most private company sales, formal vendor due diligence is an expensive
and unnecessary exercise which distracts management, when they should be
concentrating on current year profit performance, and delays the sale process.
Yet some corporate finance advisers recommend it, and a cynic may feel that
those which are part of an accountancy firm are simply maximizing their fee
potential.
Vendor due diligence is usually appropriate when a business is to be sold by

an auction process, which is to be announced in the media at the outset. For
deals worth at least £50 million pounds, the publicly announced auction
process is widely used. The vast majority of private company sales are much
smaller deals, however, and quite rightly the vendors usually wish to market
the business only to a handful of known serious buyers, and to do everything
possible to avoid customers and staff knowing what is happening until legal
completion.
In contrast, an auction may involve sending out a full information memorandum

to more than 25 prospective acquirers, inviting them to submit a written offer
without meeting either the vendors or the management team of a subsidiary.
Then about five bidders will be invited to meet the management team or the

vendors and given access to a data room, which may be ‘virtual’ as access can
be provided by a secure website. Bidders will be invited to make a second round
bid, from which a preferred bidder will be selected and one kept in reserve.
The data room would usually contain the vendor due diligence carried out by
an accountancy firm not the auditors, in order to be independent and other special-
ists such as legal, pensions and environmental experts.
Usually, when a private company is being sold, heads of agreement are signed
and only then is the preferred purchaser allowed access to carry out their own
due diligence.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 6
Unsolicited approaches – potential
jackpot or major distraction?
Recognize a random mail shot and act accordingly........................32
A letter from a professional adviser may be a mail shot.................35
A phone call from a professional adviser

might be serious interest ....................................................................35
A direct approach from a private equity

house should be serious......................................................................36
An MBO request is a potential minefield..........................................37
A direct approach from a strategic buyer might be a jackpot .......39

Chapter 6
Unsolicited approaches – potential
jackpot or major distraction?
You may be flattered by an unsolicited approach to buy your company, but it

may be nothing more than junk mail rather than a potential jackpot. To avoid
a major distraction of vital management time, it is essential to recognize the
different guises of unsolicited approaches and to handle them accordingly.
Unsolicited approaches include:
• a random mail shot;
• contact from a professional adviser might be serious interest;
• an approach from a private equity house;
• a request from your management team for an MBO; or
• direct contact from a strategic buyer.
Each one will be considered separately.
Recognize a random mail shot

and act accordingly
Business brokers and individual investors buy a mailing list of companies in a
particular sector and mail shot all and sundry. I know of quite a few outfits which
routinely mail more than 1,000 letters every month.
If the timing is not right for you, then I urge you to bin the letter without a second
thought. Even if the timing is right, I believe that a systematic marketing campaign
to sell the business may be needed to maximize the likelihood of success and
to achieve the best deal.
If, despite this, you are tempted to respond, please do so with caution. Make it
clear at the outset that the company is categorically not for sale, but you wish

6 UNSOLICITED APPROACHES – POTENTIAL JACKPOT OR MAJOR DISTRACTION?
to know why you were approached. A telephone call is likely to be more revealing
than a letter or email response. You should ask:
• What do you know about the company which prompted you to

approach us?
You should be ready to press this point, because a junk mailer may know nothing
more than the company address and a turnover figure. So, if you are simply
given a standard response such as ‘you are a well respected company in your
sector’, be ready to ask supplementary questions such as:
• Yes, but tell me what products and services which we supply are of
particular interest to you or your client?
• What caught your eye when you looked at our website?
If the approach was from an intermediary, you should ask these additional
questions:
• What are the company, person, job title and telephone number on
whose behalf you made contact?
• Did they authorize you specifically to contact me?
• If not, do they know you have contacted me?
• Are you being paid a retainer in addition to a contingent success fee

to find acquisitions for them?
• Presumably you are happy for me to telephone your client if I want

to progress matters?
If the answers amount only to vague waffle, then you know it is a junk mail
approach and bin the letter.
If the approach was from an investor, you should ask additionally:
• What deals have you completed in the past two years? – because an
investor seeking a first deal is likely to find difficulty in raising the
necessary finance without any track record.
• What was the value of your deals, the deal structure and which
institutions provided the finance?
• Do you want to acquire 100% of the equity or a smaller stake, and if

so what percentage?
• Are you wanting to back the present management team, to become

chief executive yourself, or to introduce a new chief executive?

• If so, have you already identified a suitable person and what is their
track-record? – because if they do not have a first class person with
relevant sector experience the chance of obtaining finance will be
undermined.
You must recognize that the vast majority of letters from investors, including
those dressed up as a limited company but are really a one-person operation,
are so speculative as to be nothing more than junk mail. You should adopt the
stance that they have to convince you to take them seriously by giving you tangible
proof.
The reality is that many individual investors may:
• struggle to pay a price comparable to a private equity house
• have to resort to various sources of finance to back the deal, including

asset backed finance, mezzanine finance, bank loans and an overdraft
facility
• want you to retain an equity stake or worse still, accept an unsecured

loan note in part-payment for your own company!
• If the acquisition is over-geared and the business fails you will have
lost out.
If the mail shot is directly from a management buy-in team, it may appear attrac-
tive but the overwhelming majority of MBI candidates fail to secure a deal, so
much so that the anecdotal evidence is that less than 1% succeed!
Typically MBI candidates have been made redundant and intend to use their
pay-off to finance their search for an MBI opportunity and to have enough left
to invest in the deal. To maximize their chances many will do a fairly random
mail shot approach to hundreds of companies. Some MBI candidates attach a
letter from a private equity house offering to finance them in an acquisition up
to a stated value. This may appear to be evidence of available finance, but it is
only a letter of comfort which will encourage the candidate to offer an oppor-
tunity to them. Any financial backing will be strictly subject to their standard
investment criteria.
The truth is, however, that they will have to prove to a private equity house that
they are the ideal candidate to manage the business in order to get financial
backing. This means the MBI candidate must:
• have been a chief executive – finance or marketing directors will simply

be written off as ‘wannabes’

• have chief executive experience managing a larger business in the same

sector, or at the very least a demonstrably related sector.
Consequently, a successful MBI candidate is likely to identify a handful, and

certainly not more than about 25 companies, for which a headhunter would regard
them as the ideal candidate. This is a manageable number of companies which
should be researched and then an approach made to you by telephone, and which
may merit serious consideration by you. An MBI approach must be regarded
as speculative and should be tested against offers from strategic buyers.
A letter from a professional adviser

may be a mail shot
Some professional advisers, including accountancy firms and investment
banking boutiques, use mail shots to general disposal mandates. There may be
a vague reference to seeking acquisitions for a client, but this may simply be a
door-opening tactic.
My advice is to be cautious and proceed as described earlier for any other

unsolicited letter.
A phone call from a professional adviser

might be serious interest
The fact that enough homework has been done to make an effective telephone
approach could mean that a dedicated acquisition search is being carried out
for a particular client.
If the adviser says their client does not wish to reveal their identity at this stage,
clearly caution is needed. The client may be:
• A strategic buyer – and the adviser should be able to give enough

background to convince you it is a serious buyer, without actually
naming the company.
• An MBI candidate – and although they should be convinced that the

candidate is backable and finance can be secured, it is a less compelling
approach than a strategic buyer.

• Your own management team! – surprisingly often a management team

will ask professional advisers to make an anonymous approach on their
behalf to establish that you would be prepared to explore the
possibility of a sale before they risk asking you themselves. So you must
protect yourself by establishing that it is not an MBO approach before
giving any positive reaction whatsoever.
• Or, possibly, a private equity house – but if so I cannot see any

justification for withholding their identify.
A meeting with a private equity house may be informative, but recognize that
if you are to do a private equity deal you should carefully pick three or four houses
to compete against each other in order to get the best deal. The value of their
offers and the deal structures are likely to vary considerably.
If it appears to be a serious strategic buyer, and the timing makes sense for you,
then you may wish to find out their identity but you should insist on knowing
who you will meet in advance.
A direct approach from a private equity

house should be serious
Private equity houses face a dilemma. They have a mountain of cash to invest
and an acute shortage of really attractive investment opportunities available to
buy at an acceptable price. Consequently, it is commonplace for them to make
direct approaches nowadays, either by telephone or letter.
With private companies, the private equity house may be prepared, or even happy,
to develop a relationship with the owners over a two or three year period before
investing.
The risk of meeting a private equity house for an exploratory discussion as a

result of a direct approach is minimal, provided that they are not seeking to initiate
acquisition opportunities for an investee company, which may be one of your
competitors.

An MBO request is a potential minefield

A request from your management team to pursue a buy-out should be regarded
as potentially as dangerous as crossing a minefield. Your response should be
to stonewall, albeit in a friendly way, by words to the effect that you do not contem-
plate selling the company in the foreseeable future. If you wish to add that you
will reflect on it, as a courtesy to the management team before ruling out the
possibility, it is essential that you make it crystal clear that they must not make
any contact whatsoever with potential advisers or financial backers in the
meantime. If your answer really is ‘No’, however, then I strongly recommend
that you say so at the outset, in a friendly but final way.
If you have any wish to explore a buy-out or even an inclination to do so, it is

vital that you take expert advice immediately. Even if the management team has
been unswervingly loyal up to now, the moment that you agree to explore an
MBO then you must recognize that the management team will be driven by self-
interest, actively egged on by their own professional advisers. Furthermore, if
the attempted MBO fails for any reason whatsoever, your relationship with the
management team is likely to have been damaged irreparably, and they could
well leave to pursue an MBI elsewhere.
If a buy-out does seem to make some sense, you should explore the feasibility
of an MBO and alternative avenues with your professional adviser before allowing
the management team to proceed.
• The adviser will be able to make an initial assessment of the

management team’s likely appeal to financial backers and the suitability
of the company for an MBO, together with an indication of the probable
deal value a private equity house is likely to pay. If you are the full-
time chief executive of the business and you play a key role in, say,
winning major new clients, however, it is difficult to see a member of
the management team having sufficient credibility with a private equity
house to replace you.
• Research and identify likely strategic buyers, the anticipated realizable

deal value and whether or not an earn-out is likely to be imposed, which
means some of the purchase will not only be deferred but contingent
upon you meeting demanding profit targets, typically for the next two
financial years.
• If there is a demonstrable appetite from strategic buyers, one option

is to market the business to trade buyers and about three carefully
selected private equity houses simultaneously.

The management team should be told the process to be adopted and it made
clear that no private equity bidder would be allowed access to the management
unless they were selected as the preferred bidder. You may wish to adopt a
constructive approach to your management by indicating that if a private equity
offer is comparable to the best one from a trade buyer, or even very nearly so,
then you will favor them.
An alternative option is to pursue a VIMBO, a vendor initiated management

buy-out, rather than an MBO.
A VIMBO puts you in control of the process for much longer. Three or four private
equity houses, keen to pursue the investment opportunity, are invited to make
an offer for the company and their proposed deal structure, without meeting
the management team. Only when a preferred bidder is selected, will access to
management be allowed. You will need to explain the process to your team at
the outset and tell them that provided the best offer is acceptable to you, then
you will be happy for a deal to go ahead.
It is possible, however, that strategic buyers are essentially non-existent and your
advisers may feel that a VIMBO is inappropriate, so an MBO is probably the
best opportunity and the timing may be right as well.
When you tell your management team you are prepared to consider an MBO,
it is essential that you specify the following conditions:
• A minimum acceptable offer – you must set a backable price based

on financial modeling carried out by your financial adviser, otherwise
you are embarking on a course which is doomed to fail, with the adverse
consequences outlined earlier in the chapter.
If you fail to specify a minimum acceptable deal value, management greed is

likely to run riot. They will tell the private equity houses the percentage stake
they want for themselves, and the offer price is likely to be considerably lower
as a result. In contrast, when a private equity house is bidding as a principal,
they will seek to maximize their offer, in order to maximize their chance of success,
and only offer the management team a realistic equity stake.
• Give a deadline; six weeks is sufficient, to receive an offer and detailed

deal structure on the letterhead of a private equity house.
The pursuit of an MBO becomes an overwhelming priority for the management

team and running the business, which is what they are paid to do, is relegated
to an unimportant chore. So things must not be allowed to drag on and it is
totally inadequate simply to be told by their professional advisers that funding
is available at a stated deal value.

