Merger/Takeover

[RO AV]

Hi all, I need some advice, hope you can help

I have had preliminary discussions with a client of mine (who are a larger firm) to go into some kind of partnership/or have a buyout etc. I have one employee but the business is all based around me. Without me and my input there is no business, so realistically they are buying me

Currently we undertake work for them as sub-contractors carrying out most of their installations, support and servicing. They want my company to merge into theirs and take over the operations/service delivery side of their business. This would mean wrapping up my company and becoming a shareholding director of their company.

I see this as a very good opportunity but need to get the right deal and I don't know if this is a takeover or a merger. So I am unsure what I should ask for financially.

So the main question is, how do I pitch myself and my business value-wise?

At the back of my head I think what I want is a full buyout/merger and in return I would get a stake in their business plus a high salary plus commissions/percentage of profits.

Any thoughts, ideas, pointers etc would be very much welcomed!

Thanks

Rob

 

[Clinton]

First, don't do anything without professional advice! There are a million things you can do wrong here and blow your chances of a deal.

I recently wrote an article for accountants on how to advise clients who've received an unsolicited offer for their business. You may find the article useful.

You want to play extra carefully in this case as these are clients and they can potentially hit your business badly by taking their custom elsewhere. But, on the other hand, be aware that having just one buyer is like having no buyer at all. You ask about price and value - it's near impossible to get the best value out of the deal without a competitive bidder on the table. And to get another bidder you'll need the assistance of a competent business broker. No, not those no-sale-no-fee brokers you'll find in Google and elsewhere, but somebody who can hunt down other buyers who see a similar strategic value in acquiring your business. But that will cost you £30K-£50K in advance fees! Not knowing the figures involved in your case, I can't say whether that'll be a good use of money.

From a practical point of view, there's little difference between a "takeover" and a "merger". At the end of the day there'll be a detailed document called the Purchase-Sale Agreement which lays out the terms of the deal. You'll need to decide whether you're selling 100% of your business or a majority stake or a minority stake. Then there's the option of sale of assets vs sale of shares. Each has its advantages and disadvantages for the parties in the transaction, and huge tax implications.

At the back of my head I think what I want is a full buyout/merger and in return I would get a stake in their business plus a high salary plus commissions/percentage of profits.

If they buy 100% of the business then they'll probably pay you part in cash and part in shares of their business. Your broker / negotiator will argue for a higher chunk of shares to compensate for the lack of liquidity i.e. because you can't sell these shares easily. He'll also argue for changes in the wording of their company's shareholder agreement in order to protect your interests.

For your shares in their business you'll get a dividend when the company makes a profit. But without a seat on the board you'll have little say over what dividend is paid. Even if are on the board, there's no guarantee on anything. They can decide that for the next five years they are not going to pay dividends and are going to re-invest all profit!

If you get a director's position you'll be entitled to compensation for being a director.

And if you are going to continue doing the work you're doing you'll need to negotiate the terms. This is an area fraught with problems. Ex-owners are the worst kind of employees and they probably know this. They'll want to protect themselves to the maximum extent against things going sour with you. And any protection for them ... is a concession by you.

The buyers will be looking to tie your compensation to results. But your ability to get those results will be hampered by management decisions over which you have no control.

Long story short, get professional advice as early as you can. Let me know if you want some pointers on finding the right advisors.

 

[RO AV]

Thanks Clinton

We aren't talking huge numbers and it's highly unlikely I could find anyone else interested in buying. I don't really have much funding for getting professional advice either but i do understand the need. I certainly don't have anything like 30-50K to spend on this! I have been consulting my accountant but I am not sure if he has enough experience of this. SO basically i am after free/ very cheap advice

This client basically wants someone to run the operations of his business and as I have been doing this for him since his service manager left a few months ago he wants me to do it. Rather than offering me a that he knows i wouldn't take, we are trying to negotiate something else.

In my eyes I am looking for

• Appropriate salary
• car allowance as lots of travel
• Directorship with shares and board seat
• Ring fencing my other customers and a larger share of any profits gained from them
• either commission per contract or quarterly profit share percentage
• cover costs to wrap up my company
• Take on my one employee

Does this seem reasonable?

 

[john1989]

Free / cheap advice is often the most expensive.

 

[tony84]

I dont think its reasonable for you to get more for your existing clients, but if you do not ask...

Why not ask them what their thoughts are and use that as a starting point?

 

[Clinton]

... it's highly unlikely I could find anyone else interested in buying. I don't really have much funding for getting professional advice either but i do understand the need. I certainly don't have anything like 30-50K to spend on this! I have been consulting my accountant but I am not sure if he has enough experience of this....

I'm a qualified accountant, I've dealt with many accountants, and as you know from the link above I write a column for accountants. I like to think I know them a bit. However, the average accountant isn't well versed with M&A work. Similarly with solicitors. You need a deal accountant and a deal solicitor (or an advisor who may not be qualified in those specific areas but has a lot of experience with project managing and negotiating deals). At the very least you'd be looking at £5K or so on professional services. If you can't afford even a basic £5K - £10K I would advise that you are taking a big risk getting into negotiations with a prospective investor.

Appropriate salary

• car allowance as lots of travel
• Directorship with shares and board seat
• Ring fencing my other customers and a larger share of any profits gained from them
• either commission per contract or quarterly profit share percentage
• cover costs to wrap up my company
• Take on my one employee

Does this seem reasonable?

