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Selling Your Business Successfully

By

Dr. COLIN THOMPSON

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CAVENDISH

Selling Your Business Successfully

By

Dr. COLIN THOMPSON

Building and Communicating Value will be the single most valuable investment yourorganisation makes on the road to delivering sustainable value when you come to sell yourbusiness.

The creation of value is the primary objective of any organisation and research indicates thatthe pressure senior managers already face to deliver value will intensify significantly into thefuture with a global economy.

Today, it is vital that all people build and deliver superior long-term value to meet and exceedthe expectations of all its organisations shareholders.

Discover how this report will enable you to deliver superior long-term value to and encompassthe retention of its employees, customers, suppliers when you sell the business.

Open your mind up to the `Challenges` we face in a global trading environment to besuccessful in selling the business for the best price.

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Selling Your Business Successfully

by

Dr. COLIN THOMPSON

Published in 2008 by:CavendishKings CourtSchool RoadHall GreenBirminghamB28 8JGUK

Telephone: + 44 (0) 121 244 1802Fax: + 44 (0) 121 733 2902email: info@cavendish-mr.orgWebsite: www.cavendish-mr.org

© Copyright 2004 Colin Thompson

First Edition 2004

The material contained in this report is set out in good faith for generalguidance and no liability can be accepted for loss or expense incurred as aresult of relying in particular circumstances on statements made in the report.The Laws and Regulations are complex and liable to change, and readersshould check the current position with the relevant authorities before makingpersonal arrangements.

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Selling Your Business Successfully

Contents

PAGE

Executive Summary 2Profile: Colin Thompson 5Selling Your Business Successfully 6Planning Your Exit from the Business 6Identify Your Exit Options 9How to Sell Your Business 11Successful Planning 13Finding Fulfilment after the Business 14Key Factors that Influence a Successful Sale 17Reasons for Selling a Business 19Steps to Sell your Business 20Q&A 21Added Value Solutions 25

PROVIDING THE SOLUTIONS FOR SUCCESS

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PROFILE

DR. COLIN THOMPSON

Colin Thompson has over 25 years experience as Managing Director and Director. Hiscareer to date has given him a complete exposure to business management andmanagement of people. He has wide experience in PLC and private company’s in toplevel management of increasing sales/profit. Also, turnaround and re-engineeringexperience linked to new corporate identities and successful mergers/take-overs. Plus,developed many business models to increase profitability.

Technical skills/knowledge

DirectorshipsManaging DirectorDirector-Print Management and Workflow SolutionsDirector-Operations/Customer Service and MarketingDirector-Financial and AdministrationNon-Executive Director.

Chairman - Oxford College of Management Studies Professor-European Business School, Cambridge

Initiated New Corporate Identities, also Managing Director:Datagraphic Inc. UK, division of USA GroupForms UK plc (etrinsic plc) division of InnerWorks Inc. USA GroupWH Smith PLC-Business Services -Print/Distribution and Workflow SolutionsKenrick & Jefferson GroupLtdMail Solutions Group Ltd, division of SSWH PLC

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CAVENDISH Able to successful bring new Products and Services to market i.e.

a) Set up new UK `green field` manufacturing/distribution/workflow systemsoperations and market new Products and Services.

b) Research, development and design of a Print Management Service, includingwriting a book `Print Management and Workflow Solutions`, plus many otherpublications and business models on CD/Software.

c) Produced CD-ROM `Interpreting Accounts for the Non-Financial Manager`-adapted from my two-day course for Anderson’s-Chartered Accountants fortheir clients. Plus, CD-ROM on `Managing for Customer Care`.

My training and knowledge has enabled me to take an overall view of an organisation,its operations and strategy. Also, to understand with a degree of competence in a widevariety of business skills and functions. I have dealt with challenges at a high level ofcomplexity, especially those that cut across the common functional divisions of business.Developed several business models to raise the `bottom-line`.

Education: BA, MBA, DBA, CPA, FFA, MCIPD, FIOP, MCIJ

My experiences and knowledge have enabled me to write and have published over 400articles, several publications, research reports, and CD’s/Software on business modelsplus speaking at International Conferences, Seminars and Lectures.

DDL: + 44 (0) 121 244 0306Mobile: 07831 588310email: colin@cavendish-mr.orgWebsite: www.cavendish-mr.org

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Selling Your Business Successfully

`Planning your exit from the Business`!

Far too many business owners fail to plan for their eventual exit from the business.

For some, it's because they cling to the widely-held myth that a knight in shining armour will comeriding along and make them an offer for the business they can not refuse. Wrong! Others simply getso wrapped up in the day-to-day details of running the business that they never take time to plan fortheir future.