The advisers to the management team will be eager to have a cost indemnity
from you at the outset to underwrite some of their fees if the buy-out fails for
any reason, but you should not consider a request for a cost indemnity for the
management team until you have received an acceptable offer.
A direct approach from a strategic buyer

might be a jackpot
Equally, it might be doomed to fail at the outset.
A real life case illustrates just what can go wrong. The owners of a private facil-
ities management company received an invitation to lunch from the UK
managing director of their head-on competitor, part of a world-wide company
listed on Wall Street. Curious, they went along and were flattered and aston-
ished. They received an indicative offer over lunch beyond their wildest
dreams, payable in full on legal completion.
Furthermore, they were told it might be possible to increase the offer provided
that three senior directors of the competitor could spend several weeks
carrying out a detailed on-site appraisal of the business to quantify the substan-
tial synergistic benefits and cost rationalization savings from a total integration
of the two businesses. Almost immediately after the launch they agreed to the
request and gave unrestricted access to a head-on competitor! The offer was
increased by more than 10%.
I was invited to act for the vendors to improve upon ‘the offer’ they had received,
and expressed my astonishment. I offered to telephone the Vice President M&A,
in Chicago to confirm the status of ‘the offer’ free of charge, before wishing to
be appointed. They felt I was unduly suspicious but were reluctantly convinced
it might be a good idea. The answer I got devastated the owners! Head Office
were totally unaware of the acquisition approach and told me that the UK
managing director had no authority to make an approach, let alone make a verbal
offer, and they would not even contemplate any UK acquisition until their existing
subsidiary had been restored to acceptable profitability.
Remember the good old truism. If anything sounds too good to be true, it almost
certainly is too good to be true.
There is a simple test you should always apply to any so-called offer. Insist it is
put in writing, duly signed and seek confirmation of the level of internal author-
ization it has. If the vendors had done this they would not have revealed their

innermost confidential information because no written offer would have been

received.
To satisfy yourself that a direct approach from a strategic buyer could be a poten-
tial jackpot opportunity, establish:
• the buyer has the financial resources to fund the purchase before you
even agree to meet – a small listed company may require you to accept
a large number of their shares as part of the purchase consideration;
or a private company may offer you shares in anticipation of their
stockmarket listing (which may not happen).
• you understand at the outset that the individual has obtained the
requisite internal approval to make the approach – it is more
commonplace than you might imagine for an executive to initiate a
deal without any authority, in order to impress as a go-getter and hope
to ‘sell the deal’ to the group board in due course.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 7
Professional advisers need
choosing and appointing carefully
Corporate finance advisers – their role and benefits.......................43
Corporate finance advisers – the risks .............................................44
Corporate finance fees ........................................................................45
Corporate finance advisers love ‘inverted’ fees – so beware .........47
Negotiate corporate finance advisers disbursements .....................49
Corporate finance advisers come in different shapes and sizes ....50
Corporate finance boutiques..............................................................50
Accountancy firms...............................................................................51
Investment banks ................................................................................52
Business brokers..................................................................................52
Solicitors ...............................................................................................53
Tax advisers ..........................................................................................54
Create an effective beauty parade .....................................................55
Negotiate letters of engagement........................................................56

Chapter 7
Professional advisers need
choosing and appointing carefully
Outside help is costly, and there can be no guarantee that a deal will result. Despite
this, however, external advisers are commonly used by private companies and
many listed groups, because the vendors lack the technical knowledge, relevant
experience and management time needed to ensure a successful deal. Private
company owners will find that selling a business is a prolonged emotional roller
coaster, with the added stress that the deal may collapse shortly before antici-
pated completion.
In order to decide what outside advice and help may be needed, or beneficial,
it is necessary to identify the tasks to be done and the expertise required.
The tasks to be done include:
• identifying the options available, both now and in the foreseeable future;
• choosing the preferred option to pursue;
• grooming the company to obtain the best deal possible;
• carrying out tax planning;
• valuing the business;
• deciding the target price to seek and the minimum to accept;
• writing an information memorandum to sell the opportunity;
• identifying prospective purchasers or investors as appropriate;
• approaching them to establish a definite interest;
• negotiating the deal and ensuring maximum tax efficiency; and
• handling the legal work to complete the deal.
Relevant professional advisers include:
• a corporate finance adviser or business broker;
• solicitors; and
• tax advisors.

7 P R O F E S S I O N A L A D V I S E R S N E E D C H O O S I N G A N D A P P O I N T I N G C A R E F U L LY
Existing advisors should be considered first because they should understand

the company and hopefully, some rapport and chemistry already exists. It cannot
be taken for granted, however, that the auditors and present solicitors will have
the requisite experience.
Each firm should be asked:
• Is there at least one partner who specializes in corporate finance work

or at least is involved regularly?
• What deals has the person completed during the past twelve months?
How large and complex were these? Who were the advisers to the other
side?
• Is it possible to meet the person concerned? (Unless he or she is already

known.)
Each type of advice will be considered in turn.
Corporate finance advisers – their

role and benefits
It is not essential to use a corporate finance adviser, even though they are widely
used by private companies and listed groups. The benefits should be weighed
against the costs involved.
The role and benefits delivered should include:
• dispassionate advice on the saleability of the company, the timing of

the sale and the likely range of realizable value;
• reviewing the activities of the company to identify any obstacles to a

sale and to recommend the action required;
• identifying a shortlist of known serious buyers from around the world

with most to gain from the acquisition opportunity;
• writing an information memorandum to sell the opportunity to the key

decision-maker of each prospective purchaser;
• hosting and chairing the initial meetings with prospective purchasers

to confirm their interest and to agree what further information will
be provided in order for meaningful written offers to be submitted;
• receiving written offers, negotiating improvements and clarifying any

ambiguous aspects or material items not included;

• negotiating any earn-out involved to maximize the proceeds for the

vendors;
• negotiating Heads of Agreement for maximum tax effectiveness, writing

the ‘Heads’ with the purchaser and agreeing a detailed timetable to
legal completion;
• steering the deal safely to legal completion, which typically takes six
to ten weeks from signing Heads of Agreement;
• enabling the vendors of a private company to concentrate on

managing their business with minimum distraction to ensure that the
current year profit forecast is achieved; and
• acting as a ‘buffer’ between the vendors and prospective purchasers

to avoid or defuse heated situations, which may well happen in a
management buy-out.
The real job of the corporate finance adviser, however, is to obtain the best possible
deal for the vendors with an acceptable purchaser. In this way, their fee should
be repaid several times over by the enhanced deal they achieve for the vendors.
Corporate finance advisers – the risks

The biggest risk of using a corporate finance adviser is that they only succeed
in selling about one third of the companies they are appointed to sell. Chapter
1 spelt out the damage that a failed sale will inevitably inflict on your business,
so you need to adopt a cautious and, indeed, a skeptical approach to appointing
a corporate finance adviser.
The tricks to be aware of include:
• Asking you what deal value you want and readily claiming they will
achieve and probably better your figure – so don’t tell them your view
on valuation first.
• Giving you a deliberately high valuation, possibly expressed as quite

a broad range so you will latch onto the higher figure, in the hope of
persuading you to appoint them because they valued your business
highest amongst the advisers you met -–so ask them for tangible
evidence to support their valuation.
• Cynically adopting the ‘the more the merrier’ approach because they
don’t know which businesses will sell, so the more chances they have

to sell the more profit they will make. Even well-known advisers are
tempted, especially if a deal leader needs to win more assignments –
always ask how busy the deal leader and the whole firm are, and the
name of all the companies the deal leader has sold in the last 12 months.
• Switch selling is commonplace, namely the star deal maker does the
pitching to you but is hardly seen by you afterwards – seek personal
assurances as outlined later in this chapter under the section on Create
an effective beauty parade.
• Prostituting your business by emailing a brief and anonymous

description of your business to hundreds of possible buyers, yes –
hundreds, and inviting them to sign a confidentiality agreement and
receive a detailed information memorandum which reveals your identity
– so be satisfied that the adviser will research known serious buyers
worldwide to create a shortlist and only reveal your identity to those
companies approved by you.
Corporate finance fees

Corporate finance advisers work on a shared risk fee basis. They charge a commit-
ment fee, which is capped, for doing the work involved and out of pocket expenses.
They receive a substantial success fee which should only be payable on legal
completion. This means that a failure to achieve a sale will leave them poorly
rewarded, but a legally completed deal will give them a handsome reward.
Some corporate finance advisors will ask that the commitment fee should be
paid in full before they commence work, and this should be flatly rejected. Payment
should only be made for measurable progress and ideally, a fixed amount would
be payable when each of the following milestones of progress has been achieved:
• the information memorandum has been completed;
• the list of known, serious purchasers to approach has been agreed;

and
• the first written offer has been received, preferably in excess of an

agreed figure – and if this doesn’t happen, they should not receive this
third installment.
If the project is aborted for any reason, or put on hold temporarily, there should
be no obligation to pay the full commitment fee. The amount to be paid should
reflect the progress made to date.

Typical success fees are:
DEAL VALUE (£ MILLION) SUCCESSFUL
4 3%
10 2% to 2.5%
25 1.5% to 2%
100 1% to 1.5%
A deliberate try-on widely used by corporate finance advisers is to state that

the success fee payable at legal completion should be calculated to include the
maximum possible earn-out payment specified in the share purchase and sale
agreement.
This should be flatly rejected because the anecdotal evidence I have studiously
collected over the years is that less than 25% of vendors receive the maximum
possible earn-out payment.
You should insist that:
• the advisers receive their earn-out based on how much you receive
and only when you are paid
• if they flatly refuse this, say that you will choose another adviser who
is prepared to accept a ‘pay when paid’ basis and they may well
capitulate. If they insist that the fee paid at legal completion should
cover the earn-out as well as the amount payable on legal completion,
insist that it should be the lower of:
– a conservative calculation of what you really expect to receive from
the earn-out; or
– or 50% of the maximum earn-out limit.

Corporate finance advisers love ‘inverted’

fees – so beware
They sell an inverted fee scale to vendor clients on the basis that the better deal
they achieve the bigger fee they should earn, and vice versa.
Not surprisingly this appeals to a lot of vendor clients, but is often used by corpo-
rate finance advisers to deliver them a bonanza fee if they get less than a really
good deal for you. A recent real life example illustrates this device. The vendor
of a care home business for the elderly told the adviser that he would not sell
for less than £20 million payable on completion, and privately believed that more
than £25 million was achievable.
One corporate finance adviser made a conservative valuation of £17 million to

£22 million, and proposed the following inverted fee scale instead of their standard
flat fee of 1.75%
VALUE OF DEAL £M % FEE
up to £17m, plus 1.65
between £17 and £20m, plus 3
between £20 and £22m, plus 5
between £22 and £25m, plus 71⁄2
over £25m, plus 10

The huge fee uplift is illustrated in the following table:
£’000 £’000
DEAL VALUE £M INVERTED FEE TOTAL INVERTED 1.75 FLAT
ELEMENT FEE £’000
FEE
17 280.5 280.5 297.5
20 90 370.5 350
22 100 470.5 385
25 225 695.5 437.5
27 200 895.5 472.5
30 300 1195.5 525
So the proposed inverted fee scale delivered a fee of £370,500, an increase of

£20,500, simply for achieving the minimum acceptable price. As the deal value
increases, the fee uplift is spectacular and should be flatly rejected.
As a result of negotiation, the advisers accepted the following scale:
DEAL VALUE £M % FEE
Up to 20 1.65
20 to 25 3.0
over 25 5.00
The reduction in the fee payable is shown below:
DEAL VALUE £M PROPOSED FEE £’000 NEGOTIATED FEE £’000
17 280.5 280.5
20 370.5 330.0
22 470.5 390.0
25 695.5 480.0
27 895.5 580.0
30 1195.5 730.0

The key features for the vendor were:
• at the lowest acceptable sale price of £20M, the negotiated inverted

fee would be £20,000 lower than the 1.75% flat fee – which is fair
• the adviser only gets a higher total fee on a deal of £22M or more
• for a deal worth £25M or more, the adviser receives and will deserve
a significant uplift on the 1.75% flat fee.
You should never accept a fee which rises above 5%, unless it only applies to a
spectacular deal value, but plenty of corporate finance advisers suggest 71⁄2%,
10% and even 15% tranches, which they apply to the maximum deal value
including the earn-out.
Negotiate corporate finance

advisers disbursements
Travelling and any overnight accommodation costs are reasonable disburse-
ments to be charged, but I urge you to insist on a written cap which should not
be more than £1,000 to £2,000 in the overwhelming majority of cases.
One vendor recently received a disbursement charge of nearly £30,000 plus VAT,
which included:
• creating an electronic data room capability, at a cost of almost £15,000,

which most corporate finance advisers provide free or at nominal cost;
• the cost of producing a glossy marketing brochure in hard copy and

electronic format by a specialist production house;
• bought-in research reports on the sector;
• meeting room hire when they did not have one available in their offices;
• and, to add insult to injury, the cost of sandwich lunches.

Corporate finance advisers come in

different shapes and sizes
• Corporate finance boutiques
• Accountancy firms
• Investment banks
Each will be considered in turn.
Corporate finance boutiques

Boutiques come in different shapes and sizes. Many countries have scores of
them, but quality and experience differ widely. To be competitive on fees, most
boutiques set a minimum success fee equivalent to a total deal value of from £3
million to £5 million. Some claim to handle deals up to £100 million, but this is
often a dubious boast. It should be tested by asking:
• What is the largest deal you have completed in the last year?
• How many deals have you completed in the past twelve months and
what is the average deal value?
It is unusual for a boutique to have an overseas office, so their track-record of

selling businesses to overseas purchasers must be tested. A few are members
of worldwide networks, which should help them to find overseas buyers, but
it is important to establish that network members work solely for the vendor
and share the fee, rather than another member acting for a purchaser and
collecting another fee which could present a conflict of interest.
The key features which differentiate corporate finance boutiques from each other
are the quality of their research to identify known serious buyers worldwide
and the marketing process they adopt to sell your business, so test them out by
asking the following questions:
• Roughly how many prospective purchasers do you expect to identify?
Their reply may well be 100 to 200 worldwide.
• How will you whittle this down to a manageable shortlist of known

serious buyers?
Ideally, the answer will be that the decision-maker in each company will be
telephoned to find out their appetite for acquisitions. This should reduce the

list to about 10 known serious buyers, with a similar number on reserve. If the
answer is that every company will be emailed an anonymous description of the
business and invited to sign a confidentiality agreement to receive a full infor-
mation memorandum – beware. This is likely to prostitute your business because
most people will obtain a copy to satisfy their curiosity.
Accountancy firms
Major firms have corporate finance departments in cities and large towns world-
wide. Some offices only handle deals worth at least £10 million, and their regional
offices may accept deals from £5 million upwards. So it is important to choose
a firm which will view your deal as attractive for them to handle.
Although they have a worldwide network of offices, check that fee sharing
happens when an overseas office finds the purchaser. Otherwise, there is no
incentive for overseas offices to help.
Second tier accountancy firms typically have a specialist corporate finance depart-
ment in capital cities and some limited presence elsewhere. They handle deals
worth £5 million plus and are competitive with the boutiques on quality of service
and fee levels.
Small accountancy firms welcome corporate finance work because of the prospect
of lucrative fees. Unless they have at least one partner working full-time on acqui-
sitions and disposals, however, it is unlikely that they have the requisite experience.
Sickness and holiday cover may be inadequate, and the ability to research overseas
buyers may be modest.
In addition to asking similar questions as outlined above for boutiques, another

question to be asked is:
• Do you tell prospective purchasers that they must submit a written

offer before meeting the vendors?
This smacks of laziness to me and the reality is that private companies need to
be ‘sold’ by the vendors at a face-to-face meeting. Talking to many buyers has
revealed that unless they are really keen, the process will put them off pursuing
their interest, especially prospective overseas acquirers.

