The latest Argos Mid-Market Index which shows movements in private company prices has just been published. It shows data up to Q3 2017 and indicates a record high of 9.5x. As you can see from the graph it has been steadily climbing since 2009. So if you're a business owner it's a good time to think about exit. Or at any rate to make sure you have a credible exit or succession plan in place. Many owners of private companies have much of their wealth locked up in their shareholding and so even an equity release transaction - perhaps by selling shares to a third party like a private equity house can help balance their personal portfolio.
The other factor I now start to hear in conversation with business owners is concern about the tax regime that a new government might bring. The capital taxes regime re the sale of company shares is particularly benign with Entrepreneurs' Relief effectively reducing the rate to 10% on the first £10M of lifetime gains. Whilst Entrepreneurs' Relief was brought in by a Labour government there is an up swell of concern that a Corbyn led government might change things.
None of this may happen of course but it does underscore the need for every business owner to have a plan for exit and succession - even if it is explicitly not intended to happen for some time.
We're running our Business Exit Strategies Seminar in Stevenage on 23 November the day after the Chancellor Philip Hammond's budget speech. So we should have clarity at least on his short term tax plans.
Our event, which is free, gives useful insights into a range of topics:-
The current M&A market
How to build value in your business
How to achieve succession through a management buyout
Tax - how to mitigate and also how to use your tax affairs to build value in your company
Company sales - how to sell your business, pitfalls, why some companies don't sell
Planning for exit and succession can be difficult in any business, but in family businesses there are additional factors to consider. One of the problems with family succession planning is that the two key objectives – liquidity and preservation of the business legacy appear to be in conflict – how can you get cash without selling up? A sale to a trade buyer may be unattractive if the plan is to keep things in the family, and this is where the idea of a sale to family comes in.
This is a form of management buyout – the family members buying the business are very often the team running the company. Often it goes beyond that to key managers – hence the occasionally used abbreviation the FAMBO. This is meant to mean Family and Management Buyout, or Family Buyout, although just to confuse things I’ve recently seen it used in East Anglia to refer to a Franchisee and Management Buyout. It can also be called a VIMBO or Vendor Initiated Management Buyout – because the its usually (though not always) the older generation which initiates the sale to the younger family members. At PEM we prefer to refer to such deals as Succession Buyouts – because that neatly encapsulates the overarching strategic intent of the deal.
Because family relationships are involved things can go wrong so as to delay the transaction or even kill it completely. So here are some key thoughts on how to preserve family harmony whilst successfully completing a buyout.
Plan ahead and don’t rush each other. It is really important that harmony and trust is maintained. Nothing breeds suspicion more than the idea that one family member wants to take advantage of another, either by being pushy or appearing to scheme behind the scenes. This is true whether a family member is a buying or selling. An aggressive buyer almost ensures that the seller will react negatively; an aggressive seller communicates desperation and may undermine his or her own negotiating position. Actually this is also true of Succession Buyouts amongst long standing colleagues who are not related.
Take account of peoples personalities Families ought to know one another pretty well. They know about personality traits or past circumstances giving rise to unusual levels of loyalty, or even resentment, or jealousy. This might all come out in the run up to a transaction, sometimes they are deep-seated psychological feelings, and can be almost childlike—“Dad always preferred you.” Being alert to such attitudes and steering the transaction in a sensitive way that respects feelings will help ensure success. Often the most important thing is to make sure everyone is listened to.
Get the business professionally valued If your shareholder agreement doesn’t prescribe a valuation methodology, it will be helpful to everyone involved in negotiating a transaction that there should be an independent assessment of valuation. Fairness is the key to completing the transaction and maintaining positive family relationships, and possibly sanity. Neither buyer nor seller wants to looking back on the transaction with regret or suspicion.
Find some trusted advisors. Truly independent advisors who have the best interests of the family in mind can be hugely helpful in communications and facilitating agreement amongst the family. Each family member can get some independent advice, but its much better to select an adviser with a track record of brokering/facilitating such deals amongst close knit family or business groups to work for the company/family as a whole with the objective of reaching an agreement that works for all. A skilled adviser will listen to all the agenda’s and try to manage any emotional pressures that arise during negotiations.
Tax and estate planning My tax colleagues would point out that it’s really important to consider the tax and financial affairs of the whole family, up and down the generations. And a deal like this is an opportunity to consider these things holistically. Has the family provided for everyone as they intend and have they done inheritance tax planning? Again these are things that need to be done early. One of the consequences of some buyout structures is that IHT planning becomes more important – don’t leave it to the last.
Family businesses are important to us all – according to INSEAD they account for 57% of US GDP. There’s a general perception that many don’t make it beyond one or two generations. I’m not sure that’s true, INSEAD reckon there are 5,500 bicentenary family businesses around the world, and we’ve certainly worked with some family businesses which are now at fourth or fifth generation stage. Visit our website to read about some of the family buyouts we've worked on.