Without some sort of plan in place, you will likely receive a much smaller financial return on thebusiness than you deserve. Worse, you run the risk of wandering aimlessly through retirementwondering "Who am I?" and "What went wrong?" Conversely, when you make conscious, purposefulchoices about when and how to leave the business and what to do afterwards, you end up with aninfinitely more rewarding outcome. Winning beyond business -- having a rewarding and fulfillingsecond half of life -- requires addressing the following issues:

1. Determining when, where and how you will leave the business

2. Maximising the value of the business

3. Identifying your successor (if you decide to transfer rather than sell the business)

4. Estate planning to protect your assets and transfer wealth with a minimum of taxes

5. Discovering who and what you are beyond the business

6. Identifying your true passions and "callings"

7. Finding new ways to achieve the sense of fulfilment your business currently gives you

8. Setting a course for the second half of life

By addressing these issues through careful exit and life planning, you dramatically increase the oddsof having a successful transition out of the business and into the next phase of life. Now go and do it!

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Exiting the Business

As the owner of a privately held business, your company represents your biggest and most importantasset. It is the difference between a planned and an unplanned exit can be very significant.

First, understand that as the owner of a privately held business, you have two key roles -- CEO andshareholder. As CEO, your job is to make the best decisions for the business. As shareholder, yourjob is to make the best decisions about your investment. When it comes time to exit the business,these two roles often do not coincide. Effective exit planning must therefore take into account thediffering needs of each role.

It helps to understand the key principles of exit planning:

1. Understand the full extent of exit planning. Exit planning encompasses a wide range ofactivities that include:

o Deciding how, when and to whom to sell the business

o Identifying a successor if you intend to transfer rather than sell

o Determining what you will do with your life when you no longer own/run the company

o Taking steps to maximise and protect your assets (estate planning)

Exit planning also involves a process, not a one-time event. Depending on the owner and the state ofthe business, it can take several years to develop an exit plan. Once in place, it should be revisited ona regular basis as business and life circumstances change.

1. Separate the job from the investment. Exit planning for the CEO involves figuring out whatto do after the business. Exit planning for the Shareholder involves turning an illiquidinvestment into cash and investing it in something else. In a successful exit, each roleaccomplishes its separate goals.

2. Position for the transaction. Selling a business is much like selling a home -- in order toreceive full value; you have to get it in top shape. Because positioning a business for sale cantake several years, we recommend managing the company to maximise shareholder valuerather than just top-line growth. By focusing on the areas needed to maximise value, youautomatically keep the business in shape to sell.

3. Time your exit. Receiving maximum value for your business requires selling at the right time,which means paying attention to market and business conditions. Market conditionsencompass things like interest rates, merger and acquisition trends and the availability ofinvestment capital. Business conditions have to do with your frame of mind in regard torunning the business.

Creating the Exit Plan

To create an effective exit plan, I recommend a three-step process:

1. Set goals. This first step addresses three critical questions:

o When do you, the CEO, want to stop working here?

o After selling the business, how much would you like to have in the bank so you don'tever have to work again (or worry about it)?

o When do you want to get liquid, stop investing in this company and invest insomething else?

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Answering these questions identifies three important goals: the date the CEO will leave the business,a financial target and the date the shareholder will leave the business. The answers to questions oneand three are often very different.

1. Conduct a current state analysis. Step two begins the process of determining how toachieve the goals set in step one. This involves a careful analysis of three key points -- thevalue of your business, the strengths and weaknesses of your business and your company'sstrategic position in the marketplace.

Start your analysis by determining a `reasonable and realistic` value for your business andcompare it to your answer to question number 2 in step one. This identifies the gap betweenhow much your business is worth and how much you need to have in the bank in order tofinance your retirement. Next, identify your company's strengths and weaknesses so you canfix any glaring defects or problems. Finally, understand your company's strategic position inthe marketplace by asking questions like:

o Which companies are buying other companies like mine?

o Which companies are being sought by strategic buyers and why?

o Does my company fit that profile?

o Who is likely to be a strategic buyer for my business?

The ideal time to sell, is when your personal goals, the value of the business and market conditionsare all in sync.

3. Identify your exit options. Privately held business owners have four basic ways to cash out:

o Sell to an outside entity

o Transfer the business to the next generation

o Sell to the management team and employees (ESOP)

o Initial public offering (IPO)

Each option comes with its own complex set of issues and questions that need answering. Look at allthe available options, comparing them side by side, and identify which one will best help youaccomplish your goals.

Understanding the value of your business also represents a key element of the exit planning process.There are four basic approaches to valuation:

1. Asset-based value. This method includes book value, adjusted book value, liquidated valueand replacement value.

2. Earnings-based value. For businesses without a lot of assets, earnings provide a morereliable indication of value. Earnings-based values can vary widely depending on a number offactors, such as pre- versus post-tax or current versus future earnings.

3. Cash-flow value. The most common cash-flow method involves discounted cash flow,whereby you project future earnings and value that stream of earnings by discounting itaccording to an agreed-upon number.

4. Public company multiples value. This method compares public company multiples to privatecompanies by identifying what a similar company is worth in terms of price to book, price toearnings, price to sales, and price to cash flow.