Investment banks
Most investment banks have minimum deal values ranging from £50 million to
£250 million, so they are inappropriate for most private company sales.
When investment banks are selling a subsidiary of a listed group, the process
they often adopt is a controlled auction which involves:
• a press announcement about the forthcoming sale
• the preparation of a comprehensive and detailed information memor-

andum, often prepared by a major accountancy firm at additional cost
• sending out the information memorandum to between 25 and 50

prospective purchasers, asking for a written offer by a set deadline
without any vendor contact
• selecting a shortlist of preferred purchasers to meet the vendors, have

access to an electronic data-room and receive a draft share purchase
and sale agreement, before submitting a revised offer
• choosing a preferred buyer, with one kept in reserve, to proceed to

legal completion as soon as possible.
Business brokers
Brokers generally handle deals up to about £3 million. In Europe, including the
UK, business brokers tend to offer only an introduction service between buyers
and sellers. In some ways, this may be compared with the services provided by
the traditional estate agent.
It must be understood that the fee basis most business brokers adopt in the UK
is ‘no deal – no fee’. Even more significant, they usually expect to receive their
fee from the purchaser, although they have been appointed by the vendors to
sell their business.
This must motivate business brokers to:
• encourage people to sell their business rather than pursue other options;
and
• accept an offer even though it may be possible to find a better one.
It should not be assumed that business brokers are experts in valuation, taxation
or negotiation. Positive proof is required. It is uncommon for business brokers
to be involved in the negotiation at all. Most business brokers assume the stance

of the nice guy in the middle ‘who does not take sides’. Furthermore, prospec-
tive purchasers have a marked tendency not to want business brokers present
during negotiations. In one instance where the broker suggested negotiating
on behalf of the vendors, the prospective purchaser said ‘I am happy to pay your
scale fee for a completed deal but I will not have you present to act against me’.
The ‘no deal – no fee’ approach may make brokers look attractive, but some of
them gossip. They are keen to tell as many people as possible which businesses
they are selling, not only to find purchasers for a particular company but also
to convince people that they have a large number of businesses for sale at any
time. Gossip can damage a company which is for sale if the information travels
back to either employees or customers. Strict confidentiality must be expected
and demanded of any adviser connected with a disposal, and business brokers
should be reminded of this.
Brokers typically send out literally hundreds of anonymous descriptions of a

business for sale, usually one to four pages long. Prospective purchasers will
be required to sign a fee agreement in order to learn the identity of the company,
but many do this just to satisfy their curiosity, and typical fees are:
• 5% of the first £1 million, plus
• 4% of the next £1 million, plus
• 1% of the balance.
Some purchasers will negotiate a lower fee which makes them a less attractive
purchaser for the broker.
A few brokers charge a fee for the buyer and the seller, which should be flatly
rejected because it is double charging.
Solicitors
Most private companies need to use a firm of solicitors occasionally and groups
may have an internal legal department, but this does not mean that either is
equipped to handle a disposal because it is markedly different work from property,
litigation or general commercial matters.

The solicitors need to work full-time on acquisitions and disposals to have suffi-
cient experience. A partner in a medium-sized firm should be capable of handling
deals up to £50 million, and will charge significantly less than a major interna-
tional firm. Most cities and large towns have at least one suitable firm to use,
and are likely to charge less than large firms of solicitors in a capital city.
Two situations involve additional demands. If the purchaser is likely to use a

major international law firm it is important that your solicitor has successful
experience of dealing with major firms. It is a fact that some solicitors are
overawed by a major firm and will concede more than they should. If your
business is to be sold to a management team, it is vital that your solicitor has
ample previous experience of buy-outs and buy-ins. The transactions are more
complex, involve additional issues, and there will be separate firms acting for
the equity investor, the debt provider and the management team.
Some solicitors may offer to save you money by negotiating the deal so that
corporate finance advisers are unnecessary. Generally, solicitors do not have
relevant experience to negotiate a deal and are unlikely to be able to find buyers
internationally.
Many vendors effectively hand a blank cheque to their solicitors, because fees
are not even discussed!
When you meet prospective solicitors, ask for written confirmation of:
• the role they will carry out, especially their involvement in the
compilation and management of a data-room;
• a budgetary estimate of their fees based on the nature and complexity

of the deal; and
• exactly what will be charged by way of disbursements. Some solicitors

charge for photocopying, and despite the use of email there could be
thousands of pages of photocopying, so do find out the cost per page.
It should be nominal, but some charge silly prices.
Tax advisers
Many entrepreneurs have a personal tax adviser, which may not be part of the
audit firm. If the personal tax adviser has adequate relevant experience to handle
the tax issues arising from a disposal, it makes sense to use them because they
know your entire tax history. A new adviser will have to charge you for learning
your history because tax considerations must reflect your overall situation.

Capital gains tax rules on company disposals change almost annually and often
recent precedent cases have an important bearing on the application of the rules,
so it is vital that your tax adviser has current full-time involvement with disposal
work.
Some vendors naively think that their situation is straightforward and tax advice
is an unnecessary expense. This is nonsense. A disposal is pregnant with tax
issues to be addressed in order to minimize the capital gains tax payable and it
is strongly recommended to obtain ‘tax clearance’ by the tax office prior to legal
completion, to give the vendors comfort that the deal appears to be structured
acceptably.
Create an effective beauty parade

The first step is to identify, say, three prospective firms to meet. The tried and
trusted method of asking business acquaintances for suggestions is an obvious
starting point. Trade press magazines may contain articles or case studies written
by advisers, and news of completed deals may name the advisers involved. Internet
search and reading websites is another source.
If you are unsure which individual to contact, telephone the personal assistant
to the senior partner and ask who is the relevant partner to handle the size,
complexity and business sector of your deal. When you speak to the person,
outline your needs and the agenda you wish to address when you meet. For
corporate finance advisers, the agenda should include:
• the recommended exit route and timing;
• the names of known or likely buyers;
• the probable deal value range and likely deal structure; and
• the disposal process and fees involved.
At the meeting, questions to be asked of any professional adviser include:
• What transactions of similar size and complexity have you personally

completed in this market sector or a similar one?
• Which transactions have you personally completed in the last 12 months

and what were the deal values?
• How many companies were sold by your firm to overseas buyers in

the last 12 months?

• May I have the name, job title and telephone number of three clients
for whom you have completed deals, if I decide in principle to appoint
you?
• Will you be present at every meeting I wish you to be?
• What will happen if you are on holiday or ill?
• Who else will be in your team and what is their role?
• What is your fee proposal?
• May I have a copy of your standard letter of engagement as well as a

written proposal?
Questions to be asked of previous clients include:
• Did the adviser personally lead the team for you and attend meetings
when you felt it appropriate?
• Did you get an outstanding deal, first class service and value for money?
• What things annoyed or irritated you?
• Would you unhesitatingly appoint the adviser again?
• How should I get the best out of the adviser?
• How enjoyable was it to work with the adviser?
Chemistry and style are truly important and this will become apparent during
long, tedious and contentious negotiation meetings.
Negotiate letters of engagement

Accountancy firms often require you to sign an engagement letter on appoint-
ment, which may be about twelve pages long and is likely to penalize you harshly.
For example, the engagement letter may say that if you reject a written offer or
you withdraw after Heads of Agreement are signed, you are obliged to pay their
success fee in full.
I have always believed passionately that if you do not complete a deal for any
reason, you should not pay a success fee.
I urge you to obtain a copy of the engagement letter at the same time as their
fee proposal and to go though it line by line. Then negotiate the amendments
you want from your preferred adviser before appointing them. Flatly refuse,

or effectively negate, any wording which could possibly create an unacceptable

liability to you. It is tedious and time consuming, but the last thing you want to
suffer if the sale is unsuccessful is a demand for a substantial payment. The most
recent engagement letter I negotiated for a vendor resulted in a total of 19 deletions
and amendments.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 8
Value your business from the
buyer’s standpoint
Adjusted profits before tax are of the essence .................................59
Major cost rationalization opportunities .........................................62
Strategic significance or rarity value ................................................62
Adjusted net asset value .....................................................................63
Use your adjusted profits to value your business ............................63

Chapter 8
Value your business from the
buyer’s standpoint
Some vendors pay about £10,000 to have their business valued as a prelude to
a sale. Often, this is carried out purely based on audited accounts without even
visiting the premises or any assessment of the future prospects of the business
and buyer appetites. I regard it as a complete waste of money and a much more
informed opinion should be provided by prospective corporate finance advisers
you meet and completely free of charge.
A valuation of a business for sale must take into account the factors which influ-
ence buyers, namely:
• the adjusted profit before tax to reflect the true profit the buyer will
inherit;
• major cost rationalization opportunities;
• strategic significance or rarity value; and
• the adjusted net asset value.
Adjusted profits before tax are of the essence

The price any purchaser is prepared to pay is likely to be determined by the profit
and cash flow produced from owning the business, and to a much lesser degree
by the balance sheet worth of the assets. Purchasers of a business usually produce
adjusted profit figures for at least the previous financial year, the current one,
and two future years. To value a business on behalf of vendors requires a similar
approach, and the professional advisers should present adjusted profit figures
to prospective purchasers at the outset.
From the vendor’s standpoint it is worth adjusting profits for the previous three
years if this will help to establish a record of rising profits. One-off events which
may have significantly reduced profits in a year include:
• lump-sum pension contributions from directors;
• the start-up costs associated with entering an overseas market;

8 VA L U E Y O U R B U S I N E S S F R O M T H E B U Y E R S S TA N D P O I N T
• the closure of premises or the termination of a product;
• the costs arising from major litigation;
• significant redundancy costs;
• the costs of relocating a factor, warehouse or office;
• a large bad debt as a result of a major customer going into liquidation;
• a strike affecting deliveries from a key supplier; or
• excessive personal expenses which will cease immediately post sale.
It is quite possible that a prospective purchaser will reject some adjustments to

profit, but at least the vendor has set out an arguably valid profit history.
Additionally there may be other factors which will enhance profits for the new
owners, such as:
• the directors being required to accept a reasonable executive salary

after the sale, compared with the substantial rewards enjoyed as owners
and directors;
• the intention that a director will retire upon the sale of the business
and will not need to be replaced, or only by a lower cost executive;
• the savings arising from the termination of relatives working for the
business at inflated salaries;
• the benefits to be gained from recently taken action such as a price

increase, the elimination of a loss making activity; and so on.
It is particularly important that the profits for the previous financial year and
the current one are adjusted to show the most favorable picture which can be
portrayed accurately.
In the case of the disposal of a division or subsidiary, it is important to adjust

the profits by ‘adding back’ charges allocated by the present group which will
cease following a disposal. These include a wide range of possible allocated costs
such as:
• a group management charge based on a proportion of central staff

costs;
• a percentage levy based on sales value for group expenditure, such

as research and development or public relations;
• service charges for the use of central departments such as information

technology, payroll, pension administration and so on.

The reality is that the acquiring company should be able to provide the resources
required at a much lower incremental cost than is presently allocated by the
existing group. Equally, it must be realized that the overall impact on the profits
of the vendor group will be significantly larger than the profits reported by the
subsidiary. The reason is that in practice it will not be possible to reduce group
costs by the amount allocated to the subsidiary. For example, the sale of a
subsidiary is unlikely to reduce commensurately the amount which needs to be
spent centrally on research and development or public relations.
Equally, if the aim is to make a realistic assessment of the worth of a business

to a purchaser, it would be naïve for the acquirer to ignore the extra costs which
will be incurred.
Examples of the extra costs which will be taken into account by a prospective
purchaser are:
• the appointment of a qualified financial controller to replace an

unqualified book-keeper;
• the need for increased insurance cover;
• increasing some salaries to avoid unacceptable differentials compared

with similar staff already employed within the group; and
• additional pension contributions arising from employees joining the

group pension scheme.
The acquiring company will take into account opportunities for increased profits
as a result of acquiring the business. It is equally important that these are quanti-
fied by the vendor as well. Typical opportunities to increase profits are:
• purchase cost savings as a result of increased purchasing power;
• cross selling the products and services of the acquired company to

existing group customers, and vice versa, both at home and overseas;
and
• the rationalization of premises and overhead costs.
The aim must be to negotiate a purchase price which reflects a share of the
additional value created by the profit opportunities arising from the acquisition
to be enjoyed by the vendors.

