Transcript

Hello everybody. Thank you for joining us at this morning’s webinar. My name is Enda Brady. I’m a Certified Financial Planner, and one of the owners of iQ Financial. You’re all very welcome. Today’s webinar is titled, unlocking peak value, how to maximize the sale of your business and covers effective strategies that we have seen businesses use. At the start some housekeeping to make sure we make the most of the next half hour, I will pass you over to Maria Devine, senior financial planning administrator and office manager at iQ Financial.

Hello, my job today is to keep things running smoothly. And so we’re on track and on time, I’ll be keeping an eye if there’s any technical issues and also on any questions you might ask. The way you can get involved is to click on the q&a button on your screen, and then you can type your questions there. We’ll answer questions at the end. We don’t want anyone to leave today without having their questions answered. Also at the end, I will put links in the chat to our website so we can access the iQ Financial guides for business owners, and also how to book a learn more call. After the webinar, we will send a follow up email with a recording of the session, the slides and the links to our guides for business owners. So if you miss anything the first time around, you can catch up later. So now I’ll hand back to Enda to get started.

Thanks Maria. Growth and economic activity in Ireland over the last decade has increased the number of opportunities for business owners to realise a sale at a value that justifies their years of work. In the last two and a half years, our clients have been involved in 14 transactions for the partial or complete sale of their business. In most but not all of those cases sales completed successfully. Our webinar this morning will share lessons we have learned from the experience of working with our clients, and best practice we’ve learned from other advisors involved in business sales. This is what we will cover in the next 30 minutes. Firstly, tips on how to prepare you and your business for sale. Then explain the pitfalls you may come across and how to avoid them. And finally, we will share with you a case study, based on our experience to give you a first hand account of exactly what can happen when you sell your business.

Firstly, we’re conscious that there are some attendees that may not know about iQ Financial and what we do, have not yet registered for our business owners newsletter or connected with us to get LinkedIn content, or attended our last webinar. At iQ Financial, we provide a Financial Planning and Investment Management Service to business owners. We help business owners make the most of their money so they can retire with confidence. We advise owners over 45 who want to sell, retire or make work optional in 5 to 10 years. We help owners plan for retirement, provide for their family and invest wisely. www.iqf.ie is the best place to go to learn more or contact us, and we’ll share more ways to get in touch before the end.

There are different ways you can sell your business. And there are common steps and terminology involved with most sales. These are the five most common ways you can sell your business. Firstly, a trade sale where a competitor or another business buys your business. The second way to sell your business is to transfer your business to your family or your family either upfront or over a period of time buys your business. A third option is to transition to your employees. So an employee ownership trust could be used so that a number of the employees of the business would buy your business. A fourth route is called a private equity sale, where you sell some or all of your business to investors. Typically, private equity firms are consolidators, their strategy is to buy a number of businesses in the same industry and consolidate them into one larger business to benefit from economies of scale. And typically, after about five years sell on the consolidated business for a profit. Finally, you could sell your business to the existing senior management of the business, which is called a management buyout.

Regardless of whether you’re selling your business to a competitor in the trade or a new entrant into your industry, through a management buyout, or a sale to a private equity investment company, there are common steps in the process. Let’s decode those steps and explain the key terminology involved.

What we’re going to do here is touch on the seven common steps so you know what they are, and look at two of the most important parts of the transaction being how your business is valued, and the advisors involved, in a bit more detail. If a business owner decides to put their business up for sale, an information memorandum is the document produced by a seller, which describes their business in detail. It’s shared with a number of buyers in the hope of generating a competitive bidding process and maximising the value of the business. A business can be valued in more than one way but the most common approach that we have seen is called a multiple of EBITDA. EBITDA is an accounting term. It originated in the US and it stands for earnings before interest, tax, depreciation and amortisation.