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Many owners want to take some chips off the table and still retain control. I identify three methods thatwork well:

1. Employee stock ownership plan (ESOP). An ESOP is basically a qualified benefit plan thathas vesting schedules and contribution limits. Unlike £500K, a profit sharing or pension plan,an ESOP buys company stock, is exempt from diversification and can borrow money.

2. Re-capitalisation (restructuring). Re-capitalisation involves forming a new company topurchase the assets of the business.

3. Multi-stage sale. This kind of deals works best when there are very high barriers to entry or inhigh-growth situations where a strategic buyer can afford to wait a while to achieve the desiredreturn.

Timing also plays a major role in landing the best deal. To get the most for your business:

Do not sell when you're not having fun.

Do not wait too long to sell.

Be prepared to sell at any time.

Selling the Business

The best time to sell your business is when the future of your company looks brightest, not whenyou've reached a peak or have entered a down cycle. In particular, I recommend selling when:

You have dominant market share or a recognised position, such as price leadership

You have some sort of technological or competitive advantage

Margins are good and have the potential to get even better

You have something -- such as infrastructure, distribution or access to a niche market -- thatcan be leveraged by the right buyer

Your industry and market are in an up cycle

Before posting the "for sale" sign, however, it helps to familiarise yourself with the following concepts:

Recognise that the company is the product.

Look at your company through the buyer's eyes.

Understand the buyer's motivation.

Enhance the intangibles that make your business attractive.

Know the value of your business.

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To get the highest price for your business:

Never state a price for your company. Let the market determine the price by discreetlyobtaining offers from a variety of potential buyers.

Negotiate with multiple buyers. The quickest way to erode the value of your business is tonegotiate with only one buyer.

Seek out strategic buyers. A motivated strategic buyer will almost always outbid a financialbuyer.

Use an intermediary.

Understand product and industry life cycles. Sell your company when both of these are onan upward growth curve.

Stick with your exit plan. If a deal doesn't jibe with your overall exit plan, don't sign on thedotted line.

How to Sell Your Business

The first step in selling a business, involves determining not how much or to whom, but when. Propertiming can increase the value of your business by millions. It also has an impact on the quantity andquality of potential buyers, and it affects the company's ability to continue on after you sell. Start out byasking these questions:

When is the right time to sell?

Do I want to stay with my business after I sell?

To whom should I sell?

What is my business really worth?

What kind of help do I need?

What are the risks involved in selling?

What should I be doing now to prepare for the sale?

Smart business owners begin preparing the business for sale long before they actually put it on themarket. I offer the following checklist to guide your preparations:

Document your vision.

Prepare audited and reviewed financial statements.

Make cosmetic improvements.

Identify business opportunities.

Recast your financial statements.

Perform environmental reviews.

Purge obsolete assets, excess expenses and non-operating activities.

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Settle any existing lawsuits.

Document operational procedures.

Evaluate your management team.

Break down the process of selling a business into four distinct phases:

1. Preparation:

o Assess the current state of the business and identify any immediate "valueenhancers."

o Prepare a sale memorandum (also called an "offering" memorandum).

o Identify and qualify potential buyers.

o Craft a marketing letter to attract potential suitors.

1. Marketing:

o Release the marketing letter through appropriate sources.

o Respond to interested parties by:

Having each prospective buyer sign a confidentiality agreement

Starting the process of pre-qualifying the prospects

Releasing the offering memorandum to all qualified buyers

Responding to their initial round of questions

Preparing additional information as needed

o Conduct off-site meetings to scrutinise the potential buyers.

o Arrange for prospects to visit your business and "kick the tires."

1. Negotiating:

o Collect letters of intent from serious buyers.

o Strive to create an auction environment among the potential buyers.

o Select the most promising buyer and announce that you have accepted their letter ofintent.

1. Closing:

o Both sides conduct in-depth due diligence.

o Negotiate the "definitive purchase agreement."

o Sign and close the deal.

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To increase your chances of a successful sale, avoid these common pitfalls:

Not being prepared

Failure to check out the buyer

Talking to only one buyer

Talking with competitors

Underestimating the value of the business

Premature disclosure

Succession Planning

Succession planning answers the question, "If I die, become disabled or otherwise leave the business,who will run the company and what will happen to it?" answering this question requires three basicsteps:

1. Identify the successors. When it comes to deciding who should run the business after you'regone (assuming you do not sell outright), the options are:

o Family member(s)

o Partners and/or shareholders

o Professional managers or key employees

o Some combination of the above

From these options, select a successor according to two criteria -- who you want the business to go toand who are best qualified to run it after you leave. Often, these two people are not the same.

1. Plan for every contingency. The next step involves planning for any and all events -- suchas retirement, death or disability -- that can trigger the succession plan. Be sure to identify theappropriate successor in each case, because they may not be the same.

2. Memorialise the plan. Formalise and memorialise your succession plan by putting everythingin writing and creating the necessary legal documents, such as buy-sell agreements, partneragreements and living wills. These documents also specify where the money will come from tofacilitate the transition of the business.