Major cost rationalization opportunities

Some acquisitions produce substantial cost rationalization opportunities for the
purchaser. Consider a private contract caterer which operates in a local
geographic area and enjoys a high market share. A nationwide acquirer would
be able to virtually eliminate the directors, head office staff and costs by folding
the business under the existing regional management structure. Consequently,
the rule of thumb in the market sector is to value businesses on a multiple of
gross profit. In these circumstances, it is unlikely that an overseas acquirer wishing
to enter the market could match the price because there would not be similar
overhead savings.
Strategic significance or rarity value

There is ample evidence that purchasers will pay more than a financial evalu-
ation alone would dictate when there is strategic significance to be gained. For
example, a media services group seeking to offer one-stop shopping to clients
may have a strong qualitative market research arm but lack quantitative compe-
tence. If acquisition is the only way to gain this quickly enough, there may well
be a willingness to pay a premium price.
A scarcity of acquisition targets becomes rarity when there is only one attrac-
tive company available to acquire in a country in a particular market segment.
Recently, US medical and orthopedic product companies have been keen to
acquire in the UK and Ireland, but the lack of private companies which are suitable
acquisition targets means that scarcity is rapidly becoming rarity value. In such
a situation, competitive bidding may deliver an outstanding deal for vendors.
The defensive need to acquire may arise when a private company creates a new
product, service or distribution network which is likely to threaten the existing
businesses of a major company.
In these circumstances, the company under threat is likely to take into account
not only the additional profit resulting from the acquisition of the private
company, but also the threat to the existing profits if the competitor is allowed
to continue. The advantage may prove to be only temporary, so the timing of
the sale is important.
Sometimes, stock market listed companies feel themselves to be under pressure

to make an acquisition, either to diversify into more attractive market sectors
or to reduce their own vulnerability to acquisition. If they believe this to be the
case, whether it is a correct analysis or not, it is likely to encourage them to pay
a somewhat more generous price as a result.

Adjusted net asset value

Unless, the net asset value of the business is similar to, or higher than, a valua-
tion based on profits, asset backing is likely to have little impact on the overall
valuation by a purchaser.
Nonetheless, in order to present the best possible picture, the most recent and
audited balance sheet should be adjusted to reflect the current net asset worth
by taking into account:
• the market value of freehold premises; and
• retained profits since the balance sheet date.
When the net asset backing is low compared to the total valuation, this is likely
to cause purchasers to decrease the up-front payment and to increase the propor-
tion of the earn-out consideration. For example, the net asset backing of many
service companies may be as low as 10% to 20% of the total valuation.
Use your adjusted profits to value your business

I strongly recommend that you leave overly sophisticated valuation techniques
to acquirers, which are often used to justify the price they think they will need
to offer in order to acquire the company.
The only true test of realizable value is the best deal offered in writing by a short-
list of known serious buyers worldwide.
One vendor said to me ‘I can name no less than seven major companies willing
to pay a premium price for my business and ready to offer more than £10 million’.
It was a retirement sale, accelerated by serious ill health. A thoroughly compre-
hensive worldwide marketing campaign failed to achieve a single offer. The
business was then sold to management, by now out of pressing necessity for
only £4.3 million. On a legitimate valuation basis ignoring the lack of appetite,
a deal worth £6 million to £7 million could have been expected, but I believe the
truly realizable value was £4.3 million, because there was a complete lack of interest
from trade buyers.
The adjusted profit before tax for the most recent financial year can be
converted into an overall valuation in the following way:
• deduct a full 30% corporation tax charge in the UK, because the acquirer
will undoubtedly pay the highest rate of tax applicable;

• identify the sector average price earnings ratio, and reduce it by 40%;
• test your valuation in terms of a return on investment.
A worked example will illustrate the simplicity of this approach:
Adjusted profit before tax for most recent financial year £500,000
Deduct a 30% corporation tax charge £(150,000)
Adjusted profit after tax £350,000
Sector average price-earnings ratio

listed in the Financial Times 15.0
Deduct 40% to reflect the typical discount for the prices

actually paid for private companies and subsidiaries (6.0)
After-tax multiple to use for valuation 9.0
Approximate valuation = 9.0 x £350,000 = £3.15 M
If there is rarity value, caused by lack of acquisition opportunities and a real

appetite amongst buyers, it is possible that a dramatically higher price could
be realized.
Equally, if the business is large enough and suitable to obtain an AIM or full
stock market listing immediately, it would be wrong to discount the sector price
earnings ratio at all.
The return on investment likely to be obtained by a purchaser both immediately

and after two years, is a good reality check on your valuation.
Consider the following example:
FINANCIAL YEAR PREVIOUS CURRENT NEXT YEAR YEAR 2
Profit before tax – £250,000 £300,000 £525,000 £600,000

assessed
by the acquirer
including
cost rationalization

Most listed acquirers are likely to seek a pre-tax return on investment in the current
year of at least 15% and 20% in the second year post-acquisition.
The maximum value to achieve a 15% return on current year pre-tax profits of
£300,000 is £2 million, and £3 million to deliver a 20% year in the second year
post-acquisition.
It must be stressed, however, these are little more than guestimates, but do indicate
a probable range of values.
A real life example illustrates just how unrealistic a formulae valuation may be.
The owner of a PR company said to me “my auditors have formally valued my
business to be worth £6 million”. They had completely ignored the fact, or may
well have been totally unaware, that buyer appetites worldwide in the sector
were extremely low because of difficult trading conditions. Also, the business
was heavily dependent on only a handful of clients. The vendors own profit figures
were:
FINANCIAL YEAR PREVIOUS CURRENT NEXT YEAR YEAR 2
Profit before tax £300,000 £305,000 £330,000 £360,000
The pre-tax return on a £6 million purchase price would be 5% in the current

year and only 6% after two years, when the overdraft rate for blue chip compa-
nies was currently 5.25%. The stark reality was that an up-front payment of about
£1.5 million, with a demanding earn-out likely to realize less than £0.5 million,
was the best deal which could reasonably be expected, given the lack of appetite
in the sector.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 9
Benefit from expert
streetwise tactics
Timing really is of the essence............................................................67
Sell the company and your management, not yourself...................68
Outline the structure and type of deal you want..............................69
Telegraph any potential deal-breakers at the outset .......................70
Disclose unattractive features and events positively .......................71
Never reveal your asking price first ..................................................71
Don’t be seduced by private equity players houses.........................72
Retaliate first to guard against a last minute price chisel ...............73
Sweetheart deals sometimes really are sweet ..................................74
Use win-win negotiation tactics.........................................................75

Chapter 9
Benefit from expert
streetwise tactics
This chapter has been written to share with you some of the streetwise tactics
I have developed and used over a lifetime of buying and selling companies. These
are the tactics which not only get you the best possible deal, but which may well
make the difference between getting a cracking deal or failing to sell your business.
The tactics to be covered are:
• timing really is of the essence;
• sell the company and your management, not yourself, to buyers;
• outline the structure and type of deal you want;
• telegraph potential deal-breakers at the outset;
• disclose unattractive features and events positively;
• never reveal an asking price first;
• don’t be seduced by private equity players;
• retaliate first to avoid a last minute price chisel;
• sweetheart deals sometimes really are sweet; and
• use proven win-win negotiation tactics.
Each of the above tactics will be covered separately.
Timing really is of the essence

Chapter 4 outlined that grooming may require three months to a couple of years
before initiating the sale process, which will usually take six to nine months. In
addition, about 50% of private companies sold to a trade buyer involve an earn-
out which could mean that the final payment is still two and a half years away.
So the whole process is likely to take at least twelve months and could take five
years!

9 B E N E F I T F R O M E X P E R T S T R E E T W I S E TA C T I C S
Timing is important in terms of buyer appetites as well, which may add to the
overall timescale. For example, during the last time the marketing services sector
was suffering worldwide from sharply reduced client demand, it was difficult
to sell a first rate advertising agency or PR company at all, let alone obtain a
first class deal.
Similarly, various sectors go through a flurry of acquisitions as part of an overall

consolidation process, and it is important not to miss out. Typically, there will
follow a period of integrating the businesses acquired, a lack of interest in further
deals and then only in larger businesses as a result of the consolidation which
has already occurred.
Timing is equally important regarding when to begin the sales process during
the financial year. Ideally, Heads of Agreement should be signed two or three
months before the financial year end because the forecast to the year end should
be sufficiently robust by then to be confirmed by the due diligence process. In
this way, the buyer should be encouraged to value the business on the current
year performance and you will achieve legal completion before the year-end.
If you allow six to nine months for the sale process. This means your corporate
finance advisers should start their work by the end of the first quarter of the
financial year.
Some vendors mistakenly aim to sign heads of agreement as soon as the audited
accounts will have been fast tracked and available for due diligence. Firstly, the
valuation will undoubtedly focus on the actual result because it is too early to
give credence to the budgeted profit for the current year. Worse still, however,
if the new financial year has started below budget it may unsettle the purchaser
and even cause them to delay completion until performance improves.
Sell the company and your management,

not yourself
Buyers recognize that you will work flat out for them during an earn-out period
as long as you can see yourself earning a worthwhile additional payment. But
they have no illusions, as soon as you become a paid executive you will be keen
to leave as soon as possible.
A major company privately felt smug that they had acquired a business founded
and managed by three outstanding executives, but the earn-out required excep-
tional results for them to earn any more money. Within six months, the vendors

disliked the intervention and interference they faced, and the market place deteri-
orated sharply so that they faced the prospect of not receiving a penny under
the earn-out. One Friday afternoon, the three executives announced their
immediate departure and the acquirer faced a gaping management hole.
By now, I should have convinced you that you need to downplay your continued
importance to the business and stress the experience and calibre of your senior
executives. Ideally, you should be able to suggest that one person is rapidly
becoming capable enough to replace you.
Outline the structure and type of deal you want

It is essential that you outline the type of deal you want before you receive written
offers, because often major companies are reluctant to restructure their offer
once they have obtained approval to submit their original proposal. So you may
lose a serious buyer for your business.
The features of the deal you need to outline when dealing with a trade buyer
include:
• If you wish to sell 100% of the equity at completion, which presumably

you do, say so. Otherwise you may receive an offer to acquire a majority
stake initially and the remainder to be bought or sold at a specified
valuation formula and within a pre-determined timescale, which should
be avoided.
• Make it clear that you will not accept substantial part-payment in shares
of a small listed company or one that is soon to be listed (hopefully).
A vendor of a software company insisted that he would consider any offer a

bidder wished to make in order to encourage them to put forward their ‘best’
offer. A company with a market capitalization of only £27 million offered him
£18 million and £9 million was to be paid in shares, which could not be sold for
two years and then only through the company broker. Another offer was from
a large unquoted company planning to list within 18 months. £10 million was
to be paid in shares by a convertible note which would value the shares at the
listing price, and the note would be redeemable in cash with interest rolled up
if the company had not floated within three years.

Both offers were flatly rejected for good reason, but wasted time and effort for
both sides could have been avoided by making it clear at the outset that payment
would need to be in cash.
• Outline your stance regarding an earn-out deal
Above all, be realistic. If the asset backing will be a small proportion of the deal
value, or the business is heavily dependent upon two or three customers or a
single supplier, or there is a lack of management continuity, any one of these
features will make an earn-out almost inevitable. Simply to reject an earn-out
is likely to cause bidders to drop out.
You can be realistic, however, by outlining:
• you expect the proportion of the earn-out to be, say, a maximum of

20% of the total deal value;
• you want only a one-year earn-out, and would not consider longer
than two years; and
• you want enough freedom to maximize profit during the earn-out in

order to maximize your payment.
Telegraph any potential deal-breakers

at the outset
Hopefully, you do not have any issues which are potential deal-breakers but some
may be raised by a prospective purchaser and you need to respond in a friendly
but firm way.
Possible deal-breakers raised by a prospective purchaser may include:
• an intention, or possibility, to relocate the business and to ask key staff

to relocate their families, whilst all other staff are made redundant;
• a wish to exclude a valuable freehold from the deal and merely to sign
a medium-term lease with you; or
• a commitment to acquire new offices locally in order to meet the planned

expansion of your business, but you will be expected to retain the lease
and to find a new tenant.

