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Selling a business in a bear market Back  
Conor McCarthy director at NCB looks at the challenges facing vendors in the current bear market. Valuations are different with buyers like private equity less active in the market. McCarthy says, that in this current climate, focus needs to be given to the ability to execute and fund a deal.
Selling a business is a significant challenge at the best of times but in the changed economic environment of 2008 there are additional concerns that vendors need to be mindful of. However, if they take the new environment into consideration, there is no reason why a successful sale process cannot be completed, and completed with the same positive outcome for all concerned. Aggressively selling a business, without any regard for the changed economic environment and the issues facing both buyers and the business being sold, can kill a sale process before it even starts and result in a process that lacks momentum and may significantly reduce the value for the vendor.
Conor McCarthy

• Recognise the opportunities and risks of your sector
First and foremost, a vendor needs to recognise clearly what sector they operate in and the impact that the current economic downturn is having on that particular sector. Construction and financial companies have clearly been most affected by the downturn, but some sectors remain very active, including energy, food, healthcare and IT - as shown by deals such as Airtricity. Knowing the sector and the issues a vendor’s peers are facing is key to determining the right type of process to sell a business. 2008 will see more bilateral discussions, narrower processes and less wide auction processes.

• Buyer selection is critical
Corporate buyers with strong balance sheets will be the key buyers in 2008 so getting the strategic rationale and any potential synergy case right is important. If selling, target potential buyers that score highly on both of these measures. Private equity buyers remain active, especially at the sub €250m deal size, so they should not be ignored, but any deal that has a significant level of debt in the structure needs to be treated with a degree of caution.

• Avoid overselling early in a process
Everyone is more cautious currently. A vendor, or their advisor, who is overly aggressive with synergies or forecasts and not recognising the current economic environment may damage credibility and turn buyers off before they have properly engaged. Bring buyers into the process and ensure that they buy into the strategic logic before starting the ‘heavy sell’. Recognise short term pressures on the business - ignoring these takes from the credibility of a vendor - but then focus on long term value.

• Invest the time upfront
Good preparation in terms of vendor due diligence, comprehensive data room and quality information memorandum can ensure that there are no unexpected surprises coming out of the process that can make a buyer nervous or give them a reason to move. Poor preparation, even if it was nothing to do with the vendors directly, reflects poorly on the business.

It is also critical for vendors to ensure that their advisors invest the time and resources to know and understand their sector (the risks as well as the opportunities) and reflect that knowledge in a comprehensive quality information memorandum. Additionally, negative commentary regarding the Irish economy and the outlook is currently widespread and the information memorandum needs to address this, in particular for the benefit of international buyers.

The information memorandum is the key document on which the business will be sold. An information memorandum that is not credible, contains unrealistic assumptions or forecasts or shows a lack of understanding of the sector and the economic environment, damages the image of a business from the outset and puts the vendor on the defensive. However, an information memorandum that is professional, comprehensive and realistic reflects well on the business and the vendor and makes life easy for a potential buyer and more importantly, their bank.

• Take a sensible view to valuation
Be conscious of the public market multiples and a buyer’s own valuation. Before vendors get caught up in the process, take time with an advisor to agree a realistic minimum valuation. Look at value that could be achieved through other means such as IPO or recapitalisation, or the value of retaining for the future the dividend stream / cashflows. Then, get a competitive process going with strong interest in the business and use that interest to gradually move the valuation on.

In the current climate, do not disregard earn out structures. A properly structured earn out can reduce execution risk and increase the ultimate value to the vendor, but more importantly sends out a very important message about a vendor’s confidence in the business going forward. Having said that, a poorly structured earn out can leave a vendor very exposed.

• Keep the process competitive
The volatility in the equity and debt markets increases execution risk in any process so it may be worth forgoing some value and even agreeing to bear some of the purchaser’s costs to keep a process competitive as opposed to granting exclusivity too early.

• Allow more time
In the current climate, sale processes will take longer than they would have historically. An overly aggressive timetable can rule out important strategic buyers. A long timetable can kill momentum. Work within a timeframe that is realistic for both buyer and seller.

• Taming the bear
The bear is roaring and the M&A environment has changed. There is no doubt about that. Smaller deals are less affected but will still be impacted. Circumstances always drive decisions to sell or not to sell a business and it can therefore be difficult to conclude or advise whether it is best to sell now or in six months time. The answer will vary for each different business and each vendor. The key advice is that once that decision has been taken, ensure that the process and the advisor maximise the value.

Most people will sell a business only once in their lifetime. After spending years creating value on paper, value can be lost within weeks by getting the process wrong. In the current environment where buyers are more risk averse, getting the sale process right can significantly reduce the execution risk and add value.

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