In the vast majority of cases, succession planning leads to a smooth, orderly transition of the businessupon retirement or the decision to sell. However, in the event of your untimely death or disability, yoursuccession plan should:

Include an up-to-date financial statement

Clearly state what happens with key employees, who is in charge, and what roles they play

Identify a board of advisors to help your surviving spouse through the crisis

In addition, I strongly recommend writing a "love letter" to your spouse that details what will happen tothe business should you die unexpectedly and whom he/she can turn to for advice. When creating theboard of advisors, avoid anyone directly connected with the business. Instead, identify independent,skilled business peoples whom you and your spouse both trust.

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The final pieces of the puzzle involve making sure your succession plan supports your estate plan andvice versa. The secret to successful asset protection is to delegate wisely and well. This involves:

Creating a team of specialists that includes:

A tax-savvy Accountant

An estate tax Solicitor

A business valuation specialist

A life insurance specialist

A financial planner/money manager

Identifying a team champion, someone who understands all aspects of your succession/estateplan and can communicate your goals to the other specialists on the team.

Clarifying your succession planning goals and expectations for your team champion.

To enhance your chances for a successful plan, avoid these common mistakes:

Failure to plan

Choosing a weak successor

Lack of flexibility in the plan, particularly as it relates to the sale/transfer of the company

Getting so caught up in worrying about tomorrow that you neglect what you do best -- runningyour company and making money

Finding Fulfilment after the Business

I believe that how you plan to spend your time in retirement has a greater impact on your post-business quality of life than all the business, financial and estate planning issues put together. Theyalso believe that exiting the business presents an ideal time to explore new possibilities and discover(or rediscover) other aspects of yourself that may have been suppressed in the drive to achieveeconomic success.

The biggest obstacle to this major life transition is that most entrepreneurial CEOs have invested toomuch of their identity and self-image in the business. Not only do they find it hard to let go of theirposition and explore other alternatives, many can't even think about themselves apart from thebusiness. Developing a meaningful life means recognising and accepting that you are much biggerthan your business and that life has much more to offer. By shifting your outlook and understandingthat you have 25 or more vital years ahead, you can re-invent and re-energise yourself and lead auseful, rewarding post-business life.

To find new meaning and purpose in life after the business, I suggest the following strategies:

Accept your own mortality. The process of life planning begins the moment you realise thatthe road in front of you has grown shorter than the road behind.

Look inside. At midlife, it's not so much what you look for as where you look for it. Theinformation crucial to a successful second half of life lies on the inside, not the outside.

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Stay in conversation with yourself. During times of intense self-exploration, it helps to stayin close touch with your thoughts, feelings and emotions. This important self-dialogue canoccur in many ways, such as keeping a daily journal, engaging in meditation or participating ina group (i.e. church, spiritual or self-help) whose members get together for the main purposeof "waking up."

Don't rely on hobbies or leisure activities. For high achievers, personal fulfilmentrepresents an integral component of life. Leading a meaningful life in retirement requiresfinding something other than the business to provide that same fulfilment. Although enjoyable,hobbies and leisure activities rarely fill the void.

Use outside resources. These can include:

o Books, audio tapes and workshops on personal growth

o Close friends and confidants

o Personal coaches and mentors

o Support groups

o Your spiritual community

Involve your spouse or significant other. Recognise that you're not the only one goingthrough major transition -- so is your spouse and your marriage. Setting off on the journeytogether will pay tremendous dividends along the way.

Listen to the voice of "yes." Identify the forces in your life -- the people, skills, resources andteachings that can help you turn a "no" into a "yes" -- and wholeheartedly embrace them.

The Search for Fulfilment

The journey to personal fulfilment tends to move through four predictable phases -- shake-up, self-exploration, renewal and integration. Passing through each phase takes roughly a year, with theprimary issues in each phase laying an important foundation for the next.

Shake-Up. Shake-up is a precursor of a life transition often known by other names, such as mid-lifecrisis, paradigm shift or wake-up call. It involves confronting a set of obstacles and challenges thatyour vast skills and past experience cannot address, let alone solve. Overcoming these obstaclesrequires letting go of your old self-image and crafting a new vision that can sustain and inspire yournew life passion. Key questions during this phase include:

How much time do I have?

Who am I besides my business?

What are my priorities?

What am I doing that no longer fulfils me?

Self-Exploration. This phase involves examining what was revealed during shake-up. You discoverunfamiliar aspects of yourself, parts left undeveloped, hidden or rejected. Rather than avoiding ordenying these parts, you begin to mine them as a source of new energy, untapped wisdom andimagination. The fundamental question during self-exploration is, "What do I want?"

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Renewal. Renewal is a time for connecting with your newfound vitality, passion and calling. It involvesreprioritising life goals so they mirror your growing new vision. The key question during this phase is"What is my passion?" Renewal also addresses questions like:

How would I like to be different as a person five years from now?

What do I want my legacy to be?

What is my life purpose?

Integration. Integration allows you to put your new sense of self and new life passion actively andconsciously into the world. Then, through the art of mentoring, you generously share this "knowing" asa living legacy for your peers, the community and generations to come. The key question duringintegration is, "How can I serve?"