Disclose unattractive features and

events positively
It may be tempting to withhold or delay outlining any undesirable features or
events, but it is dangerous. If the buyer only finds out about these after making
a written offer, you are inviting them to reduce their offer or to withdraw from
the deal if it is a serious matter.
My unequivocal advice is to disclose any undesirable features or vulnerabili-

ties to the vendors in a face-to-face meeting before they make a written offer,
but to ‘wrap positive news around your disclosure’.
Real life examples include:
• The vendor disclosed that as a result of a routine PAYE tax investigation

by the Inland Revenue, expenses reimbursed to staff had not been
treated properly. The positive was that the unpaid tax and interest
charges had already been paid, so the matter was closed, and the
auditors had carried out a thorough review to ensure that all tax matters
were being handled correctly and there were no more hidden
liabilities.
• A major customer had given notice not to renew their three-year supply
contact. The positive was that the cause was supplier rationalization
as a result of a merger, and the vendor was able to announce that a new
customer had just signed a major contact and two other opportunities
looked promising.
• The current year performance is significantly below budget. The positive,

hopefully, is that you can demonstrate it results from the delay in a major
order being placed or completed and you will still meet the forecast
you have given for the full financial year.
Never reveal your asking price first

This is the ultimate sucker punch to be avoided at all costs. If you reveal an asking
price first I promise you that you will never receive it. Every purchaser will merely
seek to tempt you by offering you a deal tolerably close to your figure or even
less.
Also, you need to know that almost invariably I have found that when four or
more written offers are received for a business, the highest one will be at least

50% more than the lowest, and in a significant minority of cases more than twice
the lowest offer.
When you have received either a verbal offer or a written one you should be
ready to indicate the valuation you expect to receive. Do not be tempted to pitch
your figure unrealistically high, because buyers may simply withdraw because
they feel it is pointless to increase their offer somewhat as the gap is too large.
Don’t be seduced by private

equity players houses
Private equity houses tend to be master tacticians, because they are full-time
professional deal-makers. By comparison, a private vendor without expert corpo-
rate finance advisers is a part-time amateur at best.
The proportion of debt finance used to finance buy-outs and buy-ins means that
there is little room for manoeuvre over the deal value. So a dip in current year
performance or the reluctance of lenders to provide the assumed level of debt
will probably result in a price chisel at a late stage. Some cynics claim that private
equity buyers have no intention of paying the price agreed in the heads of agree-
ment, because they are determined to find grounds to reduce their offer. It may
seem this way to an aggrieved vendor, but some private equity houses make a
legitimate virtue out of their record of consistently delivering the deal set out
in the heads of agreement.
So some vendors do feel they have been seduced over deal value, but probably
overlook the fact that circumstances have changed or current year perform-
ance has declined.
Any seduction is likely to take place much earlier in my experience. Private equity
executives are prepared to spend considerable time to persuade a vendor, or a
management team, to deal only with them or at least so that they become the
preferred bidder.
It is essential that at an early stage, you not only meet three or four private equity
houses but you obtain a written offer from them outlining the deal value and,
most importantly, the financing structure. Deal values will vary somewhat but
there are likely to be other significant differences as well, for example a proposal
that you:
• retain a minority equity stake to make financing more deliverable; or

• accept part payment by an unsecured loan note, which will pay interest
half-yearly, but if the business should fail then the note is worthless.
When selecting your private equity partner, chemistry and mutual trust are impor-
tant but not at the cost of an unattractive deal value or onerous financing structure.
Retaliate first to guard against a

last minute price chisel
It is not only private equity houses who will price chisel at a late stage, some
major corporations will be ready to do so as well. The way to minimize the risk
is to get your retaliation in first.
Once again, timing is of the essence. When the purchaser believes they have
reached agreement and says “lets shake hands on the deal”, my advice is that
you do not shake on a deal until you have said words to the effect that:
• We have described our business to you honestly and accurately.
• We have NOT sinned by omitting anything that will affect the price
you are ready to pay.
• We have NOT overstated the current year sales and profit forecasts.
• We have NOT overstated the future prospects for the business NOR
understated any vulnerabilities.
• We are confident that your due diligence will merely fill in details within
the outline information you have already received.
• So if you attempt a price chisel as a result of your due diligence, we

will walk away from the deal and leave you to pay the abort fees from
your professional advisers.
Private equity houses intensely dislike paying abortive fees because these are
charged to their profit and loss account, whereas fees become part of the acqui-
sition cost of a legally completed deal.
As you appreciate, however, if you make these claims and due diligence does
reveal shortcomings then inevitably there will be a price chisel.

Sweetheart deals sometimes really are sweet

Corporate finance advisers really dislike sweetheart deals, because it means that:
• you have already found the buyer, so their work is considerably less
and their fee should be considerably lower as well because their best
opportunity to add value is to find the buyer for you;
• worse still, they have only one prospective purchaser so they tend to
feel their chances of a successful deal are inevitably lower than when
marketing the business to a shortlist of known serious buyers.
The benefits to a vendor, however, include:
• you retain psychological advantage over the buyer because they made
an unsolicited approach to you, whereas when the business is
marketed to short-listed buyers then in truth it is for sale;
• dealing with only one purchaser consumes less of your management

time, so the risk of being distracted from the vital job of delivering
current year sales and profits is lower; and
• the risk of a damaging leak or rumor which reaches customers and

your own staff is much reduced.
To pursue a sweetheart deal with confidence requires that:
• the timing makes sense for you – if it is definitely the wrong time then
you should say so at the outset.
• you believe that the prospective buyer is a suitable owner not only for
the shareholders but for key staff as well – in a recent case, 24 senior
staff had left the prospective acquirer to join the vendors business over
the past five years and there was considerable animosity. The vendors
felt there would be uproar and a walk out by key people.
• you require a written offer quickly which sets out the deal structure,
the form of purchase consideration and key conditions, and most
importantly represents a full offer as a basis for further negotiation.
• you do not allow yourself to be sucked into lengthy meetings and

discussions about post-acquisition integration until you have received
a really attractive offer.

Use win-win negotiation tactics

I really do believe that the most important tactic is your attitude to negotiation
meetings. The art is to create a climate in which the purchasers will do their
best to accommodate your requests. In stark contrast, I have heard people say
about the other side, “I would never do a deal with them because they are arrogant,
patronizing, insulting, rude, bullying and interrupt before a question has been
posed fully”. This happens more often than you might imagine.
The keys to a successful negotiation include:
• agreeing the progress to be reached by the end of the meeting, to create

a mutual expectation;
• agreeing the agenda at the outset;
• introducing everyone at the meeting – their name, job title, company

and the role they will play;
• keeping control of your own team;
• ensuring only one person speaks at any time and no one is cut short
or interrupted;
• listening to the other side attentively and encouraging them to

explain the reasoning behind the position they have taken; and
• creating a friendly climate for the meeting.
At the outset, outline the features which are important to you and your reasons,
but do not present them bluntly as inevitable deal breakers unless you get your
own way, because it creates entirely the wrong atmosphere.
Examples may include:
• your wish to sell 100% of the equity at legal completion – rather than
receiving an offer based on the purchase of, say, only 51% initially and
the remainder to be bought in two separate tranches.
• your unwillingness to accept part-payment in the shares of an

unquoted company – even though the plan is to float the company on
the stock exchange within two years.
• your reluctance to accept more than a small proportion of the

payment as shares in a listed company – especially a small one, because
there would be an embargo on your selling any shares for up to two
years.

• you would prefer not to have an earn-out, if this is a reasonable position

to take in the particular circumstances of your business, and in any
event would judge their offer on the up front payment and would not
be willing to accept an earn-out of longer than one year.
• you are not prepared to partly finance a deal with a private equity house
by accepting an unsecured loan note, which cannot be redeemed for,
say, five years or on an earlier exit, because a lot could go wrong in
the meantime.
If there is a disagreement over a particular item, rather than indulge in a long

drawn out discussion, suggest that you ‘park’ this item and return to it towards
the end of the meeting.
Be ready to trade concessions, so that you secure a valuable benefit for yourself
but are able to accommodate the other side in a cost effective way to you. They
key to achieving this is to ask questions so that you fully understand the reasoning
behind the concession requested, so that you may be able to accommodate it
in a more acceptable way for you.
It is important to start off by asking for large concessions and gradually reduce
the impact of them, but perhaps even more important to systematically reduce
the cost of concessions you are prepared to give. In this way, you are sending
a covert but powerful message that you have nearly reached the limit of your
ability to grant any more concessions.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 10
Manage the due diligence
process effectively
does not delay legal completion.........................................................78
Due diligence information to be collated ..........................................79
Presentation of due diligence information ......................................84
Stick close to the investigating accountants.....................................85

Chapter 10
Manage the due diligence
process effectively
In a sweetheart deal or a covert auction, which will lead to the selection of a

preferred bidder and another one kept in reserve, due diligence should not be
allowed to commence until heads of agreement are signed, a period of exclu-
sivity has been granted and the draft share purchase and sale agreement has
been received to check that there are no unacceptable features which need to
be rejected at the outset.
In a controlled auction, several companies may be given access to carry out some
due diligence, on the basis of their initial offers, so that they are able to make
a final offer, before selecting one preferred bidder to negotiate heads of agree-
ment and a period of exclusivity granted. As before, another buyer should be
kept in reserve.

does not delay legal completion
Collating the information required for due diligence is a time consuming process,
and preparatory work must be done well in advance to ensure that legal comple-
tion is not delayed.
The aim must be to minimize the time required from accepting an offer to legal
completion. The deal is at risk and could be aborted because:
• the stockmarket collapses because of another major terrorist attack

or a sharp increase in oil prices caused by a political crisis or armed
conflict;
• you lose a major customer, which you must notify to the acquirer, and
could result in their withdrawal from the deal or demanding a major
price reduction which is unacceptable to you; and
• the acquirer receives a totally unexpected hostile take-over approach

and puts the acquisition on hold.

1 0 M A N A G E T H E D U E D I L I G E N C E P R O C E S S E F F E C T I V E LY
Due diligence information to be collated

The due diligence information typically required is rather daunting and is detailed
below.
THE COMPANY AND SUBSIDIARIES
• registered number;
• registered office address and other trading addresses;
• Memorandum and Articles of Association.
SHARE CAPITAL AND SHAREHOLDERS
• authorized share capital: amount, number and class of shares;
• issued share capital;
• names and addresses of shareholders and details of their shareholdings

(size of holding; whether beneficial or not; if not beneficial, name and
address of beneficial owner);
• any charges over the shares;
• any shares held in other unquoted companies by the vendor (excluding

subsidiaries) (number, class and percentage of issued share capital in
each company in question);
• any agreements, arrangements or schemes to allot, issue, sell or transfer

any shares including options and shares under conversion or pre-
emption rights;
• any shareholders’ agreement which may be binding on a purchaser

of the shares of the company;
• any arrangement by the company to purchase its own shares.
FINANCIAL
• accounting reference date;
• audited accounts for the last three years;
• management accounts since the date of the last audited accounts;
• updated forecast profit and loss account for the current financial year;
• name and address of auditors;
• name(s) and address(es) of bank(s) at which accounts are held, with

account numbers;

• all borrowings, including all loan and credit agreements, promissory

notes and overdraft facilities, made or obtained by the company or
any of its subsidiaries and all guarantees given by others in respect
of such borrowings.
Copies or details of:
• all bank facilities and bank facility agreements of the company or any
of its subsidiaries, including company credit cards;
• all hire purchase, finance lease and operating lease agreements

entered into by the company or any of its subsidiaries;
• material borrowings, whether secured or unsecured by the company

or any of its subsidiaries;
• all documents and agreements relevant to any lien, charge or

encumbrance over any part of the assets or undertaking of the company
• any debt factoring and similar arrangements;
• any credit arrangement giving unusually long or otherwise beneficial

terms for payment to a customer or client;
• aged debtor analysis report, analysis of provision for bad or doubtful

debts and credit notes issued;
• all vehicles used, stating whether owned or leased;
• all licences entered into by the company or any of its subsidiaries.
BUSINESS
• a brief description of activities, markets, key customers or clients, major

products and services, and principal competitors;
• any acquisitions/mergers that have taken place in the last three years.
ORGANIZATION AND MANAGEMENT
• organization charts with names and roles;
• details of all staff by name, job title, date of joining, date of birth, salary
and bonus, place of employment, fringe benefits and notice period;
• any agreement or arrangement between the company or any subsidiary

and any director or shareholder of the company or any subsidiary for
the provision or sale of assets, goods or services to, or the receipt or
purchase of assets, goods or services, or any outstanding loans.

TRADING
• Any long-term, unusual, onerous or material contracts, commitments,

orders or tenders relating to the company or any of its subsidiaries;
• All licences and authorizations required for carrying on the business

of the company or any of its subsidiaries;
• all standard proposal letters, including terms and conditions used in

connection with the business of the company or any of its subsidiaries;
• Share Purchase and Sale Agreements relating to any mergers or

acquisitions that have taken place in the last three years;
• any agency, distributorship, licence and joint venture agreements or

significant acquisitions or disposals of assets;
• written contracts with major customers, suppliers and subcontractors;
• complaints by or disputes with any major supplier or client;
• any partnership, joint venture, profit sharing or other similar form of

agreement or arrangement entered into in connection with the
business;
• any intended sale or purchase or option or similar agreement or

arrangement affecting any assets of the company or any of its
subsidiaries;
• any reason for believing that a major customer or supplier is likely to

or may cease to deal with the company or any of its subsidiaries or
materially reduce the level of business;
• any contracts which are or are likely to be of an unprofitable or loss-

making nature or contain material obligations or restrictions;
• any other contract or arrangement which has or is likely to have a

material effect on the financial or trading position or prospects of the
company or any of its subsidiaries;
• any trade association or other organization of which the company or

any of its subsidiaries is a member;
• agreements or arrangements which will or may be terminated, or the

terms of which will or may be varied, as a result of a change of control
of the company or any of its subsidiaries.