Salary - this is negotiable, but they'll likely want to tie it to results. At the moment your income is risk based i.e. no profit = no salary. If the investors agree to give you a salary they are taking the risk element out for you. Nice and cushy for you, not such a great deal for them. What sweeteners do you have to offer in exchange?

Directorship / shares - not easy to calculate. I guarantee neither of you will agree on what's a fair share split. What then happens is that both companies get valued. Both parties need to be brought to an agreement on those valuations. Ideally, a merger model needs to be created with a spreadsheet showing what the merged accounts will look like. Then a more informed discussion can happen on how many shares to give you. Who'll handle all that juggling if you don't have an advisor assisting?

Then we move to other matters. As tony84 says, the ring-fencing of customers is not likely to be viewed sympathetically. In fact, if you were on the other side of a negotiating table with me and made those demands I would consider them so unreasonable that I'd advise my client to walk away (because dealing with a novice who's making unreasonable requests almost always ends in tears - lots of time wasted and no deal in the end).

The employee issue isn't a problem. They'll probably figure they have to take him on anyway under TUPE legislation. That's not a request for which you need to concede any concessions when the negotiations begin.

 

[RO AV]

I have spoke to them as a starting point and they actually suggested the ring fencing of my customers when i pointed out that there is no real benefit for me to just hand over my business and client base in return for a full time job that i already sort of have?

i understand my income is risk based but i have a good few years of solid business that I would be bringing to their turnover. It will effectively pay for myself, my employee and a bit on top so the risk to them is pretty minimal as they are getting me running their operations, another employee and enough turnover to pay for it all. Effectively improving their business for free? unless there is a fee involved or a share of their business... That's where i need advice

Hope that, makes sense as this is what i see

 

[The Byre]

I've been through exactly this scenario and I too did not have any competing bids.

Every deal is different and every M&A runs along different lines (as far as I can tell - I've only done this twice!) Sometimes the other party names a price and you say OK and that's an end to the deal. You only do that, if it was a business that you were going to walk away from anyway! In my case, the main business was being sold elsewhere, so this 'side' business was going to be orphaned. It was a case of sell it cheaply or close it down.

The main business was a news agency and I sold it at the height of the dot-com boom, when large publishing and media houses were throwing money around, as if the party would never stop. They named a price and when I was able to stand up again and get a change of pants, I told them I would have to think about it.

The deal took 18 months to complete and three payments over 12 months were made and during those 12 months, I was tied to the company in a period for handing-over. This protected them for a year and protected the employees from sudden changes.

The key to any sale is to get the right price. It has to make sense for both parties. Obviously they must stump up the value of net assets, plus outstanding debtors and any other bits floating about, such as stock, vehicles, buildings, whatever. AND they have to place a figure on the trading value of the company and a further figure of where they think/hope the company might be in a year or two. All these things have a value and you need to put a figure on that value.

In my case, it was totally clear that at the end of that 12 month period, I would be suddenly and totally conspicuous by my absence. Dec. 31st, I was gone, never to show my face again! I was selling the company, lock, stock and caboodle and the price had to reflect that happy state of affairs. I was not, nor did I want, a job, or shares, or anything other than money.

In your case, you are getting some sort of position within the new merged company. One way to skin that cat, is to be made a partner with a percentage of shares that reflects the value of what you are bringing to the party. They might like to shove in a cash incentive to sweeten the deal.

 

[Clinton]

I have spoke to them as a starting point and they actually suggested the ring fencing of my customers ...

Then get that in writing in a Heads of Terms. As I described in the article linked to above ... buyers sometimescome in with all kinds of starting points, huge monetary offers and other tasty sounding deals... and then they chip away during the negotiations to get to where they really wanted to be. This is especially the case if they hire advisors to represent them.

i understand my income is risk based but i have a good few years of solid business that I would be bringing to their turnover. It will effectively pay for myself, my employee and a bit on top so the risk to them is pretty minimal as they are getting me running their operations, another employee and enough turnover to pay for it all. Effectively improving their business for free?

You're not giving anything for free. Take care to not double count. If they are paying you any cash, shares or other compensation, or giving you a position on their board, that's payment or part payment for the cashflow/profits and all the assets and goodwill of your business. You can't ask for payment for the same assets twice.

... so the risk to them is pretty minimal

I beg to differ. There's a huge risk to making an acquisition, any acquisition. There are all kinds of hidden risks including potential litigation from something you did in the past, an HMRC inspection that throws up irregularities in your accounts that leads to a fine that they have to pay. Then, what if you drop dead tomorrow, or develop (feign) some illness? I could name 1,000 other risks.

Anyway, I hope my posts have been of help. I've got a busy week so I'll let others post replies now. All the best.

 

[The Byre]

There's a huge risk to making an acquisition, any acquisition. There are all kinds of hidden risks including potential litigation from something you did in the past, an HMRC inspection that throws up irregularities in your accounts that leads to a fine that they have to pay. Then, what if you drop dead tomorrow, or develop (feign) some illness? I could name 1,000 other risks.

According to many sources, most M&As fail. My opinion is, the purchaser is totally deluded as to the true value of the target company and even more deluded about their own ability to run the new company.

One total basket case was the bonkers company Avid and their purchase of over 20 companies, nearly all of which they had to either sell at a massive loss, or simply close down. In all, they blew $1.2 billion on stroking the ego of their CEO. Today, Avid has a market cap of just $230m - and debts of roughly the same amount, with crippling covenants on that debt.