Finding personal fulfilment involves a cycle of continuous self-exploration, growth and renewal, ofconstantly pushing your own boundaries and being willing to redefine yourself in new and moremeaningful ways. At first, this can feel uncomfortable for entrepreneurs who are used to focusing ontheir external rather than their internal world. But as you get more comfortable exploring those aspectsof yourself that lay dormant for so many years, the journey becomes easier and much more rewarding.

Finding Your True Calling

We help people align (or re-align) with their passion and sense of purpose in life. He refers to thisprocess of self-exploration as "finding your true calling." He describes a calling as "any urging thatcomes from the geographical centre of yourself and tells you what it will take to make your life literallycome true."

Obstacles often get in the way of pursuing callings. I identify the three worst offenders as:

Societal pressures. Because callings tend to be disruptive, society rarely trains or evenencourages people -- especially those in positions of great responsibility -- to pay attention tothem.

Self pressures. At the same time, many CEOs feel deeply responsible for the lives of theiremployees. Hence, they tend to tune out any inner voices that may distract them from runningthe business.

Ambiguity of callings. Perhaps the toughest challenge of all involves picking out a truecalling from all the "background noise," the fanciful daydreams that seem like callings but haveno real substance to them.

When following a calling,

Accept that sacrifice is inevitable. All growth requires letting go of something, and callingsare no different. You have to be willing to give up certain things in order to fulfil your passionand purpose.

Identify your passions. Passion is one of the primary channels through which callings maketheir way into the light of day. It also represents a quick and easy way to get a real sense ofwhere to find your "real juice" in life.

Let go of resistance. Rather than fighting your inner resistance, accept it as part of theprocess. Enter into a dialogue with the resistance, asking, "Who are you? Where do you comefrom? Where have I heard this before?" Recognise that the inner voices of "no" were instilledin you at a very young age by adult authority figures and that you no longer need to carry themaround in your head.

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Consult your own death. When you acknowledge and accept your own mortality, youachieve ultimate clarity.

Get help. Identify the forces in your life that can help turn "no" into "yes." Make a list of all-possible resources, mentors and advisors. Include anyone who can help you make thetransition, provide a source of inspiration or has done what you want to do.

Consider the big picture. In the end, we will all turn to dust. Knowing this can give you thecourage to go ahead and take the plunge.

Take action. Often, the only way to identify a true calling is to dive right in and see what kindof results you get. Avoid over-analysing. Just do it!

Avoid an "all-or-nothing" approach. Following a calling does not mean dropping everythingin your life and taking off on a wild goose chase. Instead, take small steps that graduallyredesign your school of thought and your behaviour. Now make your decision!

But, before you rush off take on board these other points I share with you as follows.

Key factors that influence a successful sale

Misaligned thinking and action at the early stages of considering a sale can account for many failures.Being determined to address the following four issues will have a major influence on success. Theseare:

1. Avoid passivity at all costs

This is a selling issue. It is interesting to note that the best acquirers are often not considering anacquisition. Buying a company may not be on their agenda. The only way to find such buyers isthrough an active search. On the other hand venture capitalists and large PLCs looking to sustainshare values are always on the hunt, but rarely pay a premium. Passive selling will only ever locatesuch buyers.

Successfully selling products involves active enquiry generation. Why should selling a business beany different? At Cavendish, we have developed a database of companies. Using this globally uniqueresource we actively contact (on average) two or three hundred prospective buyers just to locate twoto three good ones. There is no short cut.

Additionally, a search should not be restricted to the UK. Overseas buyers seeking access to the UKwill often buy small to medium-sized companies and premiums may well be paid for a strategicacquisition.

At Cavendish we are dedicated to this early research and identification of potential buyers. With all ofthis commitment it still takes us six weeks to complete this element of a project. There are no shortcuts. Failure to find hundreds of good prospects will almost certainly result in 'no sale'. Interestingly,the more companies you approach the luckier you get! Approaching up to 12 competitors by mail isvirtually certain to fail. So let us help you be successful with the sale of your business.

2. Motives vs. Multiples

If most company owners were to ask their accountants to value their business there is a 90 per centchance that the valuation would be related to the historic profitability of the business.

This might surprise you but the value of a business is driven by the motive of the buyer and notmultiples of profit. If you calculate the value of your business using multiples of past profit and then putthat value into the public domain you will be making one of the most expensive mistakes of your life.

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Motives for purchasing a company are diverse. It is a fact that the number one reason behind thepurchase of companies is not short term return on investment but the quality of that company's clientbase. This is the greatest reason why anyone buys a company and the greatest reason why apremium price is ever paid.

The second reason why a company is purchased and a premium price is paid is its potential for futuregrowth. What could the business look like in three years under new ownership, with new clients andfresh investment?

These issues have a far greater influence over value than multiples of historic profit.

Let us validate this with what we have come to call the 2.5 rule'.