PREMISES
• all freehold premises owned by the company or any of its subsidiaries,

with details of any mortgages and charges, where the deeds are held,
authority to inspect the title deeds;
• the freehold title documentation, most recent valuations and survey

reports or investigations;
• all leasehold properties occupied by the company or any of its

subsidiaries and where the documentation is held;
• copies of all leases, tenancies or licences held or granted by the company

or any of its subsidiaries.
EMPLOYEES AND CONSULTANTS
• service agreements, contracts for services and consultancy agreements

with senior employees and directors;
• the staff handbook, disciplinary procedures and business conduct

guidelines;
• standard employee service contracts;
• key employees who have left during the last three years;
• employees who have resigned in the last 12 months and copies of their
letters of resignation;
• employees who have been dismissed in the last 12 months and copies
of any dismissal letters and agreements, and records of disciplinary
procedures;
• the nature of any personal data held by the company or any of its
subsidiaries;
• any employment related claims or disputes made, notified or threatened;
• any pension scheme, together with copies of all relevant documentation,

including trust deed and rules; pension schemes office approval letter
any contracting-out certifications; list of all members, deferred
pensioners and pensioners; names and addresses of trustees and of
actuary; and latest actuarial valuation and report;
• trades union or staff association membership and record of any

disputes.

CHARGES AND GUARANTEES
• Any mortgages, charges or debentures over any part of the undertaking

or assets and copies of such documents;
• Any guarantees, indemnities, counter-indemnities or loans given by

any person in connection with the business.
LITIGATION
• documentation for any significant litigation in relation to the company

• any argument, dispute, claim or other events or circumstances which

might give rise to significant litigation or other dispute resolution
procedure.
REGULATION
• licences, permissions, authorizations, registrations and consents

necessary to carry on the business (and any pending applications);
• any of the directors or employees of the company or any of its

subsidiaries at any time convicted of any offence involving fraud or
other dishonesty or any offence under legislation relating to companies,
including insider dealing.
INSURANCE
• full details of all current insurance policies and premiums paid;
• full details of claims history and any outstanding insurance claims.
TECHNOLOGY
• information systems in use in the business (both financial and

business systems) with details of hardware and software packages used;
• maintenance contracts for both hardware and software;
• details of all bespoke software used in the business.
INTELLECTUAL PROPERTY
• details and documentation of all trademarks, service marks,

business/trading names and logos, internet domain names and any
other intellectual property owned, used or applied for in, any known
challenges or disputes, and what action has been taken to protect them;

• any suspected or alleged infringement of those intellectual property

rights, together with copies of any related documentation, including
licence agreements;
• any known or alleged infringement by the company or any of its

subsidiaries of any intellectual property owned, used or supplied by
a third party, together with copies of related documents.
ENVIRONMENTAL, HEALTH AND SAFETY
• environmental compliance procedures, inspections, surveys and

reported infringements;
• health and safety procedures, surveys, accident records, claims made,

still outstanding or notified.
TAXATION
• all taxation returns, documents and correspondence for the last three
years, giving details of any penalties and interest, paid or outstanding;
• any other documents or information which are significant and

relevant to a prospective purchaser.
It may be a counsel of perfection but ideally the collation process should

commence at least four weeks before the acquirer(s) will begin their due diligence
investigation.
Presentation of due diligence information

Usually the acquirer’s lawyers will provide their own due diligence checklist,
but by using the above much of the preparatory should be done in advance. To
help the acquirer, the actual presentation should follow the sequence given by
their lawyers and numbered accordingly for easy reference.
For a straightforward transaction, information could be provided using indexed

lever-arched files. The minimum number of copies required is one each for:
• the acquirer;
• the acquirer’s lawyers;
• the accountants doing the financial and tax due diligence;
• your lawyers; and
• a master copy kept by you.

The initial delivery of due diligence information should be largely complete, but
inevitably there will be documents to be added or an updated version produced
subsequently, so each item should be clearly dated to avoid confusion.
Electronic data rooms are commonplace today and are virtually essential for
controlled auctions because simultaneous access is available. Lawyers and corpo-
rate finance advisers have the requisite software to facilitate compilation. Some
people use a combination of hard copy and electronic data, with the use of secure
passwords to control access.
The acquirer’s due diligence advisers will undoubtedly want face-to-face

meetings in order to ask questions, to clarify the information provided and to
fill in any gaps. Confidentiality within the vendor’s business is of the essence,
and access should be restricted to those people aware of the transaction. Site
visits by property surveyors or environmental due diligence consultants must
be carefully controlled. It would be disastrous if a surveyor arrived at recep-
tion and said, “I’m here to inspect the property and prepare a report in connection
with the acquisition”. Such a thing has happened and will happen again, but it
can be avoided by ensuring that these visitors are properly briefed as to how
to announce themselves.
Stick close to the investigating accountants

Sometime ago I read a newspaper article which claimed that 13 out of the 14
largest UK accounting firms were involved in or facing litigation for damages
arising from alleged shortcomings in a due diligence report for an acquisition
client. Whilst I do not know how accurate the article was, I do know that account-
ancy firms are understandably sensitive to the risk of a negligence claim arising
from due diligence work.
So it is not surprising that the investigation is likely to focus on and accentuate

the negative. But perhaps the worst thing that can happen to a vendor is for
the due diligence report to wrongly interpret a situation in a damaging way. In
my experience, some damage is irretrievable even if you have an opportunity
to provide the correct interpretation later.
It is highly unusual for the vendors to be allowed to see the due diligence report,
or even sections which are critical. So the best prevention is to develop a rapport
with the due diligence investigation team and to encourage them to discuss any
aspects of the business they are unhappy about so that you can help them ‘to
get to the bottom of the situation’. It often works!

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 11
Steer the deal safely to legal
completion
Proceed towards a heads of agreement negotiation meeting .......87
A typical heads of agreement negotiation agenda ..........................88
Earn-out deals need defining ............................................................91

share purchase and sale agreement ..................................................93
The maximum liability of the vendor.................................................94
Joint and several liability for vendors ...............................................94
Negotiate the minimum value to trigger a claim ............................95
Purchase consideration to be held in escrow...................................95
Use your disclosure statement to undermine warranties ...............96
Prepare to announce the deal internally and externally..................96

Chapter 11
Steer the deal safely to legal
completion
The first major step to convert an offer letter into signed Heads of Agreement,
which is essentially a more detailed description of the deal and should be written
in commercial language. It must be clearly understood that the Heads of Agree-
ment do not oblige either side to legally complete a deal. Typically, only a few
parts of the Heads of Agreement create a binding obligation, for example:
• Non-disclosure of the deal prior to legal completion and only then with
the written permission of the other – this is important protection for
the vendors because many do not want relatives, friends and neighbors
to know just how rich they have become.
• A cost indemnity obliging either one or both parties to reimburse the

other to cover abortive professional fees for unilaterally withdrawing
from the transaction, providing set conditions are met, and the liability
is usually capped.
Certainly vendors should refuse a cost indemnity unless it is a reciprocal agree-

ment, and my experience is that the issue can become an emotive one unless it
is handled carefully. Furthermore, it is very rare for either side to actually receive
payment under this kind of indemnity and I believe it to be of dubious value to
either side.
The heads of agreement is typically between about 3 and 6 pages long, and is
useful to brief each set of lawyers about the contents of the deal.
Proceed towards a heads of agreement

negotiation meeting
It is important that the value of the offer and any material terms and conditions
are negotiated before selecting and inviting the preferred purchaser to meet in
order to negotiate Heads of Agreement. This signals to a prospective purchaser
that they are the preferred buyer, even if the word preferred is not used. Conse-
quently, the purchaser may take the stance that the scope of the meeting will

1 1 S T E E R T H E D E A L S A F E LY T O L E G A L C O M P L E T I O N
only be to negotiate detailed Heads of Agreement and there will be no increase

in the offer. One other offer should be kept in reserve because it is always possible
that either agreement will not be reached at the meeting or the deal will be aborted
at a later stage and it will be necessary to involve a reserve purchaser.
Although the purchaser will understandably require exclusivity once Heads of

Agreement have been signed, at least one purchaser should continue to be kept
in reserve. It is important, however, that the best possible offer is negotiated
with the reserve purchaser before they are told that exclusivity has been granted
to another company. If the original deal collapses, hopefully the reserve
purchaser will wish to pursue an acquisition, but it is extremely unlikely in these
circumstances that they will improve their previous offer and they may well seek
to negotiate a reduction.
Typically, the acquirer will produce a draft agenda for the Heads of Agreement
negotiation meeting. It is important that the vendor ensures any additional points
are addressed because afterwards the acquirer may be unwilling to negotiate
any other points on the grounds that these should have been raised at the meeting.
If the vendor has appointed corporate finance advisers, then they should lead
the negotiations on behalf of the vendor. The advisers should be sufficiently knowl-
edgeable about the legal and tax issues for it to be unnecessary for either lawyers
or tax advisers to attend. Lawyers and tax advisers have a habit of seeking to
negotiate technical points which should only be addressed later, and there is a
real risk that the discussions will be adversarial.
A typical heads of agreement

negotiation agenda
It is usual for the buyers’ corporate finance adviser to draft the agenda, but the
vendors advisers should add any additional items and change the sequence of
items to best suit your situation. This means the meeting should commence
smoothly because the agenda will be agreed beforehand.
In addition to warranties and indemnities, and earn-out arrangements, typical

items to be included in the agenda are:
• Confirmation of the offer. Even if the purchaser has said there can be
no further improved offer, a determined but friendly attempt should
be made to gain some improvement.

• Assets to be excluded. It may be agreed that certain freehold premises

are to be excluded and a medium-term lease will need to be negotiated
in terms of the duration, initial rental and rent review dates. In the case
of a private company, assets for personal use such as cars or a boat
may be excluded and a price will need to be agreed for the individuals
to purchase them. The written down book price is often agreed as the
value and this may well be lower than the market value.
• Form of purchase consideration. If shares of the acquirer form part of

the purchase consideration, the value of the shares will need to be
defined. To guard against a sudden increase in the share price
working against the vendors, it may be possible to negotiate that the
value of the shares is the lower of the mid-price at the close of the day
immediately prior to legal completion and the average share price for
the previous 20 working days. When the acquirer requires some of
the consideration to be in the form of loan notes, then the interest rate
and payment dates, the redemption arrangements and bank guarantee
will need to be negotiated.
• Warranted net assets at completion. It is commonplace for the acquirer

to seek a minimum net asset value at legal completion, with a cash
adjustment to make up any shortfall. Sometimes it may be possible
for the vendors to negotiate that any excess benefits them. An issue
which may affect the net asset figure to be warranted is the amount
of working capital to meet the short-term needs of the business and
this will need to be negotiated.
• Completion accounts. The vendor may be asked to produce a balance

sheet at the completion date to verify that the net assets acquired by
the purchaser are in accordance with Heads of Agreement.
• Pensions. The question of pension transfer is often one of the last issues
to be resolved, and it might simply be agreed that the pensions advisers
to both sides will meet as soon as possible to negotiate an agreement.
• Release of personal guarantees. The shareholders of a private company

may have given personal guarantees under a leasehold agreement or
for a bank loan. If so, the vendors need to realize that the acquirer cannot
undertake to release them from their guarantees at completion.
Release rests with the holder of the guarantee and the acquirer should
promise to use its best endeavors, a phrase which has legal meaning,
to procure a release. Normally, there should not be any problems
because the financial resources of the acquirer should be more

acceptable, and any loans may be repaid at completion or shortly

afterwards.
• Job titles and service contracts. Continuing directors will usually be

required to sign new service agreements with salary, bonuses, pension
contributions and fringe benefits in line with the acquirer’s normal policy;
job titles may be changed as well. If there is no earn-out deal, then the
notice period will be the normal one used by the acquirer, but when
there is an earn-out the continuing directors need to ensure that their
service contracts extend for the duration of the earn-out agreement,
plus an additional three or four months to allow for the final accounts
to be prepared, before the standard notice period comes into effect.
• Any consultancy agreements. These are sometimes encountered

following the sale of a private company. The acquirer may want to have
access to a ‘retiring’ director to make use of personal contacts or
technical know-how for a limited period. If so, the reward must be
commensurate with the amount of time spent.
• Restrictive covenants. It is becoming increasingly difficult to enforce

restrictive covenants in employee service contracts, but vendors should
assume that restrictive covenants in the Share Purchase and Sale
Agreement will be enforced. The covenants are likely to cover any
competing business serving the same geographical area typically for
a three-year period, although it may be possible to negotiate this down
to two years.
• Due diligence. Staff have an uncanny knack of suspecting that

something major is happening during on-site due diligence, despite
any attempts to conceal matters by adopting a cover story such as a
review on behalf of a bank prior to obtaining a new loan facility.
Consequently, the terms of reference and duration of each aspect of
the due diligence work needs to be understood and every effort made
to do as much as possible of the work off-site.
• Timetable to legal completion. It is quite inadequate to agree that

‘because Christmas is nine weeks away, let’s agree we will target legal
completion for the week before Christmas’. This is nothing less than
shooting in the dark; the vendors need a detailed timetable in order
to know promptly when the acquirer is allowing the timetable to slip.

The typical steps in a timetable are:
Heads of agreement signed Week 1
Draft share purchase and sale agreement received Week 2
Due diligence commences Week 2
Due diligence investigation completed Week 5
Due diligence report presented to the acquirer Week 6
Date reserved to meet to finalize the share

purchase and sale agreement Week 6
Formal executive or investment committee approval Week 7
Disclosure statement submitted to the vendors Week 8
Legal completion Week 8
The number of weeks required will vary according to the size and complexity
of the deal. In a straightforward case, due diligence may require only two weeks,
but in a complex acquisition it could take five or six weeks, especially if the initial
work prompts the need for supplementary investigation .
When a circular to shareholders is needed by a stockmarket listed company,

either to obtain the requisite approval or to have a rights issue of shares, additional
steps and time will need to be included in the timetable.
Earn-out deals need defining

Earn-out deals occur in about 50% of all private company sales to a corporate
buyer in the UK, but rarely feature in the sale of a subsidiary. Vendors of private
companies are understandably nervous about earn-out deals because part of
the purchase consideration is not only deferred but contingent upon achieving
agreed profit targets for usually the first two years post-acquisition. In addition
to the inevitable trading uncertainties, there is always the concern that the acquirer
may hamper profit achievement.

