Set out below are some practical suggestions as to how sellers can seek to maximise the price they obtain for the sale of their business or otherwise smooth through the process. Ideally a seller will have done its planning and be on the ‘front foot’ ready to welcome buyers to conduct due diligence on the business, rather than being taken unaware by the work involved while trying to run a business. Many of the examples have cropped up on transactions in which we have been involved.
Talk to advisers some time before you decide to sell. To obtain the most benefit from tax planning, certain measures need to be in place one or two years before the sale.
Agents and valuations
Choose one with a good reputation who will negotiate the best price on your behalf. The first offer will not necessarily be the best, and agents with a large number of comparable local valuations will be better able to give a steer.
On what basis is the business being valued? Private care home businesses are typically valued as operational entities, assessed by reference to actual and potential trading performance, and by comparable evidence based on multiples of fair, maintainable operating profit. The valuation multiple will depend upon various factors, such as condition of the property and occupation levels.
Require prospective buyers to sign a confidentiality agreement by which they agree not to use or divulge business information, nor poach employees during or after the due diligence process. Remember that not all potential acquisitions proceed to completion, and the seller would not want a prospective buyer using commercially sensitive information or contacting key staff, residents or their families. If staff and residents discover that the business might be sold, they may become unsettled, whether the deal happens or not.
Buyers will often ask for a period of exclusivity in order to conduct due diligence on the business and arrange finance. Sellers should, however, not agree to exclusivity until the buyer has proof of funding. They should also resist overly long periods of exclusivity, in order to keep the buyer focused on completing the deal within the prescribed time and thereby limiting potential disruption to the business.
First impressions count; like selling a house, kerb appeal is important. Having the property painted and repairing the gutters, for example, may well lead to a quicker sale at a fuller price.
Whenever you are showing around a prospective buyer or an agent, actively market the plus points of the business in a positive manner, while not forgetting to mention potential improvement upsides for a buyer. A well run and maintained care home, and positive presentation should help reassure prospective buyers that they are buying a well managed business.
Put yourselves in to the shoes of a potential buyer. What issues might put you off the business, or potentially decrease the offer price? Consider rectifying those issues pre-sale.
Missing records and other information is likely to raise doubts in the buyer’s mind about corners having been cut, and possibly lead to the request for a retention from the sales price for possible claims.
Prior to sale, arrange all the material relating to the business into well organised folders (physical or online), with examples being CQC inspection reports, user contracts, employment contracts, training records, asbestos inspections, fire inspections, H&S records, planning permissions, and accounts. This will give the buyer confidence that the business has been well managed and should speed up the sales process.
Where assets are being sold, the main transaction document will be a business transfer agreement and a property transfer or lease. Under that arrangement, employees will automatically transfer with the business. Where shares are being sold in a company, the main agreement will be a share sale and purchase agreement. All properties, employees and other assets of the company will be transferred with the company to the buyer.
From a seller’s perspective the following should be covered off: The buyer will (or should) seek warranties covering all areas of the business and tailored for a care home business. These should include additional warranties on regulatory matters, employees and contracts.
Remember that a buyer will be unwilling to complete a transaction without sufficient warranty protection and its lenders will check that the investment is suitably covered from a risk perspective. An experienced adviser will be able to guide the seller through which warranties are and are not reasonable, which will avoid delays and escalating advisory costs in protracted negotiation.
As mentioned above, the seller will be expected to produce a disclosure letter by which they provide information to the buyer and qualify the warranties. For example, if there is a warranty that the list of residents is set out in a schedule, and some leave prior to completion (and are not replaced), that fact would be disclosed.
The buyer, having knowledge of that fact, would not be able to bring a warranty claim against the seller. It is well worth the seller going through each warranty and producing a comprehensive disclosure letter as a means of protection. Solicitors can advise on the several ways in which a seller can protect its position in respect of warranty claims.
If the business is being sold on a cash-free/debt-free basis, include adequate completion accounts. Sometimes, to mitigate tax, a seller will retain cash in the business, rather than make a pre-completion dividend. There needs to be a clear mechanism by which the additional cash will be paid out.
If a buyer requests an indemnity for any matters of concern that have arisen during due diligence, ensure that the drafting is tight enough for that specific matter. So as to retain the goodwill in the business it is advisable for a buyer to obtain promises from the seller that they will not compete with the business, poach customers or staff, or solicit suppliers. Such restrictions will be by reference to a time period and geographical limit.
The seller will ideally want to receive all the consideration on completion. It is not uncommon, however, for a buyer to retain part of the purchase consideration for a period post-completion from which it can take payment in the event of a successful claim. A seller would want to have any funds put into an account, over which its adviser has some control, and have a time limit for the notification of claims. In addition, in the absence of such notification, a clear mechanism for the release and payment of the funds would usually be put in place.
For more information on buying and selling a care home, please contact Dominic Travers.