If you negotiate well with a choice of strategically motivated buyers, then you will almost certainlyreceive a diverse range of bids.

At Cavendish we have a unique perspective through the observation of the number of deals that wehave completed. Over many years we have noticed that the difference between the lowest and highestbids is consistently 2.5. That is the highest offer is 2.5 times more than the lowest offer. We get veryfew exceptions to this. It is a great differential between highest and lowest bids.

At Cavendish we approach, on average, many prospective purchasers to sell just one company. Ittakes us approximately six months to vet and qualify this list down to no more than five or six. Theseprospects will be asked to submit a competitive bid. Bear in mind that we have been negotiating formany months. They have been thoroughly screened. It is at this advanced stage we consistently findthat the difference between the highest and lowest bid will be 2.5 times.

If valuation was truly rooted in multiples of adjusted profit, then all bids would be relatively similar.There would never be such a great differential. All buyers would use similar logic, figures and multiplesand the bids would be much closer together.

3. Bidder competition

There is one factor that influences `sale ability` more than any other and that is bidder competition.Having a choice of buyers, in effect 'creating a market', is the single most important issue that avendor can address.

Not only must you find a choice of acquirers, but they must also be strategically motivated andfinancially strong. It is essential that this matter is not compromised. Therefore, you will have tocontact many potential acquirers and this will dramatically influence the sale.

Bidder competition influences three things:

The speed of the deal

Where there is competition an acquirer is less likely to become hung up over minor warranty problemsetc. At Cavendish we work closely with lawyers around the UK. This is more important than mostpeople realise because the more protracted a deal, the disproportionately more likely it is to fail.

The price achieved

Of all the factors that will influence price upwardly, the greatest is 'creating a market of bidders'. Ofcourse this is true in any negotiation; nobody would argue this point and yet establishing biddercompetition remains the most compromised element of most traditional sales.

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4. Future Potential

We have already said that the number two reason why companies are purchased and why premiumprices are paid is potential for future growth. However, if you were to analyse a traditional prospectusyou will find almost no comment on this most crucial of subjects. The truth is that nobody ever buys acompany's history they only ever buy its future.

When you sell a company you should never sell what a company looked like last year under yourownership. You should absolutely never sell what a company will look like this year under yourownership. Neither should you sell what a company will look like in three years under your ownership.When you sell a company you should only sell what a company will look like in three years under newownership.

The 5 main reasons for selling a business may be diverse but they are also the most commonwe encounter.

Lifestyle change

Running a successful business requires considerable levels of commitment and responsibility. Rarely,if ever, is there the opportunity to leave the office at 5pm without a further thought given to the nextday’s workload, operational challenges or the future of the business. After living with the burden ofsuch responsibility for many years, business owners often yearn for a more relaxed lifestyle with timeand thoughts dedicated to family and leisure pursuits.

Entrepreneur versus manager

Many owners of privately owned companies have a strong entrepreneurial spirit and building abusiness, although time consuming and extremely hard work, is also an exciting and dynamic time.However all businesses inevitably require adherence to policies, procedures and legislation duringday-to-day operations. All this consumes an ever increasing proportion of the day for each businessowner, increasingly pulling them away from the exciting and dynamic environment in the early years ofthe growing company. For many owners, the motivating elements of growing and running a businessbecomes far less evident.

Time

Building and running a business often requires considerable commitment. It rarely allows businessowners the luxury to take extended breaks away or the care free option of simply working `9 to 5`.Because of this, whilst business owners develop and expand their businesses, there is little time leftfor family and social activities and holidays. For this reason many business owners choose to reap therewards of their labour and sell their business, using the proceeds to regain lost time.

Business life cycle

A typical business life cycle sees rapid growth in formative years as each business develops from‘start up’ status into a small and then medium sized company. Once the business reaches this size itis often necessary for the business owner to inject a considerable quantity of capital into the businessto maintain the level of previous growth. At this stage many business owners have a stable andprofitable business and feel less inclined to make a major financial commitment in the business whichmay take many years to be fully realised. At this point a decision is made to sell the business andallow a new owner, with greater financial resources and commitment to ensure the continuedexpansion of the business.

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An approach

An approach from a potential acquirer can be the catalyst required to change a business owner’smindset from running and developing a business to enjoying the often considerable proceeds of apotential company sale. Approaches are typically made either from an external organisation or fromthe internal management team (commonly known as an MBO or Management Buy Out). Manybusiness owners experiencing such an approach take advantage of the Cavendish Negotiation onlyservice.

Cavendish utilise there unique and refreshingly different way to sell your business for itsmaximum value: the 5 step process.

Step 1: The project brief

We work with you to create a comprehensive `Sell Your Business` brief, thinking laterally and beyondthe obvious.

The brief covers all aspects of your business including:

Your client base

Your products and services

The marketplace

Financials

Purchaser profiling

We then appoint a project Director to handle the business sale process.

Step 2: Exhaustive research

The project is now passed to us as the specialists. We identify potential buyers. At this stage it is vitalto look at complimentary buyers (not just competitive) and possibly from overseas, not just from theUK.