Acquirers will insist upon or seek an earn-out deal if:
• the company is particularly dependent upon issues such as successfully

negotiating a major five-year contract renewal in, say, a year’s time
with a major customer, or a critically important sole supplier;
• profits are forecast to grow dramatically;
• the continued commitment of directors is demonstrably important; or
• the net tangible asset backing is extremely low compared with the
purchase price.
Once legal completion occurs the company will be expected to adopt the acquirer’s
accounting policies. There have been a few exceptions, however, because of partic-
ular circumstances whereby the company has been allowed to continue with
existing accounting policies purely for earn-out calculation purposes and the
figures have been converted afterwards.
To protect the vendors, it is essential that profit is defined precisely for earn-
out purposes. Typically the definition should be based upon:
• the acquirer’s accounting policies;
• profit before tax arising from the ordinary course of business – which
would rule out a capital gain on disposal of a freehold property and
similar exceptional items;
• an agreed and specified annual charge for services the acquirer will
provide such as audit, tax advice, legal, payroll and pension
administration, etc;
• a specific ‘rate card’ for group services which the company intends
to use when required – examples could include rent of additional space,
transport, etc;
• an interest rate, possibly linked to underlying base rates, for cash

borrowed from the group to finance expansion;
• a notional interest credit for any interest earned as a result of the group
placing surplus cash on overnight or short-term deposit;
• agreed rules for profit sharing when carrying out business with other
group subsidiaries.

The profit thresholds set for earn-out payments to be made must be negotiated
using the above definition of profit. There may be other circumstances,
however, which must be taken into account when agreeing the profit thresh-
olds, for example if:
• the acquirer insists upon appointing, say, a qualified accountant as

finance director in addition to the existing accounting staff, then the
total cost of employment should be deducted from the threshold;
• the acquirer wishes the company to launch sales offices in Europe and
the likelihood is that this will detract from the ability to maximize earn-
out payments, then it should be negotiated that all incomes and expenses
arising are excluded for earn-out purposes.

share purchase and sale agreement
Vendors must not abdicate their involvement in helping to ensure that the
warranties and indemnities are reasonable. Firstly, it is essential that you under-
stand the important difference between indemnities and warranties, because
many vendors are confused.
Cost indemnities are a binding obligation on the vendors to reimburse the acquirer
for liabilities which relate to the period up to legal completion date. The most
onerous indemnities relate to taxation matters and the buyers lawyers will usually
seek protection for seven years – because the Inland Revenue has a period of
six years to claim additional tax payments. The vendors cannot get out of a tax
obligation by claiming that both they and their auditors were completely unaware
of the situation. Ignorance is categorically not a defence.
Every effort should be made by your corporate finance advisers to negotiate a

maximum tax indemnity period of two years – because usually the acquirer’s
auditors are appointed immediately on legal completion and will do everything
possible to uncover and quantify any tax liabilities as part of their first two annual
audits.
A warranty puts the burden of proof on the acquirer to demonstrate that they
would have reduced the purchase price, and most importantly to quantify the
amount, had they known that the company was in breach of a warranty at legal
completion. The buyer may ask for a three-year warranty period, but this is exces-
sive and it should be possible to negotiate a two-year period.

The maximum liability of the vendor

The acquirer is likely to take a hard line and the first draft of the share purchase
and sale agreement is likely to specify that the liability under warranties and
liabilities will be up to the total amount of purchase consideration, regardless
of whether it is in cash, loan notes or shares.
I reject this completely, but sometimes the corporate finance advisers and lawyers
acting for the vendors seem to me either lazy on this point or easily persuaded
that it is fair and reasonable. It is not!
The maximum liability should be the amount of purchase consideration

received, less capital gains tax, so that it is impossible for the vendors to face a
liability greater than the cash actually received. I passionately believe this is fair
and reasonable. The vendor’s lawyers should go further and ask the acquirer
to itemize and quantify the maximum exposure they could face under each
warranty and indemnity. In most cases, this will produce a significantly lower
liability limit. Similarly, if the company owns valuable freehold land and build-
ings, which the acquirer accepts are clear of any environmental problems, then
this is an alternative argument for reducing the maximum liability. The position
you ultimately arrive at, however, is entirely subject to negotiation. If your lawyers
are not determined enough, involve your corporate finance advisers, and if neces-
sary intervene yourself.
Private equity investors often take a hard line with regard to these liabilities.
Their stance is likely to be a flat refusal to accept any liability as they have had
no active part in the executive management of the business. The shareholder
directors must recognize that this is likely to be an issue and should raise it with
their private equity investors well before legal completion.
Joint and several liability for vendors

It is entirely reasonable for the acquirer to demand joint and several liability
among the individual shareholders of a private company, which means that if
any shareholder does not pay his/her share of the liability then the acquirer can
pursue the other shareholders. The liability of each shareholder can be capped
by all of the shareholders entering into a deed undertaking to pay the requisite
share of liability claims.

Negotiate the minimum value to trigger a claim

To minimize the risk of the purchaser pursuing warranty claims, the share
purchase and sale agreement should specify not only the minimum amount of
each individual claim but also the minimum aggregate claim value.
Most acquirers are likely to readily accept that only individual claims of at least
£2,500 each will count towards the minimum aggregate value before any warranty
claims are made, but it should be possible to negotiate a minimum figure of £10,000
for each claim.
Acquirers are well aware of the management time and professional fees involved
in pursuing a warranty claim if litigation is required. Consequently, they should
readily agree that the minimum aggregate claim to be pursued is £50,000 and
it may well be possible for the vendor to negotiate a minimum figure between
£100,000 and £250,000 depending upon the value of the transaction.
Purchase consideration to be held in escrow

Some acquirers will seek to have a sum of money deposited in an escrow account,
held by the two firms of lawyers, to ensure that cash is available to meet warranty
and indemnity claims. Although the vendor will be credited with the interest
received, they will be deprived of the use of the money held in escrow.
If an acquirer is insistent on holding money in an escrow account, the time to

raise and negotiate it is during the Heads of Agreement meeting. Some acquirers
deliberately stay silent on this point and simply include the requirement for an
escrow account in the first draft of the Share Purchase and Sale Agreement.
When this happens the vendors should reject it on the grounds that it was not
raised during negotiations and would have been ruled out if it had been raised,
but the buyer may insist and it is a reasonable position to take.
If a retention is inevitable, the amount should be negotiated downwards. Usually,

it should be possible to restrict the retention to between 5% and 10% of the total
purchase consideration. Your approach needs to be pragmatic, however,
because in a recent transaction a major US corporation specified a 25% reten-
tion and it was only possible to reduce this to 20%, otherwise it would have been
a deal breaker, but it still remained an outstanding valuation for the vendors.

Use your disclosure statement to

undermine warranties
A disclosure statement is, in essence, an appendix to the contract.
Some vendors mistakenly feel they should not disclose any existing breaches
to the warranty claims demanded by the buyer, because it may unsettle the
acquirer. By contrast, the vendors should work with their lawyers, and corpo-
rate finance advisers if used, to make a comprehensive disclosure of every possible
breach of a warranty.
If the acquirer finds the disclosures are deliberately vague or all embracing, they
should ask for the disclosures to be amended to become more specific and
meaningful. Once the disclosure statement has been accepted, however, the
acquirer cannot make any claims for breaches which have been revealed.
Prepare to announce the deal internally

and externally
A sizeable subsidiary of a listed company may well be sold by a publicly announced
controlled auction, so staff, customers, suppliers and competitors will have read
about the sale or have been informed at the outset. For most deals under £25
million, however, the sale process is likely to be either a sweetheart deal resulting
from an unsolicited approach or a covert auction to a shortlist of known serious
buyers.
My advice about internal communication is unashamedly uncompromising. In

the overwhelming majority of cases, people should only be notified prior to legal
completion if they need to be involved and then only when really necessary. For
example, the financial director of a private company may not be a shareholder,
but may be needed to provide ad hoc financial information required for presen-
tation to prospective purchasers. If so, the financial director must be ‘sworn to
secrecy’.
I am categorically not suggesting that you break any employment laws which
require disclosure, but the reality is that the purchaser has no legal obligation
to complete the transaction, and deals are aborted up to the last minute and
some for totally unpredictable reasons. For example, a profit warning by a small
listed company which, rightly or wrongly, results in the board deciding not to
complete a sizeable acquisition.

Staff are powerless to influence whether the deal will legally complete, but if
an announcement has been made lasting damage will have been done. A recent
real life example illustrates this. A private company was to be acquired by a FTSE
250 company, and two weeks prior to legal completion the vendor was
persuaded to announce the deal internally with the acquirer “so that we achieve
a flying start at legal completion”. Only two working days before legal comple-
tion, the acquirer aborted the deal because a more attractive and much larger
opportunity had become available.
Preparation is needed so that meetings can be held to announce the deal and,
most importantly, to answer questions just as soon as possible after legal comple-
tion. When overseas locations are involved, special efforts must be made to ensure
simultaneous announcement, because nothing is worse than people finding out
from the company grapevine.
External announcement preparations need to be in place prior to legal comple-

tion. Customers and suppliers should learn about the deal from the company
before reading it in the newspaper, trade press or, worse still, from a gloating
competitor. A combination of emails, letters, telephone calls and personal meetings
should be used as appropriate.

THOROGOOD
PROFESSIONAL
INSIGHTS
Chapter 12
Think and plan your life after exit
Who are you happy to know that you have
suddenly become rich (or even richer)?............................................99
When will you leave your company? ..............................................100
How do you intend to avoid boredom and loneliness?.................101
How will your spouse react and cope? ...........................................102
Where do you want to live?..............................................................103
What do you want to do with your wealth? ...................................104
What inheritance planning will you do?.........................................105

Chapter 12
Think and plan your life after exit
Beware, your golden goodbye could become a gateway to boredom, loneliness,

loss of self-esteem and excessive drinking. No? Well, it has happened to quite
a few other people, and they never expected it could possibly happen to them.
Issues you need to address include:
• Who are you happy to know that you have suddenly become rich?
• When will you leave your company?
• How do you intend to avoid boredom and loneliness?
• How will you spouse react and cope?
• Where do you want to live?
• What will you do with your wealth?
• What inheritance tax planning should you do?
Remember the old saying, something along these lines; wealth doesn’t ensure
happiness but at least you can be miserable in luxury. Quite a few jackpot winners
on the lotto have found it was true in their case, so make sure it doesn’t happen
to you.
Each issue will be addressed separately.
Who are you happy to know that you have

suddenly become rich (or even richer)?
Unless you wish to boast about the deal, insist that the purchaser and profes-
sional advisers on both sides are not allowed to reveal the deal value, unless
the transaction is sufficiently large that the stock exchange requires a listed
company to do so.
Keep the deal value out of the local papers, regional and trade press. The best
way to achieve this is to make it absolutely clear to your colleagues that you
would be horrified if details of the deal were leaked. One vendor sold his company
for £42 million and was keen to avoid revealing the price. He never imagined

1 2 THINK AND PLAN YOUR LIFE AFTER EXIT
that one director who had been given share options, which gave him a capital
gain of £1.1 million, would give an interview to the local small town newspaper
headlined, Family Firm’s Apprentice becomes Millionaire. It was patently obvious
to everyone that the founder, who lived locally, must have received in the region
of £40 million. Sadly, the vendor never imagined it could possibly end up in the
local newspaper, so he only gagged the acquirer and the professional advisers
to both sides.
Some neighbours, friends and even relatives may react differently to you when
they find out you have suddenly received a large sum of money, even though
you may have worked tirelessly for 20 years or more and made various sacri-
fices to earn it. Burglars may target your house as well. Local newspapers can
be a useful research tool for a professional burglar.
When will you leave your company?

If there is an earn-out you should assume that you will be keen to leave as soon
as the profit and loss account has been prepared to the end of the earn-out period
and your payment has been agreed. I believe that an owner-director is psycho-
logically disabled from becoming an employed executive again, especially in what
was your own company once but will already be managed very differently.
I regularly tell vendors that they will probably work harder during the earn-
out than they ever imagined, because it is not unusual for someone to have the
opportunity to earn more than £1 million, net of capital gains tax, during a two
year earn-out in addition to their executive salary.
If payment is made in full on legal completion, you may be required to sign a

service agreement for between one and two years to continue as managing
director in order to ensure a successful transition of ownership. I strongly recom-
mend that you negotiate a four-day working week for yourself, even if you have
to concede a pro-rata salary reduction, in order to have time to develop oppor-
tunities, interests and ideas for the future.
If you are selling to an MBO or MBI team, the odds are that you will be expected
to leave soon after completion; even if you are to retain a significant investment
to help finance the deal. Your role will be restricted to a usual non-executive
role.