With the Cambridge and the East of England economy continuing to perform strongly we're hosting a free educational morning seminar targeted at local small and medium size business owners (in the £1m-£100m turnover band).
Alongside our own corporate finance, and tax specialists we have speakers from our joint event hosts Barclays and Business Growth Fund who will give insights into raising debt and equity finance. The whole event is designed to give business owners practical ideas on developing a strategy for growth.
Any acquisition should have a sound strategy underpinning it. And it should look not only at the why and how, but also at the long term implications – when will you see benefits? Will it make your business more attractive to buyers?”
As well as giving advice on acquisition, we'll cover using strategic growth to maximise the value of a business. The event is going to be comprehensive, guiding attendees from growth right through to succession or trade sale.
acquisition, Advice, bank debt, Bedfordshire, business valuation, Cambridge, company sales, Corporate Finance, East Anglia, East of England, Essex, Herts, leveraged finance, M&A, Norfolk, Northants, organic growth, Peterborough, private equity, strategy, Suffolk, venture capital
I'm pleased to report that we helped the management team at Alacer Software to acquire the company from its parent company Lifecrown Investments.
Alacer is a developer of hospitality software that allows all manner of businesses in that sector to run their businesses more efficiently. Instead of having a patchwork of various different systems Alacer brings together all elements of their business (bar, conference, spa, front of house, reservations and so on) into one system. This makes life much easier as it then involves one supplier, one system and is properly "joined up".
Alacer was the only software business in its parent group, which itself was focussed on a very different market sector - so the logic of the buyout was compelling.
We were able to help Rob Day, MD of Alacer, to negotiate and structure the deal. I'm glad to say that we continue to help them with the business in an advisory role post transaction.
A big thanks to Rob for agreeing to appear in our first PEM Corporate Finance video, and to the spielbergian skills of Peggy McGregor of PEMCF and Connor Nudd of PEM for pulling the video together. Alas too late for this years Oscars.
I'm pleased to be able to report on a recent management buyout that we advised on. Lee Green, Matt Higgs, Phil Dascombe and Dan Todd have acquired Kloeber, a manufacturer and supplier of glazing products.
Based in Somersham in Cambridgeshire, Kloeber is a manufacturer and supplier of glazing products - including bi-folding, sliding and entrance doors, windows, roof lights and bespoke glazed screens.
It has had a lot of attention in the media, with its products featuring on TV programs such as Grand Designs and DIY SOS. In 2012 the company’s signature ‘FunkyFront’ door – a contemporary take on entrance door design – received Build It magazine’s Best Joinery Product Award.
Very often management buyouts take place at long standing mature businesses. In fact Kloeber has not been around that long, and its rapid growth is a real success story. Launched in 2006, the company capitalised on the high demand for quality glazing products from the home improvement and self-build sectors.
Despite a general decline in the UK window and door market, the bi-folding door market grew by 17% (to £43 million) in 2011, an expansion that greatly benefited Kloeber. Within the first year of trading the company had designed a full range of timber glazed products. It later added uPVC, composite and aluminium products to its range.
The management team having run the company on a daily basis for the past three yearsacquired the company from its founder Director, Gavin Morris who now wants to focus on his other business activities while retaining a reduced involvement and shareholding in Kloeber.
What is also noteworthy about the deal is the raising of raise finance from RBS in a still tight debt market - particularly for this type of buyout funding.
We’re often asked how to achieve succession within family businesses. For this type of business Business Exit Strategies mean how to pass it on and not how to achieve a trade sale of the company. Very often this will be done in the form of a Vendor Initiated management buyout, particularly if those who are to succeed are not just family members. The VIMBO or succession buyout structure can also work well in a family deal, if Mum and Dad want full value rather than gifting the business, and if they need some sort of carried interest or ongoing income.
SIMPLEST CAN BE BEST
That said simple is often best. And particularly in small deals variations on the share buyback theme can be useful.
We recently helped a family business in Suffolk achieve succession using this type of structure. It wasn’t a huge business, but was sustainedly profitable, and had grown to have branches in Essex, Norfolk and Cambridgeshire. Mum and Dad had been running their business as a company for many years, but had involved their two sons in the business as full time directors. As the sons took more responsibility in the business they felt that it was time for them to take control. The aim was to achieve the transfer and for the parents to have the profits which had accumulated in the company to be paid out to them tax efficiently. If the arithmetic stacks up this can be done using a buyback of shares.
The tax legislation which gives favourable tax treatment to an individual when a company purchases some of its own shares provided certain hoops are jumped through. In outline the steps are:
The sons get given some shares (a 32% minority holding) in the company a few years before Mum and Dad were ready to fully hand over the reins. Result = no tax charge for parents or children due to the availability of tax reliefs - it qualified as a trading company.
More recently, when Mum and Dad decided to retire, the company bought back their shares. This was done correctly and so the proceeds will be taxed as capital receipts for the sale of their shares (and not subject to income tax). Entrepreneurs’ Relief should be available as both the individuals and the company meet the conditions and so the tax charge is only 10%.