The research stage usually takes 6 weeks and is approved by the seller before implementation.

Step 3: Prospect generation

The project Director now draws on his skills and experience. Our consultants contact, in strictestconfidence, every prospective purchaser. We introduce the initial idea without telling them yourCompany name.

The objective is to generate face-to-face meetings with multiple prospective purchasers to create anatmosphere of competition. Each prospective buyer will be asked to sign a non-disclosure agreementbefore proceeding. There are no valuations at this stage. Due to strongly adhere to confidentialitypolicies, a breech of confidentiality is virtually unheard of.

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Step 4: Qualification and bidding

The Cavendish Directors will vet and qualify each prospect.

We prepare the client with our 'dry run negotiation meeting' to help them understand:

What to say and what not to say

How we will be inviting competitive bids

How to think benefits

How to trade, not concede

How to keep sight of the objective

When the client should talk and when they should leave it to the negotiator

The Cavendish team facilitates and leads every meeting and takes each prospect through our provenbidding process.

Step 5: Concluding the deal

We continue to handle the negotiations between buyer and seller and their advisors. We manage thedue diligence process that ensures the buyers know that what they believe they are buying is whatthey really are buying.

We ensure the business purchaser knows that the seller still has alternatives, because choice—orperceived choice—impacts on the speed and price of the business sale.

How much is my company worth?

The million pound question with no simple answer.

The easy response would be to state that your business is worth a standard multiple of earnings oradjusted profits. However the right answer, that we must face up to, is that your business is worthwhat someone is prepared to pay for it.

Motives and not multiples determine value. The issue is more about negotiation than valuation.

Often quoted is a multiple of 5 or 6 times adjusted operating profit (that is operating profit after makingadjustments for the profitability of the company under new ownership and after corporation tax).

The reality is that your company may be worth much less than the above or much more. On averagewe find that the difference between the highest bidder and the lowest bidder is 2.5 times. The reasonfor this is that they are buying with different motives. A strategic buyer is likely to pay a higher pricethan a return on investment buyer.

Your objective must be to put yourself in the best possible negotiating position and that means havinga `choice of buyers`. It also means being well `prepared` for the negotiation.

We wish there was an easy answer to this question but the truth is that there is not one. Any otheradvice is seriously flawed and could result in you significantly underselling your business.

Traditional valuation based simply on return on investment makes an assumption that nobody will paya premium for your business. This may be true but it is a very premature assumption. However becareful not to limit your aspirations.

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How long will it take to sell my business?

Another difficult question. Many shareholders never manage to sell their companies, others take manyyears. The main reason for this is a `passive` selling process. No enquiry generation means that yourely on a buyer finding you. Not only can this take many years but leaves you in a poor negotiatingposition.

From the brief to received bids is consistently 6 months. The Due Diligence and Legal processes aremore difficult to guarantee.

What do I need to do to prepare for the sale?

Important preparations include:

The Cavendish checklist - Charting the Take-Over Maze

Within 4 weeks of commencing a new project we will carefully work through our checklist in order toprepare for the forthcoming negotiations. We will need to collect all the information necessary toanswer the questions that may be raised during the negotiation meetings.

The most important aspect for establishing control of the negotiation is to locate a choice ofprospective purchasers. Following that comes good preparation of documentation.

The meeting

Prior to the negotiations Cavendish carry out a dry run meeting with you. During this time we will actas pseudo acquirers, together learning the best tactical approach. The main reason for this meeting issimple. Most of our clients have little experience in selling companies. On the other hand mostacquirers are experienced in these matters. The playing field needs to be levelled and the dry runmeeting is the ideal tool.

In addition we will need to take early tax advice in order that the lawyers can structure the deal in themost tax efficient way.

What about lawyers?

Along with your accountant, your lawyer needs to play a key role in your plans to sell your business,and in drawing up the legal documents that will carry out those plans. We can introduce you to skilledand experienced lawyers.

It may be that the lawyers that you use for general commercial activities are not experienced in themergers and acquisitions field. If this is true then we need to find another practice.

It may also be worth considering that your present lawyer has a built-in incentive to dislike any dealyou may propose: if you sell your business, he or she will probably lose a client! Consequently,whether they realise it or not, some lawyers who represent small businesses may tend to "pick apart"a deal by finding so many roadblocks that your deal falls to pieces, or continues on so long that theother party loses interest. Also, this becomes a very costly issue for you.

It is also true to say that it is unlikely to be necessary that you need to employ a big city practicewhose fees can be exorbitant. There are a good number of experienced regional practices that will doan excellent job.

What about tax advice?

If you have used an accountant regularly to prepare your tax returns and draw up financial statements,he or she will be very well acquainted with the financial shape of your business. This knowledge maybe helpful during the due diligence process.

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Your accountant will also be essential in drawing up the historical and projected financial statementsand other data required to place a benchmark value on your business, and in gathering and organisingfinancial data that will be requested by the buyer during the due diligence phase of negotiations.

