The strategy behind optimising a business exit

  04 October 2014

In late 2013 and the start of 2014 the industry has seen an unprecedented level of merger and acquisitions activity in the UK motor retail sector and there appears to be little sign in this waning.

For most franchises you now need a cluster of dealerships in order to be able to achieve the efficiencies in buying and spread the cost of representation to deliver a strong return. This, allied to a desire from some franchises to reduce their number of partners, has driven people to either want to grow or get out.

Some franchises are also looking for significant investment from their dealer network to make the jump to future volume targets and this naturally causes owners to pause and think whether they have the desire to take the leap.

Other franchises are very desirable portfolio additions for the acquisitive groups and they are actively “badge hunting” for the right opportunity.

Profitability

With the majority of goodwill calculations based, at least loosely, around current profitability performance, the fact that motor dealers are currently delivering record levels of profitability clearly enhances this payment.

Strong profitability among groups with a desire to grow gives them a strong platform for generating cash and borrowing to invest. While the results being produced at the current time are superb, for the majority of retailers this is the result of a massive amount of hard work, with everyone flat out from the start of a quarter to the end. As a result some owners are no longer “having fun” and are thinking of exiting.

Succession

Over the past 10 years there has been a slow and steady changing of the guard in the industry with many dealers and franchises looking at the business succession plans. Where the next generation are not skilled or willing to take over, we are seeing a large number of businesses changing hands.

The strategy behind optimising the exit from a vendor’s point of view is very similar to selling a house. Most vendors want the optimum price and an efficient transaction.

The buyer needs to know that the business will not fall apart once they take over. While they will naturally expect to bring in their own senior team, it is vitally important that you invest in the team who run the day-to-day operations to make sure they can operate without the existing ownership structure. The challenge is then to evidence this to the purchaser.

Upgrade potential

For the vast majority of purchasers, they will want to significantly improve dealership performance post acquisition in order to receive a shorter payback on the goodwill payment. It is vital, therefore, the areas of underperformance are set out and they are not taken as a criticism of the current personnel running the business.

To create a great impression of the business, selling the positive aspects about performance, people and culture is essential. The preparation of a comprehensive “information memorandum” which acts as a sales document for the business is crucial.

Nothing can jeopardise a deal faster than a purchaser finding nasty surprises during the course of due diligence. The natural reaction is to wonder what else has been going on which hasn’t been uncovered and, wherever possible, an honest picture of the business should be presented. The worst seen by the ASE team was finding an undisclosed defined benefit pension scheme which was seriously under water. This clearly had a massive impact on both the transaction price and the trust between the parties.

In the same way as you would perform last minute repairs on a house, wherever possible perform any maintenance required. Frequently in recent years this has involved unwinding tax planning schemes undertaken by owner managers during the 50% personal tax period.

While it may be costly to unwind this planning, it removes a significant hurdle which will be encountered during the negotiations and ensures the vendor is in charge of agreeing the settlement with HMRC. Also consideration of group restructures and the moving of property in a tax efficient manner can be achieved given enough planning time.

Kerb appeal

In selling a business you need to sell the uniqueness of the opportunity. For dealers with great brands these will prove easy to sell, with a queue of willing investors. For the brands lower down the desirability listing the rationale for why the purchaser will continue to earn exceptional returns will be required. In housing parlance it is, however, easier to sell the cheapest house on the best street than the most expensive one on the worst.

As a result of the franchise model and the block exemption regulations there are usually a limited number of easy purchasers for any one business. To maximise the price competition among purchasers for a business needs to be created, but the valuation will be massively reduced if the purchaser does not get agreement to keep the franchise or franchises.

Emotions

Selling a business can become a very emotive experience, particularly when the vendor has built that company up over a number of years.

Buyers will not necessarily place the same value on things and, irrespective of how much was paid, they will make their own assessment of what it is worth. It is recommended to keep focussed on the overall price for the business and not get bogged down with the emotive. For some dealers the only way to do this is to let someone else handle the detailed negotiations.

The franchised model provides an added complication for selling businesses within the motor trade and the timing of the introduction of the concept to the franchise is vitally important. The franchise holders are, quite rightly, trying to manage their representation and for a successful transaction you need them to be at worst ambivalent. The level of interaction depends on the franchise, with some brands managing every transaction within their network. This does not always, however, result in a low goodwill figure to the vendor.

Momentum

Selling the business will be a massively time consuming activity which should not be underestimated. In spite of this it is essential to ensure that the financial performance of the company does not suffer during the sales process as this could lead to a chip towards the end of the sales process.

There is clearly a lot to try and juggle when looking to optimise a business exit. While it is difficult to plan for all of the above it will make the process significantly smoother and enhance the price received.

 

* Author Mike Jones is chairman of ASE. For those considering buying or selling ASE’s Dealer Match team are hosting a Conference on 9th October, contact dealermatch@ase-global.com for more information.

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