If you sell your business, you only sell once, and your business reflects a lifetime of effort and achievement. This is a unique transaction requiring specialist advisors and forward planning to maximise the value you get when you sell. A team based approach to making the most of the sale opportunity works best. From nondisclosure agreements to purchase agreements and earn out details, unique legal documents for the sale, and the legal experience that comes with knowing how to prepare those documents are vital to secure a successful sale. Due diligence is the stage where the buyer seeks various financial, legal, regulatory, property ( if property is  involved), and compliance information about the company to ensure that as much as possible, the buyer has an excellent understanding of the business, and that there are no surprises after the business is purchased. It’s common for a large portion of the purchase price to be paid upfront, with the remainder paid over an agreed period of time, often one to three years. This period is called the earn out period, with the payment of funds often subject to achieving a certain pre agreed targets including profitability. We will look now at how businesses are valued and the role advisors play in a sale in a bit more detail.

We have seen businesses valued in three ways, a multiple of EBITDA, a multiple of the turnover in your business, or valued based on the business’s net asset value as per your financial statements. These are three common valuation methods. By far the most common way that a price can be agreed for the sale of your business is to look at a multiple of the EBITDA in your business. Let’s look at a simple example. Let’s consider a hypothetical Company ABC manufacturing limited which produces and sells shoes. To assess the value of ABC manufacturing limited potential buyers can use the EBITA multiple method. This method involves multiplying the company’s EBITA buy a certain number, called the multiple to estimate its value. To determine ABC manufacturing Ltd EBITDA let’s say their average yearly financials for the last three financial years are as follows. Turnover 2 million euros – Cost of Goods Sold 1.1 million euros leaving gross profit of 900,000 – operating expenses including salaries of 350,000 – earnings before taking account of debt interest paid taxes paid and depreciation and amortisation is then 550,000. So ABC manufacturing limited EBITDA is 550,000 In this example.

Next potential buyers will determine an appropriate EBITDA multiple, let’s say based on industry analysis and market trends, the average EBITDA multiple for similar companies in your industry is six times (we’ve seen lower multiples and substantially higher multiples) to estimate the value of ABC manufacturing Ltd. Using the EBITDA multiple method means taking your EBITA of 550,000 and multiplying it by six. So according to this method, ABC manufacturing ltd its estimated value is 3,300,000.

Bank interest repayments taxes paid and depreciation are not trade related items. The sales/turnover of your business, less the operating expenses of your business are a good measure of how much cash your business is generating now and how much cash the business should generate for the new owners. Understanding your current EBITDA is for many businesses, the first step to understanding how much someone could pay for it.

We’ll just take a pause there. Before we talk about the final three areas that we want to cover this morning. And Maria has a reminder for you.

So just to let you know that you can put your questions in the q&a button at the bottom, you can type them in there, and it’d be really great to get some of your questions. And also, at the end, I will put links in the chat so you can access our guides on our website, and how to book a learn more call. Okay, I’m gonna hand back over to Enda now.

Thanks Maria. In addition to highlighting the importance of EBITDA we also want to share the role advisors play when you sell. Selling your business requires a team to help you make the most of the transaction. It’s normally stressful, time consuming and unpredictable. Having an experienced team of advisors is very important. On your team, you may need a merger and acquisition specialist. Often they are one of the larger accountancy firms but don’t have to be. The key reason for having the m&a specialist is that they will manage the negotiation with the potential buyers for you. They will help you negotiate the price, manage queries and issues during the due diligence stage. And in addition, the m&a specialist can also market your business for you (If you want to initiate the sales process yourself)

The second advisor on your team will be your personal tax advisor. The key reason for having your personal tax advisor is to make sure your sale is done in the most tax efficient manner possible for you personally.

Another advisor on your team is your existing business accountant, your accountant will make sure the buyer and the buyer’s advisors are clear on the finances of the business and your accountant will provide the various financial information needed during the due diligence stage.

The fourth member on your team is a specialist legal adviser, a solicitor who has experience managing the legals and similar transactions, who may well be your existing solicitor. They prepare the sale documents and have specific knowledge of the legal requirements of both the buyer and seller.