If you haven't been in the habit of getting audited financial statements, we strongly suggestthat you do so now.

It is absolutely essential that at least one of the members of your team be an expert in dealing with thetax aspects of business sales and acquisitions. This person may be your accountant, your lawyer, oryou may also decide to hire a specialist solely for this purpose.

Depending on how the deal is structured by the lawyers, you may face an enormous tax bill upon thesale of your business, or next to none. There are a lot of opportunities to save money here.

Taking advantage of tax-saving opportunities requires planning in advance of signing the salesdocuments. We suggest that you start talking to such an adviser 4 months before a deal is expected.

What size and type of company does Cavendish help?

Most Cavendish company disposal clients are small to medium sized businesses. Clients have aturnover from £1million to £30million.

You might be interested to know what characteristics are likely to make a company more attractive toa buyer:

An enviable client base without vulnerability to any single customer

Strong potential for growth

Scarcity

Cash generative abilities (rare)

High Awareness / reputation

Guaranteed income streams via service agreements etc

A strong forward order book

Items to be avoided include:

Serious unresolved litigation

Major financial debts

Skeletons in the cupboard

Minority shareholder problems

What is Due Diligence?

Usually, after a buyer signs a letter of intent to purchase a business and the seller accepts the letter,the buyer will have a specified period of time in which to conduct a due diligence investigation of theseller and the company. During this period, your buyer should have access to your financial and otherrecords, facilities, etc., to investigate before finalising the deal.

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Cavendish will have assisted you in the preparation of documentation so by now you should havecollected and examined most of the information the buyer wants. The vast majority of it is in the formof documents in hard and electronic copy. The buyer will want to see copies of all leases, contracts,and loan agreements in addition to financial records and statements. He or she will want to see anymanagement accounts/reports you use, such as sales reports, inventory records, detailed lists ofassets, facility maintenance records, aged receivables and payables reports, employee organisationcharts, payroll and benefits records, customer records, and marketing materials. The buyer will want toknow about any pending litigation, tax audits, or insurance disputes.

Buyers will also look at the environment your business operates in, including the size and makeup ofyour market, your principal suppliers and customers, your competition, and your industry. They mayask you for more and more information until you feel overwhelmed! We suggest that you respondpatiently, and cooperate as much as you reasonably can. Just keep your mind on the goal - `sellingyour company` at a price and terms you can live with - and you will get through this potentially verytrying period.

Your own due diligence with our document `Charting the Take-Over Maze` will help in this process...You should also do some serious investigating of your own. You will want to find out the buyer's creditrecord, management experience, reputation, and the plans he or she has for your company's futureoperation. This is particularly true if you plan to continue an employment or consulting arrangementwith the buyer after the sale. We can carry out this exercise on your behalf.

What is the Business Purchase Agreement?

The purchase agreement for your business is one of the most important legal documents you will eversign. After all, many years of hard work will culminate in this single transaction. You do not want tohave issues (problems) collecting the money due you or to have legal problems haunting you into thefuture, and a carefully constructed purchase agreement can be your best insurance policy forpreventing such catastrophes.

Customarily, the buyer's lawyer provides the initial draft of the purchase agreement for a business.This makes sense, since the buyer has to live and work with the company while you will walk awayinto the sunset with the cash (theoretically, at least). However, we suggest that your lawyer shoulddraft the sections that are most important to you. In most cases, that means the clauses containingrepresentations and warranties about the business. Ideally, you should try to avoid or limit the makingof any warranties or guarantees for which you can be held legally accountable. You may alsonegotiate closely with the buyer as to which liabilities he or she is assuming, and which will remainwith you.

Here's where a good lawyer can pay dividends. Make sure that you maintain on-going liabilityinsurance for any liabilities that will remain with you - for example, product liability insurance onproducts that were sold during your tenure as owner.

Indemnity provisions, in which you promise that you will reimburse the buyer for certain types ofexpenses if they occur, are often a hotly disputed area of the contract.

The purchase agreement is likely to be a lengthy, complicated document. For some of the moreelaborate deals, the contract plus attachments can run into hundreds of pages. You should go throughit carefully with your lawyer and make sure that you understand the implications of whatever is inthere.

Once both parties have agreed on the language of the purchase agreement, it will be signed by bothparties. The contract will state the date at which the final transfer of ownership and possession of thebusiness will occur, and when the seller will get the money. With a signed purchase agreement inhand, the buyer can finalise any financing arrangements with outside lenders in anticipation of theclosing.

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Added Value solutions

`Valuer`- Business Valuation Software and complete guide to improve your business

`Charting the Take-Over Maze - Successful Acquisitions` publication

www.cavendish-mr.org for comprehensive details.

Vision of Colin Thompson:

Changing Limited People into Limitless People and Turning Limited Companies into Limitless Companies.

DDL: + 44 (0) 121 244 0306Mobile: 07831 588310Main T: + 44 (0) 121 244 1802email: colin@cavendish-mr.orgwww.cavendish-mr.org

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