The company then cancelled the shares so that the shares held by the next generation are the only shares in issue and they all of the company.
THE GROUND RULES
In all deals there are some company law rules to be observed, or the danger is that the purchase of shares is an invalid purchase with unfortunate consequences. As ever there are also tax rules to follow – and they’re often not quite so clear cut. In this case the two keys matters that had to be established were that the company was a trading company for the purposes of Entrepreneurs’ Relief and that the purchase of shares is for ‘bona fide commercial reasons’. The ability to “clear” this with the revenue in advance is helpful. Of course there is usually a financing issue too. In this case the company had the cash to payout. But what if the company doesn’t have enough cash? There are ways round this – and indeed this might be a cue to consider a Newco buyout structure.
I'm pleased to say that PEM Corporate Finance has advised on the recently completed private equtiy funding for Bourn Bioscience Ltd, the parent company of Bourn Hall Clinic. They raised equity finance from Mobeus Equity Partners to support their plans for geographic expansion. An initial £3.5 million investment for a minority shareholding is supplemented by a commitment to invest significant follow-on finance.
The first IVF clinic in the world, Bourn Hall Clinic was founded in 1980 by Robert Edwards and Patrick Steptoe - the IVF pioneers whose work led to the birth of the first test-tube baby in 1978. Since its founding, this internationally renowned clinic has helped to make over 15,000 births possible.
Today the company boasts three full service IVF clinics, based in Cambridge, Colchester and Norwich and supported by a number of satellite units. With 120 staff and the delivery of over 2,500 IVF cycles per annum, Bourn Hall Clinic is the largest independent fertility services provider in the East of England.
The UK market for fertility services has grown considerably in recent years, driven by increasing awareness and acceptance of IVF procedures, favourable demographics and improved success rates. Bourn Hall Clinic is looking to continue its geographic expansion, leveraging its strong brand and reputation.
We have worked with Mike Macnamee and his team at Bourn Hall before, advising on their original management buyout from Serono and later on their acquisition of ISIS Fertility. Hopefully with this warchest there will be more deals to come. More detail on this on our webpage
We think its more of an art than a science. And this is borne out by legal precedent:
"in the field of valuation the experience of the valuer and his ability to form a sound commercial judgement is of overiding importance. The process of valuation cannot be reduced to the application of a set of abstract formulae..."
Justice Vinelott - High Court Case Re Cumana (1986)
I lead our business valuations activity, and as such I often get to see earlier attempts at valuing the company, or sometimes in a dispute the valuation prepared for the other side. I'm always astonished at home little knowledge is shown of the business being valued. Its like a surveyor valuing a house simply by driving past it at speed. And companies are more complex to value. I've also seen valuations where earnings multiples are simply plucked from the air, or derived from quite ludicrous comparatives. And probably the worse offenders are the valuations that clearly suffer from "death by spreadsheet". In other words lots of complicated, but meaningless, analysis.
We believe strongly that valuation reports should be useful, and if possible interesting to the company that commissions them.
If you're interested in learning a little about the factors that will influence the value of your business, why not come to one of our seminars where we cover the topic. We're runing one in Norwich this week 14 March at Dunston Hall Hotel. We're running them again in Cambridge at the Trinity Centre on 13 June, and in Borehamwood at the Holiday Inn on 20 June. If you'd like to find out more about the program or to book visit our events page.
For most busines owners once they've begun to think about exit strategy "how do I get the best price" is often top of the list of questions. We're addressing that at a series of three seminars this autumn entitled Business Exit Strategies. They're being held on 3rd, 10th, and 24th November in Hemel Hempstead, Northampton and Brentwood. These are half day free seminars designed to demystify the topic and to offer genuinely practical insight and ideas for business owners. For full details and the ability to book easily and confidentially visit our website.
For those owners who want a decent price but also the ability to acheive a sale to their management team to reward the people, and to secure continuity we have a special session in the seminar on this topic. Its an area we specialise in and we'll be sharing some pracitcal advice and some real case studies.
Buyouts are usually discussed as being distinct from M&A - more usually thought to be corporate merger and acquisitions - although of course they're just another flavour of acquisition transaction. Barclays Private Equity and the Centre for Management Buyout Research have recently published their review of activity in Q1 of 2011. Lots of stats but interestingly on the one had management buy-out volumes are at historic lows and at the same time MBOs rose to account for a greater proportion of M&A activity in a flat market.
Within the MBO market the smaller deals - which they classify as below £10M have suffered the biggest downturn with just 269 deals at a value of £508M completed in 2010 compared to only 75 deal;s at a value of £137M in the first quarter of this year. Not surprising given that the lack of bank liquidity for deals is most pronounced at that end of the market.
Despite that the overall prognosis is marginally positive - some signs of recovery in volumes and just as importantly in the UK exit market. Given the recent Eurozone problems, and that of the US economy I can imagine that the Q2 report when published will be even less bullish (if possible).