There are many reasons why a decision may be made to acquire or dispose of a limited company. Motives for buying a company may include an attempt to increase market share, acquire new technology or designs, diversification, to enter new markets rapidly or to gain control of valuable assets or resources. Motives for the disposal of a business include personal reasons such as ill health, divorce, death, to raise finance. Once it has been determined to acquire or dispose of a business a decision needs to be made as to how to “target” potential vendors or purchasers. Options include appointing business transfer agents, advertising or using existing trade contacts.
PREPARING THE BUSINESS FOR SALE:
Care is necessary before a business is formally marketed:-
- If the seller is contemplating a sale of only part of the business then it may be necessary to take steps to separate the business out – premises, employees, services (for example accounting and administrative functions) may need to be “hived” into separate companies. There may need to be decisions made as to what records are to be disclosed to prospective purchasers.
- Advice may be necessary as to how a sale might be achieved – whether it be by a sale of assets or shares in the company.
- Great care is necessary in terms of the information which is to be made available to prospective purchasers. Considerable commercial damage might accrue to too much information being given to prospective purchasers (who may well be competitors) in an uncontrolled fashion. Prospective purchasers may need to be required to sign confidentiality agreements.
- Legal liability may be incurred for representations made by a seller which later turn out to be incorrect.
VALUATION OF THE BUSINESS:
A tension inevitably exists between prospective sellers and purchasers of companies as to valuation. There are a number of different approaches which may be adopted:-
- Price earnings ratio. This is a calculation involving an analysis of historical and anticipated earnings per share in the company.
- Net assets plus. This involves a valuation of the company’s net assets and the attribution of an additional value (more of an art than a science) as to what added value the purchaser believes that he can gain from the business (for example by means of cost savings, cross selling opportunities etc.)
In considering a valuation it is naturally important to take accountancy advice but in pricing businesses for sale or purchase there is usually a subjective element which will include issues such as the seller’s motives for disposal and the benefits which may be available to the purchaser and cost savings, or perceived benefits to the purchaser of diversification and acquisition of a competitor.
Thought will also need to be given as to how the price for the company should be structured. Options include:-
- Payment of a fixed cash price on completion. This approach has the advantages of clarity, simplicity and minimises the risk of post completion disputes between the parties.
- Formula cash price. The parties identify the price by reference to the past and/or future performance of the company. This is more complex, may lead to a greater possibility of disputes and may be more attractive to a purchaser who knows that the price to be paid will depend upon the continuing performance of the company.