What happens when a client wants to sell up?

This is another piece in the series of what to do when clients want help with something that goes beyond your level of knowledge and experience.

Imagine you’ve had a business client for some time. The owner trusts you and appreciates your advice. They tell you that they have received an offer for the business and are thinking of selling. What do you do if you’ve never been heavily involved in the sale of a client’s business before?

Or, perhaps, during a conversation with a client you feel it’s right to encourage them to think about selling up as they are getting on and slowing down. Or maybe you feel now might be the time for them to capitalise on what they have built before the bottom falls out of the market.

While some accountants feel they have the time, skills and experience to handle the sale of a client’s business, others will feel more challenged, particularly if there are sophisticated buyers involved.   Leaving aside regulatory restrictions which may apply in some circumstances it is worth thinking about your comfort zones:

• Are you comfortable advising on the valuation and the deal structure if required?
• Are you able to market the company to maximise the price?   
• Do you have the negotiation skills?
• Are you able to support the business through due diligence and agreeing the contract details?

I spoke with my friend David Lewis about this recently as I know he has helped many professionals who have found themselves in this situation.

David is a qualified accountant, an ex-partner of a large London firm and now an experienced ‘special projects accountant’.

His first piece of advice is to manage your client’s expectations and to help keep their feet on the ground.

David recommends that however far you are or are not prepared to go technically, you can always play a role in keeping your clients’ feet on the ground. 

“Firstly it is best to be up front about the support you will and won’t provide – and to discuss whether extra help may be needed. Secondly you can prepare the client for the realities of a deal.

It will almost always take longer than envisaged.  While some deals can be done in a few months, others can take well over a year.

It will be intrusive, disruptive and stressful for the client.  They will need to allocate time and resources to ‘do the deal’; but the business also needs to be kept on track – the buyer will be purchasing future performance!

Preparation is key, but despite that there still may be bumps on the way”

David also recommends that you can help keep the client grounded regarding expectations during the deal:

No company is perfect, so you should discourage your client from pretending things are better than they are. They should expect that financial due diligence and the legal disclosure process will identify any skeletons in the cupboard.  And even if they don’t, warranty claims could arise post deal.

Transparency is essential.

Finally, there is the importance of getting things right first time.  If the deal is based on incorrect information, then it will reduce the client’s credibility in the buyer’s eyes and impact on the final outcome.

Choosing a buyer

Here David suggests that you could help clients think about the type of person they might be selling to:

• If a client is approached by a single buyer – are they going to be offering the best price?  While one view is that a bird in the hand is worth two in the bush, would some competitive tension improve the price?
• The buyer offering the highest price may not be the best buyer. For example, if they need to apply for funding, there are likely to be extra hoops to jump through.  The risk of the deal not completing needs to be considered and weighed against the extra price this buyer is offering.
• Over and above the £s for some clients there can be an emotive aspect.  Clients need to be prepared in their own mind to let go of the business when the sale goes through; or in some instances they may want to only consider a deal where they can continue to have some involvement.  Similarly, some clients may have a high degree of loyalty to staff members either individually or collectively – which could (say) preclude buyers who say want to buy turnover and integrate what they are getting into an existing business.

As a trusted advisor you can be well placed to help the client think carefully about the choices, before they jump in with both feet.

Marketing the company and doing the deal

Assuming your client wants to find a buyer, David Lewis points out that there are a variety of firms out there that can help.  The degree of support and fees will vary tremendously:

• At one end of the spectrum there are web sites which simply put buyers in touch with the client.  
• At the other end there are corporate finance firms which carry out in depth work to prepare an information memorandum to market the business to more than one prospective buyer. They will use databases to identify potential buyers both nationally and internationally and they will also help negotiate the deal.   They may also appraise the client of likely due diligence requirements. These firms are rewarded on a success basis, but will probably also expect an up-front retainer.

It is important that clients are clear on the help they are getting (and not getting) and what will be expected of them.  More expensive options may achieve a better net outcome, but questions around track record and sector knowledge for example should be asked.

David Lewis conducts what he calls ‘buy side due diligence’ as well as supporting companies being sold through the due diligence process.  He told me a salutary story about a recent case.  David was acting for a purchaser and his due diligence work revealed that the target company’s accounts were a mess and its profits had been massively overstated.  The company had been marketed by a broker who seemed to have taken the figures provided at face value. While the broker may have been a cheap option, the seller went through weeks of disruption only to have a failed sale.  A more intrusive initial approach can pay off in the long run.

Financial due diligence –what will the buyer be looking at?

David explains that sometimes the due diligence work can be fairly broad brush; other times it will be extremely detailed. The level of due diligence will dictate the information required. I asked David what factors are likely to impact the approach the buyer takes?

“In my experience, the approach adopted will depend on:

• The nature of the business
• The nature of the buyer (some will need to be seen to have gone through a thorough process, others will have the freedom to be pragmatic)
• Why they are buying
• How significant the deal is to the buyer
• The deal structure
• The pricing rationale (eg: whether it is based on historic or prospective earnings)

In broad terms financial due diligence looks to establish the credibility of the numbers that underpin the deal and identify risk areas:

• While tax and statutory accounts will feature, sophisticated buyers will also be tuned into the commercial drivers, the prospects for growth and cash flow.

• Where the deal price is based on forecast results, then projections will receive greater scrutiny.  

One area which may get attention is the business’s working capital requirements.  Business sales are often made on a debt free/cash free basis; this means that any cash surplus (or shortfall) to requirements is added to (or deducted) from the headline price.  Working out and agreeing the surplus or shortfall can be a difficult area.”

Due diligence from the accountant’s perspective

Due diligence may be conducted in a period of ‘exclusivity’ where only the selected buyer will have access to information.  The buyer (and most likely the client) will therefore expect swift responses to requests for information. Be aware that you will need to deal with this while juggling other client requirements.

David told me about some of the things that can go wrong:

“Adverse findings can lead to:

• the price being chipped,
• the deal structure changing (eg: part of the price being based on future performance instead of being paid up front)
• or at worst the deal falling through.    

It is really important that things are right first time.  If they aren’t, the accountant’s credibility may be on the line if they are perceived to be at fault.  Preparation is key, but at the very least to help manage expectations you could have early conversations about:

• the limitations of past figures (eg: you haven’t done an audit)
• possible areas of vulnerability in the figures
• the need to get things right first time
• likely additional information needs beyond the accounts.”

Due diligence support

So now we come back to why I invited David Lewis to share his thoughts with me on this issue. I spend my life looking for ways to help accountants to be more successful as they face the future and what is yet to come.

If you have clients looking to sell up or who get approached to sell, you will want to help them to get things right first time. This means they need to have all the required information available to help the deal proceed as smoothly as possible.  Having a critical friend onside can help the client:

• prepare properly and deal with problems in a safe space
• deal with the investigating accountants during due diligence, through someone speaking on the same wavelength

While you may have the experience, ability and time to be that critical friend, you may not. You may also recognise the benefits of bringing in specialist support from someone with:

• an eye for what buyers will be looking for
• the skills to sense check information, as well as plug any gaps
• a project based approach which will allow sufficient time to be devoted to the task

That’s most definitely NOT  service that I offer. David Lewis does though and there are many other experienced specialists out there too, all round the country.