Finally, you will need your personal financial planner who should be doing at least four things for you. Firstly, your personal financial planner should create a plan with you in advance. Part of your plan will be identifying your number, that’s the minimum amount you need, from the sale of your business to fund the priorities in your personal plan. Secondly, your financial planner will be a sounding board for you during the sales process. Thirdly, your planner will help you to extract funds efficiently from your business as part of the sale. And finally, your planner will help you invest the funds from the sale to best match the needs of your long term financial plan.

We’re going to go through four key pitfalls you should avoid next. And then before we finish, go through a short case study to help you get a handle on the different costs involved when you use these advisors, and understand the net amount you could get from a sale.

There are four pitfalls that we think it’s important to highlight to you this morning. We believe these are four of the most damaging pitfalls to avoid. Firstly, a failure to plan can be really damaging. This shows itself in not understanding your own number in advance of any sale  – the number you need personally to fund your priorities for the rest of your days. And it shows itself in not understanding your EBITDA and what the market will pay for a business in your industry at that time. A failure to plan includes a failure to address business issues that may put off potential purchasers and a failure to ensure effective tax and legal structures are in place prior to a sale. Finally, a failure to plan shows itself in having valuation gaps between what you expect to be a fair price for the business and what the market is willing to pay. It may be difficult for many business owners to be objective about the value of their business. It’s your life’s work, and the sale of your business can be full of emotion.

Another important pitfall to avoid is not understanding the effect on your business during the process. It takes time, up to a year or more can pass from the time an approach is made to when the sale is completed. And it’s common for the deal to collapse. You might have to complete the process two or three times to get it done. If the deal does not complete, you will still have the cost of your advisors and the hours spent hammering out the deal. Maintaining confidentiality is key for a host of reasons. You will want to make sure you stay in control and have no surprises. You will want to maintain confidentiality until you are 100% happy with the deal and ensure your business continues to perform during the sales process.

Another pitfall is not having a post-sale plan. How will you spend your time post a sale? What will your purpose be? How do you feel about selling? One of the huge benefits of having a personal financial plan that you create and review with your spouse (or partner if you have one) is that you can identify the things that matter most to you and make your financial decisions, including how you exit or sell your business to best match the priorities you’ve highlighted in your plan. A lot of business owners don’t see the difference between their personal and business lives, their purpose, their time, their energy is completely intertwined with their business, and putting in place a plan to ensure personal needs are dealt with, irrespective of the future exit strategy from the business is something business owners ask us about.

Finally, in terms of pitfalls, a sale cannot be completed without the seller having robust processes and clarity on the latest position of the business. The due diligence part of the sale is dependent on having clear financial, legal, regulatory and property information to support the rationale for buying the business. Much of the delays and issues we have seen during a sale stemmed from the buyer not being happy with the information provided by the seller, or not agreeing with how reliable some part of the sellers disclosures are.

How does this all fit together? Here’s a practical case study to show you the steps and the outcome. We’ve put this together based on our experience of a number of completed sales in recent years. specific client information is omitted to maintain confidentiality. This will give you a feel for what’s involved. The type of deal we will look at is a trade sale. The sale of 100% of the shares our client owned in their limited company. An offer was first made by the buyer approaching the seller. The business was valued using the multiple of EBITDA method. And it took one year to complete the deal with an additional one year earn out before 100% of the purchase price was paid.

Here’s a common sequence of events. The buyer approaches the seller, there’s an initial meeting, the seller reviews the situation with their family and with the help of their personal financial planner. Then if both buyer and seller are happy, the seller appoints their advisors and there’s a nondisclosure agreement signed. Following that the main terms of the deal are confirmed and documented in a heads of terms. Due diligence is done, and the deal is then closed.

