This article examines how businesses are sold, what the traps are for the unwary, the key steps to take and how advisors should work with owners of companies.

When people sell a business, or float it on a stock market, these are important liquidity events that private banks and wealth managers understandably want to track. The process of selling/floating a firm is also an emotional event – years of hard work, creativity and grit have gone into building a business in the first place. The transfer of that business may be a time of great relief, but also quite a wrench. The business of advising clients going through this process is an important one. 

To cast light on this situation is Charlie Ring (main picture), a corporate partner at Charles Russell Speechlys, the law firm, and Marcus Yorke-Long (see below), who is head of the firm’s soon-to-be-launched private office. The editors are pleased to share these views; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com 
 

Marcus Yorke-Long

It has been a challenging start to 2023 for global M&A. According to recent data from Dealogic, a prominent financial markets platform, global M&As in the first quarter of 2023 sank to their lowest levels in over a decade – driven by high inflation, climbing interest rates and fears of recession, and certainly not helped by the Silicon Valley Bank crisis.

However, when looking behind the curtain, the picture is not quite so simple. The outlook as we move into the second half of the year might well change. Depressed valuations can create more opportunities for private equity buyers and hostile takeover bids, and for this reason, there are predictions that M&A activity might trend up again. For business owners planning to sell in the near future, there is significant opportunity. 

If they are thinking of targeting an acquisition in 2023, however, it is important to plan for it in the correct way. There are a number of common pitfalls that business owners frequently fall into, which are important to avoid.

Planning early
Planning early is by far the biggest predictor of success. Formalising written agreements with key partners, considering corporate and personal tax structuring around the deal, the owner working out how and to whom they are actually going to sell their business (for example, is selling the whole business really the best option or should they consider just selling a chunk of shares) should all be considered at least a year or two in advance and not the day before. 

Business owners should sit down and think about how they might handle that potential M&A, ideally at least a year or two in advance, even before one has materialised. In an ideal world, they ought to have spoken to advisors to plan out a rough approach to a potential M&A, just as a “what if” and importantly, to ensure that they do not miss out on being able to implement any pre-sale restructuring that might maximise any ultimate deal value. 

Many individuals will obviously feel that theorising about intangibles in this way is ‘premature’ and pointless. But those who are ready to move in the right direction immediately when opportunity arises tend to be much more successful than those who do not. Clients should be encouraged in this direction wherever possible.
 

Controlling costs
It can also be difficult in deals to control costs. Particularly when an owner is engaged in a deal for the very first time, there can be some reluctance to spend a lot of money up front early in the process. 

According to data from Harvard Business Review, between 70 and 90 per cent of all M&A deals fail – and given that the deal is also at greater risk of falling through in the earlier stages, it is not surprising that business owners are often reluctant to spend significant amounts up front. There can be fears of this creating unnecessary risk or waste. In short, owners can feel as though there is a need to spend as little as possible until the last moment. 

In corporate deal-making, the sums involved can be more than an individual has ever handled before, but timing spending wisely helps keep overall costs under control and can also lead to better deal terms and an optimisation of deal value. Being lax on costs – e.g. by being determined to only pay for ‘the best of the best’ or insisting that tiny details in the deal are scrutinised where in reality the associated risk is small or theoretical, can result in owners’ costs being spread too thinly and getting less value for one’s money.  

Linked to this is the fact that corporate deals are complex, and things may very well get held up or go wrong for a variety of reasons. If an owner is too focussed on controlling spend, it can be difficult to absorb extra costs incurred to deal with unexpected issues. This in turn can lead to owners agreeing terms just to “get the deal done,” exposing an owner to risks that they wouldn’t normally take or that could have been negated had a little more extra spend been available at the time of negotiations. The stakes are high in a merger or acquisition, and it pays to have a financial buffer in case things do not entirely go to plan.

Owners should choose the advisors that are the best fit for them and, at an early stage, identify with their advisor what their priorities are, and the key risk areas that they might face. Owners can then focus their costs on those priority and riskier areas at the right time (e.g. on early stage planning or the fixing of problems to maximise deal value later on).

There are ultimately many ways for owners or businesses to control costs in a deal – from which sale structure they choose to go with, to the complexity of the terms agreed or those they commit to focusing on. It is sensible at the earliest possible moment for an owner to speak to their advisors about doing a deal that is “practical” and "commercial," rather than “perfect.” Adopting this mentality often leads to better outcomes for all involved. We tend to find that clients respond better to “commercially sound” or “risked-backed” advice, rather than advice requiring everything to be "theoretically perfect."

The personal aspects of a deal
Business owners must equally consider issues cropping up as a result of the sale of their business at the intersection of personal, family and business, not just corporate. The sale of a business has an impact on more than just the companies involved; it can generate significant wealth for the individuals behind the deal and in many instances, it may be their first time of becoming affluent. 

The deal should therefore be structured in a way that maximises value for the beneficiaries of the sale and their families. The professional deal advisory team tends rightly to be more focused on the details of the deal at hand and “getting the job done” than concentrating on the personal affairs of the business owner(s) and shareholder. But the two should always be considered in tandem, and it is worth building an advisory team that has the capability to do both. 

Ultimately, individuals should be guided not just on selling their business but on how they sell their business, through thoughtful advice that navigates what are usually very particular circumstances in respect of (amongst many other things): efficient tax structuring, specific family dynamics, PR or reputational concerns, capital preservation and diversification etc. Wherever possible, working through such matters well in advance typically proves to be time well spent as it aligns the key decision-makers and allows the merits of the specific transaction opportunity to be assessed clearly.

Private wealth advisors should be taking their clients on these journeys and encouraging them to think in longer terms. In this day and age, this is the service that private clients are increasingly coming to expect, and it is how we as advisors can truly deliver value.