"A Time to Sell,  a Time to Buy?"
by Dermot Grant, Managing Director, Origin Corporate Finance Ltd.

These are indeed strange times we live in, which present big challenges for accountants in practice and in industry.  It is possible that the economic climate may result in the need to sell a business or a subsidiary or branch of a business.  For cash rich companies, it may be the ideal opportunity to consider an acquisition while perceived values are low and an increased availability of distressed companies and less competition.

"A Time to Sell"
The decision to sell a business is motivated by a number of circumstances:

1. Retirement
2. Selling non-core activity
3. An offer you can't refuse
4. Value unlikely to increase in the short to medium term
5. Under financial pressure

In the current economic circumstances, the 2 latter items above are becoming increasingly common.
It is important to have a proper fix on the financial health of the business now and in the short to medium term and to be able to judge the impact of the current financial circumstances on the future viability, profitability and valuation of the business.  If you perceive that there may be matters which will negatively impact on value in the future or you expect to have financial difficulties, it is important  not to leave it too late and be subject to a 'fire sale'  or liquidation.

Valuations will be suppressed if a potential buyer can "smell blood". Although the business may be experiencing a downward trading trend and cash flow difficulties there will be more value in a realisation of the business as a going concern rather than liquidation.

If the business is under pressure it is normal to carry out an in depth review to consider the businesses ability to continue to trade in the short to medium term. This review will include a review of costs and funding requirements.

As part of the review process, also consider the option to sell the business. The matters to be considered include the following:

1. Research who might be potential purchasers and how you would approach them.
2. Review of costs, in particular what economies of scale, synergies and cost savings a potential buyer might achieve eg administration costs.
3. Cessation of unprofitable contracts and change of control issues in contracts
4. Company restructure e.g. removing property assets, pension fund, etc.
5. Tax implications of restructure and sale
6. Impact of sale on management team and employees
7. Impact of sale on customers and suppliers. It is better to sell the business with a profitable contract, rather then loosing a contract due to financial pressures or liquidation.
8. Consider disposal by share sale or asset sale. Although there is more rigorous due diligence in a share sale, generally there is less tax and stamp duty liabilities for both parties. 
9. Determine valuation after factoring in the above.

If you can restructure the business to suit the potential buyer before purchase eg implement redundancies, you will get the benefit in value and it will be less hassle for the buyer.

A buyer, while not admitting it in a sales process, will always look closely at the real contribution to profits post acquisition of the target. It is important that the seller and his advisors are also aware of this in order to get the best deal.

By clearly understanding what benefits your business would be to a potential purchaser will help you arrive at a decent value even in these times. Use any available time to restructure to maximise value but don't leave it too late.

"A Time to Buy"
The current recession provides great acquisition opportunities for cash rich companies.  If you or your client don't necessarily fall into that category, that does not mean the opportunities do not exist. Although there is an uncertainty about the availability of bank funding, we have to presume that good deals will get some level of leverage funding, particularly with improved bank liquidity following the Government Guarantee Scheme. Lower interest rates, if passed on by the banks will also help.
If your company or your clients company is acquisition minded, a proactive strategy should include the following:

Research
Determine suitable targets in industry sector and compatibility with goals.

Information
Gather as much information on the targets including company search information, trade reports, rumours, etc.

Approach
Consider direct approach or through adviser.

Valuation
Look at other deals in the sector, reason for sales and synergies.  Factor in current market conditions, in particular impact on profitability and lower profit multiples in sector.

Funding
Use own funds or consider out side investment or ability to raise debt.

If you hear about a company in financial difficulty it may not always be best to wait for liquidation because the benefits of a lower price paid to a liquidator will possibly be off-set by the negative trading impact of liquidation.
Having said that, a greater emphasis on due diligence will be required where the target is a distressed company.  Understand the reasons why trading/profitability has deteriorated and ensuring that post-acquisition it can be turned around and make a positive contribution to the merged entity within a reasonable period.

If you ultimately are buying from a liquidator, the negative aspects of the liquidation should be factored into future performance. Also, contracts with customers and suppliers will have to be renegotiated.  The acquisition will likely be an assets purchase which may result in a less favourable stamp duty scenario. For a buyer and a seller timing is everything. As a business owner, avoid a distressed sale by being aware, as far as possible, of changing circumstances and their impact on the business and be ready, prepared and willing to make hard decisions to maximise value.