In this case study the purchase price is 3,925,000. The proceeds were subject to capital gains tax CGT at 33% of the gain. Tax in this case was 636,075 euros. In our last webinar, one of the areas we looked at was the different personal tax reliefs available to business owners when they either liquidate or sell their business, including what’s called retirement relief and other options. Maria will put a link to that short webinar in the chat at the end this morning, if you want to see more on that. Company debt in this case of 315,000 was cleared. Advisor fees totalled 182,500 or 4.6% of the purchase price. We have seen advisor fees range from 2% to 5% of the sale price. In this case, the net sale proceeds are 2,791,425. Along with other investments the owners had made for themselves separately, the net sale proceeds met the needs of their personal financial plan, which and this is a hugely important point, their personal plan was not solely reliant on the sale of their business. For the owners we advise, we work to help them be in a position where they can treat any potential sale as just that – a potential sale. It’s planned as a bonus, not a necessity. They use the profits from their business during their career to make investments that do the heavy lifting to make work optional in future years.

In summary, the three areas we’ve just covered are firstly tips on how to prepare you and your business for sale. And we looked at the EBITDA method for valuing businesses and the role advisors play in a bit more detail. We explained the pitfalls you should try to avoid. And we shared a case study to give an example of what can happen when you sell your business.

So, what can you do with this information? What is your next step? Planning ahead of time, at least two to three years in advance of any potential sale is really important. There is no reason, regardless of your age, or the stage of development in your business that you can’t do the following now. Firstly, prepare your personal financial plan and identify your number. Calculate your EBITDA today and work to improve it. And finally, look at pitfalls we’ve highlighted and make sure you can avoid them. The most reliable way to maximize the sale of your business is to plan in advance, take these three steps now, and leave yourself in a better position to maximise a future sale.

If you want to discuss these three steps with us, send us a message in the chat now and Maria will set that meeting up. We’ll also give you contact information for iQ Financial after we take questions. So Maria, I’ll take a break there and we will deal with questions people have.

Okay, I’m gonna have a look and see questions we’ve got. Got one here. What issues do you see with due diligence?

What issues do we see with due diligence. There can be issues agreeing EBITDA, there can be queries about property and property title, different regulatory and compliance issues that vary depending on the sector. In our experience, some of the issues in due diligence are red herrings trying to have a situation where they can negotiate the price down. And in any event, the vast majority of issues can be dealt with, once you have good people on your team who have knowledge in these types of transactions.

Okay, thanks. While you’re answering that, I’ll just put in the chat, the links to iQ Financial’s guide for business owners on our website, and the page on our website where anyone can book a learn more call or sign up to our newsletter, and also the link to our previous webinar on mastering the art of tax efficiency.

I’ve got another question here. What’s involved in having a financial plan?

Financial planning is done in a structure of three meetings. There’s a framework where we take people to a three meeting process, and it normally takes between three and six weeks.

Okay, thank you. Another question. What does inventory stock levels have on valuation property? What effects does inventory stock levels have on valuation? How is it treated?

You’re the business accountant and the m&a specialist will give you a definitive answer on this. In our in our experience, the amount of stock in the business does seem to be a positive towards valuation. So the more inventory you have it should help the value of the business – particularly if the buyer needs and wants the inventory. We can look at that a little bit more closely and use some of our contacts to help give a little bit more detail on that for the for the specific person asking the question, but the higher amount of stocks you have, it should be a positive towards the price of your business based on our experience.

That question is from an anonymous attendee.

All right, anonymous, that’s okay.

I think that’s all the questions we’ve got for now. Just anyone else? So I’ll go back to the slides.

Okay. Folks, thank you for those questions and your attention this morning. If you have any other questions about what you’ve heard today, or questions about any other financial query, we’d love to hear from you. If you go to our website, which is www.iqf.ie, you can book some time in our diaries using the book a learn more called button at the top where we can learn more about your query, you can email us using clients@iqf.ie, or call us on 071-9155560.

At iQ Financial we help business owners make the most of their money so they can retire with confidence. We advise owners over 45 who want to sell, retire or make work optional in five to 10 years. We help owners plan for retirement, provide for their family and invest wisely.

Thanks a million for your time this morning. We hope you got value from the webinar. We would appreciate any feedback you have to help us improve future events. We are running three more webinars this year, addressing the most important questions that our business owner clients ask us and we hope to see you next time. Thank you