How do you intend to avoid boredom

and loneliness?
You may be saying to yourself ‘Me, bored? Me, lonely? Never!’ For many
successful entrepreneurs and senior business executives, work is an all
consuming and fulfilling way of life. Think about the breakfasts, lunches and
dinners you attend. Plus sporting events and social occasions you attend as part
of corporate entertaining.
If you retire from the world of work, you risk quickly becoming out of touch.
When you meet former colleagues, customers and suppliers for a social lunch,
it will suddenly become somewhat different for them and something of a duty.
There is nothing worse than someone reminiscing about ‘how things were in
my day’, when technology and market place changes makes it sound like a bygone
era, within only two or three years.
So, the first things you need to explore are the various opportunities open to
you, which include:
• Start another business. Start-ups are risky, and your successful exit
has not equipped you to walk on water. I have seen quite a few people
lose a lot of money by launching a restaurant or buying a luxury yacht
as a rental opportunity. These are specialist businesses and you have
to be satisfied that the team you assemble has the market knowledge,
technical skill and creative ability to succeed. A safer bet is likely to
be a quite different business from your previous one so that you do
not contravene restrictive covenants, but in the same market sector
so that you have transferable skills and experience.
• Become a business angel. Some entrepreneurs have made serious

money and enjoyed their non-executive roles as well, but I suspect many
more have lost their investment and had their fingers burned. The key
is to be selective, assess the management team and ensure that the
proposition is thoroughly researched and lacking in euphoric financial
projections.
• Buy another company with private equity finance. An entrepreneur

who has made a successful exit is regarded as highly backable. This
means you will probably be able to acquire, say, a 40% equity stake
in a sizeable business for a modest investment because of the leverage
effect of private equity financing. This could launch you on the path
to become a serial entrepreneur.

• Buy your previous company from the new owners. A surprising

number of entrepreneurs have bought back their company at a much
lower price than the exit value, because the new owners have not
succeeded. The key is to keep in touch with what is happening in the
company.
• Take time out to study. It could be either full or part-time, or distance

learning. The subject could be a university degree, a fine arts course
or a creative course such as photography or interior design. It doesn’t
matter whether you are pursuing a leisure interest or a possible
opportunity for self-employment, you will be stimulated, enjoy plenty
of social contact and make new friends.
• Take a part-time executive role with a charitable organization. There

are specialist agencies which will find you the type of work you want,
with a compatible organization and a suitable location so that travel
is manageable.
• Become a non-executive director or management consultant. Many

entrepreneurs tend to think that invitations to become a non-executive
director or consultant will come easily. The reality is that you will need
to network systematically and energetically before you get an invitation
and may never receive one.
• Make the golf club or bridge club your second home. It may sound
like a great idea but after a short while the attraction may diminish
rapidly.
The key to guarding against boredom and loneliness is to commence your

research work well in advance, to decide which opportunities you will pursue
and to make them become a fulfilling reality.
How will your spouse react and cope?

A surprisingly common answer is – with difficulty!
One woman found that her husband expected her to provide a cooked lunch,
served with wine, on three or four working days a week. She was horrified, and
rightly so. They were happily married but she regarded his presence during the
day as an unacceptable intrusion into her life. Fortunately, dialogue and common-
sense prevailed. Lunch together became an occasional and strictly optional extra.

A vivacious female entrepreneur achieved an exit from her business at the age
of 41 and decided to take a lengthy break from the world of work to enjoy her
growing family. Fine, but her husband was the problem. She told me that he
was a 45 year old and keen to give up his executive job with a large company
because he was anxious that she would end up having an affair. My only comment
is that giving up a career seems an extreme and bizarre response in these circum-
stances.
My message is simply to listen attentively to your spouse and to ensure that the
changes in your life will be mutually acceptable.
Where do you want to live?

This decision will not only affect your wealth, it may have an even bigger impact
on your quality of life. The opportunities available to you include:
• Staying put – boring perhaps, but this is a safe bet. You could always
revamp or extend your present home but the real bonus is you, your
spouse and children do not have to face the social disruption caused
by moving away from family, friends, sports clubs and such like.
• Moving overseas to eliminate capital gains tax – is the gain really worth
the pain?
At the time of writing most entrepreneurs should only have to pay capital gains
tax of 10%. To eliminate the tax liability, expert advice is needed long before the
sale process is commenced. Capital gains tax regime changes are often made
as part of the Chancellor’s annual budget, but issues which need to be clarified
include:
• By when do I have to establish an overseas domicile?
• Will I be obliged to dispose of my UK home prior to legal completion?
• How many complete tax years must I be domiciled abroad?
• Could I face an overseas tax liability?
The keys are expert advice, together with meticulous attention to detail, timing
and documentation.
• Move overseas simply to enjoy life in the sun – will the reality live up
to the dream?

An entrepreneur had enjoyed flying out to the Costa del Sol region of Spain to
enjoy golfing weekends with other friends and he decided to live there. Unfor-
tunately, his friends were only able to join him for occasional weekends. He found
company in some hard drinking expatriates and returned to the UK within five
years disillusioned, bored and an alcoholic; but at least he was able to transfer
his membership of Alcoholics Anonymous to the UK.
• Buy a second home overseas – a potentially excellent opportunity which

can be shared with family and friends.
• Relocate to an idyllic country estate in a remote part of the UK

surrounded by 300 acres – is this really, really what you want?
The keys to the right decision are achieving a family consensus and finding out
what the reality of the dream will be like for you before you decide to make
changes.
What do you want to do with your wealth?

Wealth should be looked at in terms of both capital assets and annual income.
Most people find that for peace of mind their annual income should cover their
outgoings without dipping into capital, and ideally this means preserving the
value of your capital despite inflation. So the core of your annual income should
be assessed in terms of:
• your likely income after leaving your company;
• your spouses’ likely income; and
• the pension income for each of you.
If your goal is to preserve the value of your capital, despite inflation, you must
recognize that typical interest rates earned on deposit accounts just about offset
the impact of inflation after allowing for higher rate income tax.
To outperform inflation, net of relevant taxes, you will need to invest in a variety
of less certain investments, in addition to cash deposits, which could include:
• UK equities;
• overseas equities;
• private equity;
• property – both commercial and residential;

• hedge funds;
• fixed interest instruments; and
• alternative investments, such as fine art.
Even if you are determined to invest and manage your wealth, I urge you to
visit, say, three blue chip private client asset managers. Various major invest-
ment banks have dedicated teams managing wealth for individuals. They will
provide you, free of charge, with a recommended investment allocation model,
the anticipated annual income and assess the risk factors for each asset class.
I promise you that you will learn a lot and avoid making costly investment mistakes
at the outset. For example, they will be able to illustrate the capital gain profile,
expected annual income and risk profile of a collective commercial property
scheme, possibly available only to their private clients, compared with the risk
of buying an individual office, retail or warehouse development yourself.
A spread of investments will achieve a lower overall return compared to one

stellar investment but the significantly reduced risk profile may well make a spread
the more attractive choice.
What inheritance planning will you do?

Inheritance tax rules are tinkered with in most annual budgets by the Chancellor
of the Exchequer and may be radically overhauled by an incoming government.
At the time of writing, inheritance tax is payable at 40% on an individual estate

in excess of £263,000, which means that if you do nothing to reduce your IHT
liability, and your estate was worth £5.263million, the government would collect
£2 million and your beneficiaries would receive only £3.263 million.
There are various opportunities to legitimately reduce your income tax, under
current rules, including:
• Gifts made at least seven years prior to your death escape inheritance
tax, and the liability is reduced on an increasing sliding scale after three
years. You must prove, however, that you do not have any retention
of benefit from the gift.
• You and your spouse can make modest annual gifts up to a £3,000 annual
exemption each.
• An IHT free gift can be made on the marriage of a qualifying relative.

• Gifts made on a regular basis out of surplus income which do not reduce
your standard of living are IHT free.
• The creation of a trust for younger beneficiaries offers various tax

benefits.
Inheritance tax planning is a technical minefield. Generalized advice outlined

above is designed to persuade you to take expert advice as soon as possible,
because timing and meticulous execution are essential.
The sobering reality is that the deal may make you a multi-millionaire, but only
systematic planning and positive action on your part will ensure happiness for
you and your spouse!

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Strategic planning in public relations

Surviving a corporate crisis
KIERAN KNIGHTS £69.00 – 100 things you need to know
1 85418 225 0 • 2001 PAUL BATCHELOR £125
Tips and techniques to aid you in a new approach 1 85418 208 0 • April 2003
to campaign planning.
Seven out of ten organisations that experience a
Strategic planning is a fresh approach to PR. An approach corporate crisis go out of business within 18 months.
that is fact-based and scientific, clearly presenting the
arguments for a campaign proposal backed with evidence. This very timely report not only covers remedial action
after the event but offers expert advice on preparing every
department and every key player of the organisation so
that, should a crisis occur, damage of every kind is limited
as far as possible.
FINANCE
Tax aspects of buying and selling Practical techniques for effective project
companies investment appraisal
MARTYN INGLES £99.00 RALPH TIFFIN £99.00
1 85418 189 0 • 2001 1 85418 099 1 • 1999
This report takes you through the buying and selling How to ensure you have a reliable system in place.
process from the tax angle. It uses straightforward case
Spending money on projects automatically necessitates
studies to highlight the issues and more important
an effective appraisal system – a way of deciding whether
strategies that are likely to have a significant impact on
the correct decisions on investment have been made.
the taxation position.
Tax planning opportunities for family

businesses in the new regime
CHRISTOPHER JONES £49.00
1 85418 154 8 • 2000
Following recent legislative and case law changes, the

whole area of tax planning for family businesses requires
very careful and thorough attention in order to avoid the
many pitfalls.
MANAGEMENT AND PERSONAL DEVELOPMENT
Strategy implementation through project

management
TONY GRUNDY £95.00
1 85418 250 1 • 2001
The gap
Far too few managers know how to apply project
management techniques to their strategic planning. The
result is often strategy that is poorly thought out and
executed.
The answer
Strategic project management is a new and powerful
process designed to manage complex projects by
combining traditional business analysis with project
management techniques.
For full details of any title, and to view sample

You can place an order in four ways:

1 Email: orders@thorogood.ws
2 Telephone: +44 (0)20 7749 4748
3 Fax: +44 (0)20 7729 6110
London EC2A 3DU, UK

Trade Secrets of Business Disposals

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THOROGOOD

A SPECIALLY COMMISSIONED REPORT

A SPECIALLY COMMISSIONED REPORT

Other Thorogood Thorogood Publishing Ltd

t: 020 7749 4748

Employers and Employees

A Practical Guide to Knowledge All rights reserved. No part

Special discounts for bulk quantities

Printed in Great Britain

Barrie Pearson is Chief Executive of Realization. The company provides world

THOROGOOD PROFESSIONAL INSIGHTS iv

THOROGOOD PROFESSIONAL INSIGHTS v

1 A FAILED ATTEMPT TO SELL WILL

2 REALIZE A REALITY CHECK IS VITAL 7

3 WHAT BUYERS REALLY WANT…

THOROGOOD PROFESSIONAL INSIGHTS vi

4 RECOGNIZE FINANCIAL GROOMING

6 UNSOLICITED APPROACHES – POTENTIAL

THOROGOOD PROFESSIONAL INSIGHTS vii

7 PROFESSIONAL ADVISERS NEED CHOOSING

8 VALUE YOUR BUSINESS FROM

9 BENEFIT FROM EXPERT STREETWISE TACTICS 66

THOROGOOD PROFESSIONAL INSIGHTS viii

Don’t be seduced by private equity players houses...............................72

10 MANAGE THE DUE DILIGENCE

11 STEER THE DEAL SAFELY TO

THOROGOOD PROFESSIONAL INSIGHTS ix

12 THINK AND PLAN YOUR LIFE AFTER EXIT 98

THOROGOOD PROFESSIONAL INSIGHTS x

Customers and staff may be unsettled by a leak................................4

Owners and key directors may suffer lasting demotivation.............5

Abortive fees for advisers are costly ...................................................5

Management may make an opportunistic MBO approach ..............6

So why do other corporate finance advisers adopt a more relaxed approach?

Current year performance is likely to suffer

THOROGOOD PROFESSIONAL INSIGHTS 2

Your personal involvement will probably include:

• beauty parading three firms of prospective corporate finance advisers

• briefing your chosen corporate finance adviser and providing

• a meeting to edit and approve the information memorandum and to

• preparing a presentation for you to give to prospective purchasers at

• beauty parading prospective lawyers and negotiating their fees;

• reviewing offers received and meeting your corporate finance advisers

• attending a heads of agreement negotiation meeting with your

• reading the lengthy share purchase and sale agreement provided by

• meeting with various members of the due diligence team to answer

• attending a lengthy all parties meeting to resolve outstanding points

• providing the necessary information to enable your solicitor to

• hopefully, attending a boring, long drawn-out completion meeting, as

THOROGOOD PROFESSIONAL INSIGHTS 3

If heads of agreement, essentially a letter of intent, have been signed and it

Customers and staff may be unsettled by a leak

Although it is inexcusable, some prospective purchasers might deliberately

THOROGOOD PROFESSIONAL INSIGHTS 4

Owners and key directors may suffer lasting

Abortive fees for advisers are costly

THOROGOOD PROFESSIONAL INSIGHTS 5

Management may make an opportunistic MBO

THOROGOOD PROFESSIONAL INSIGHTS 6

Test your opinions by beauty parading

Be realistic about likely value and deal structure...............................9

Obtain shareholder agreement at the outset....................................10

Corporate vendors contemplating the sale of a subsidiary are just as likely to