There’s a lot to sort out before selling your business and many of the tasks can be completed long before your sale. But only if you know what they are. Georg Ell, CEO of Tenzing’s alumni company Smoothwall, sold the business to Family Zone for £75.5m, generating an outstanding 5.6x return. Here, he reveals the jobs you need to do to ensure a successful deal.
As we were gearing up to sell Smoothwall in 2021, I kept thinking about this Chinese proverb: “The best time to plant a tree is twenty years ago. And the second-best time is today.”
It resonated with me because we kept coming across lots of little wrinkles that needed ironing out. We managed to solve these issues and achieved a brilliant result. But, with hindsight, many of these challenges could have been solved well in advance. So, I’m sharing the insights I gained to help you plant the trees that will support you in securing an exceptional deal.
Tip 1 – Corporate finance advisors bring benefits you might not expect
As part of your preparation to sell, you’ll need to appoint a corporate finance advisor (CFA), sometimes known as a Banker. They’re the key advisor that helps you sell your business. Their role is to:
- Make a shortlist of buyers – both trade and private equity.
- Produce an information memorandum.
- Run the process.
- Try to maximise your sale value.
Your CFA will represent your business to the whole market, so it’s important to choose carefully and take up references.
I arrived at this process quite sceptical of CFAs. Despite my concerns, our experienced CFA team brought significant value to the sale process by helping us:
- Tell our story in the right way. While we had all the facts and information, we needed support:
- To clean and prepare our data and use it to tell the right story about our business.
- With extra horsepower to crank through particular analyses throughout the sale process.
- Communicate strategically and effectively.
- Our lead banker prepared us for the different questions we were likely to receive throughout the process. I was able to give solid answers to both trade and private equity (which brings an additional level of scrutiny).
- We worked closely to agree on the right messaging at the right time to the right people. This was particularly important at key negotiating moments to secure optimal outcomes.
An interesting bit of advice I received was to make sure you’re not too stingy on your Financial Advisors’ fees. Pay a good base fee and ensure the way it ratchets up is aligned to delivering a great result. This means you’ll have your Financial Advisors’ attention and that they’re focused on your deal, not someone else’s. Don’t forget – if they do well out of the transaction, it should be because you are too.
Tip 2 – Make the most of your advisors
Appointing tax, finance and audit advisors is part of the normal course of business. It’s also typical for CEO’s to pass the responsibility for building advisor relationships onto the CFO or Finance Director. Early on, I also did this at Smoothwall. But during the sale process, I discovered the value of cultivating relationships with our UK and overseas tax and audit partners. The more I knew them, the better they knew our business. Giving them the context to deliver the right advice and move quickly when the pressure was on.
Tip 3 – Understand the implications of international business
The complexities of running an international company extend to the sale process too. Even more so if your business operates in the USA. The good news is that there are a number of international tripwires you can avoid ahead of a sale:
- International board member domicile – it’s important to achieve the right board makeup with members who are domiciled in the jurisdiction of the entity they represent. Get this right, and you’ll be able to provide a board attendance audit trail with decisions being taken in the right location by the appropriate people. This will also ensure you pay the relevant tax on different aspects of your business in the right jurisdiction.
- Transfer pricing – if you have a US sales office but your research and development (R&D) is carried out in the UK, the US office must pay a fair price to the UK entity as an R&D consumer. This is key to meeting your tax liabilities and obligations.
- Sales tax – in the US, every state has its own sales tax rules with a range of nuances to understand and act on. Keep on top of this from the start so you won’t have to back solve the issue. Or you’ll run the risk of having an unquantifiable (and therefore problematic) tax bill during the sales process. This is also true for VAT across the EU. It’s not uncommon (although it is avoidable) for companies to make mistakes that need to be resolved or reimbursed through a sale process.
- Insurance – our buyers asked lots of questions about a range of insurances, including employee health insurance. So make sure your cover is well documented and easy to find. You might also want to hire a US HR Business Partner or a good outsourced alternative to keep you on track.
Most of these issues are straightforward to resolve as long as you engage with them early on.
By having good relationships with the right advisors, you’ll be supported to effectively set up your international business far ahead of any sale.
Tip 4 – Make sure data privacy and IT security are part of business as usual
Whatever your line of business, General Data Protection Regulation (GDPR) compliance and IT security will be a focus for potential investors. Smoothing out any bumps in this area is essential for the sale process.
Even if you don’t hold sensitive data, to comply with the GDPR, you’ll need a Data Protection Officer. We chose to outsource this role, and we also hired someone internal to coordinate the information for data requests.
Another tip I received ahead of the sale was to ensure our documentation around IT security was up to date and to be sure that we had recent penetration testing results. Buyers don’t expect to see perfection. But they do want to know that you have a process in place to identify issues and plug any gaps.
Tip 5 – plan ahead for your next sale
Although this article is mainly about the benefit of hindsight, you also need to exercise some foresight. Every time you sell your business, you’ll create a digital data room with thousands of pages of data for buyers to access. If you’ve already been through a sales process and you’re smart, you’ll have kept a copy as a starting point for your next sale.
The same approach applies to any disclosure letter from a previous transaction. If you haven’t created one before, this letter provides a list where you disclose answers to a set of questions you’ve discussed or negotiated with the buyer(s). The disclosed answers fall outside of any warranties that you may have to give.
If you can, it’s worth getting hold of the disclosure letter from a previous transaction. The letter might highlight issues you now have an opportunity to fix, which could benefit your business. And it could contain issues you’ve already resolved, in which case you can exclude them from the new disclosure letter. Refer to this letter early, and you’ll have more time to optimise your business for the sale.
The benefits of planting trees
At one end of the sale process, you want to present your business in the best possible light. At the other, someone is staking their reputation on buying your company. This results in lots of due diligence with the onus on you and your team to respond. By identifying your risks well in advance of a sale, you can plant the trees that will solve many of these issues. Not only will this give you a better chance of selling and reduce your stress level through the sale process, but you could achieve a superior price for your business.
