November 10, 2016
When it comes to Brexit, it seems that all we know is that…we don’t know. When will Article 50 be triggered? When will the UK complete the departure process? At what point between those two events will various aspects of the EU withdraw from the UK? What effects will it have on the wider economy at each step? We don’t know.
An environment where so many of the big questions remain unanswered can be a difficult one in which to complete the sale of a company. On any given day there is the risk that even vaguely Brexit-related news, and the accompanying market reaction, could put a Buyer off a deal that previously looked attractive.
The intention of this article isn’t to speculate about how Brexit will go, or to advise on the best places to locate a Buyer given the sterling exchange rate. Instead I want to look at some practical issues around the legal process of selling a business, and what Sellers can do to reduce the deal issues associated with Brexit uncertainties.
Do your due diligence
If every day carries with it some amount of risk of a new Brexit development, one way to reduce the risk of something coming up is to keep your process as short as possible. An aspect of a sale that often takes undue time is due diligence, and in particular assembling responses to Buyer’s questions.
Sellers should prepare a good data room, which addresses the major areas that Buyer will seek to explore, at latest by the time the termsheet has been signed; Sellers can anticipate this coming, and speed the eventual process. Professional advisers can help, and are doing their own homework to develop cost-effective ways of doing so. Inevitably there will be follow-up enquiries during the process, but if the Buyer feels comfortable that disclosure is being properly handled then the timetable will be considerably shorter and the risk reduced.
By the same token, full responses to further diligence enquiries will conclude this exercise far quicker than making selective responses and inviting further enquiry. This is not cut and dried, disclosure will continue to be a balancing act for Sellers trying not to frighten Buyer away with too much bad news at once, but in times of market uncertainty there is a thumb on the “disclose” side of the scales.
Push the process
A perennial discussion around sale processes is how much time to spend on the termsheet, and when to move on to the definitive documents. There will always be a commercial driver to have clarity and certainty around the terms of the transaction, but Buyer’s mental and moral (if not legal) commitment to a transaction almost always increases once the termsheet is signed. Leaving detail points for the definitive documents, in an uncertain market, has much to recommend it.
Likewise, once definitive documents are in play, there is real value in ensuring that the Seller has established a deal team, and that the members know their responsibilities and have cleared sufficient time in their schedules. Reviews of the transaction documents, negotiation meetings, obtaining relevant information for disclosures – spreading those responsibilities around a team is essential to avoid bottlenecks and mitigate the risk that some new development derails the deal. The disruption to the deal team’s day-to-day roles in the business is a price worth paying.
The gap and the MAC
A further question is whether a sale could be set up with a period of time between signing and completion, or if it should sign and complete simultaneously. A gap is only usually required for third party reasons (for example because a regulator or merger control authority needs to agree to the transaction), but the advantage of a gap is that Buyer signs the SPA, and is therefore committed to buying the business, without having to resolve every ancillary issue (e.g. new employment contracts for senior staff) and bear the risk of delays on those points. Buyer’s protection during that committed period is a material adverse change clause, or MAC. The intention of the MAC is to give Buyer the ability to walk away if something happens that causes a material downturn in the business or prospects of the target company.
Using Brexit to trigger a MAC, however, may be difficult to achieve. Contract clauses are commonly interpreted against the person using them, and so it must be clear that the event falls within the intention of the clause for Buyer to pull out of the deal. Last year the High Court also suggested that it will consider the impact on the market more widely; in that case they ruled that revision of profit forecasts did not count trigger a MAC clause, and one reason given was that to allow it would produce uncertainty in the M&A market (by introducing a potential new category of MAC-triggering events).
If there is a particular risk that is material to the target company, such as the withdrawal of a particular EU programme from the UK or a major exposure to currency fluctuations, there might therefore be a risk of a MAC being triggered. Absent that specific risk, however, Brexit announcements or events would be unlikely to give Buyer the right to walk away – Buyer will have to clear some high hurdles of interpretation to show that those events are clearly within the intention of the clause and constitute a material downturn in the target’s business or prospects.
Reduce your currency risk
Another way to reduce transactional Brexit risk is consideration structure. Deal terms often push some elements of consideration into the future, payable either on specific milestones or on the business’s performance over an “earn-out” period. This is often attractive to Sellers who believe the business has greater potential, and therefore are willing to accept some later consideration relating to the business’s performance, but given the uncertainty around macroeconomic conditions over the next few years Sellers may want to push harder on initial consideration and less in the earn-out.
It’s also worth thinking about exposure to significant currency fluctuations that seem to follow every remotely Brexit-related move. On a sale to a foreign Buyer, Seller’s exposure is obvious – and simply solved by a contractually-fixed currency exchange rate; but similar thinking can be applied in less obvious areas. If a business reports in pounds but it has substantial sales or cost of sales in another currency, for example, it can be specified in the SPA that the accounts used to calculate any earn-out payment will be adjusted to use one or more stipulated exchange rates.
Uncertainty always creates difficulties for sale transactions, and Brexit in that respect at least is no exception. A prepared Seller can, however, take some simple and practical steps to mitigate uncertainty – this is by no means an exhaustive list. We would, of course, be delighted to discuss further ideas with you if you’re considering a sale process; please do get in touch.
Written by David Willbe, Partner Lewis Silkin LLP
“We were delighted with the services that Bluebox offered us. Bluebox’s attention to detail through their Diamond Programme ensured that we were well prepared for when the business was taken to market and that the sale process itself was managed expertly.
We challenged Bluebox with finding the right strategic buyer and thereafter negotiating a deal that met our requirements. In helping initially to identify and to secure the deal with Mountville Mills they accomplished just that. Communication throughout was excellent and professional, managing each stage of the process. I would have no hesitation in recommending Bluebox to any corporate shareholder or private business owner looking to divest their business.”
Richard Millward, Former Client
“We were delighted with the services that Bluebox offered us. Bluebox were challenged with finding us the right strategic investor and, thereafter, negotiating a deal that met our complex requirements. In identifying and securing the deal with LGC they have done exactly that. The process itself was efficient and smooth, largely due to the excellent communication from the Bluebox team, who also demonstrated excellent experience at managing a very engaging auction process. I would be delighted to recommend Bluebox to any corporate shareholder or private business owner looking to divest a business.”
Helen Dickinson, Former Client
It has been a real privilege working with the team at Bluebox over this last year or so. Bluebox’s attention to detail ensured that we were well prepared for when the business was taken to market and the sale process itself was managed expertly. Starting the process, I had no idea exactly what this would entail and the volume of work that has been produced by everyone and the result reached today is nothing short of brilliant.
Hugh Morris, Former Client
We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.
Laurence Seward, Former Client
Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.
Mike Minett, Former Client
We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.
David Stokes, Former Client
When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.
Jeff Weinstein, Former Client
When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.
Bill Ballard, Former Client
Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.
Alan Montgomery, Former Client
The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.
Nigel Parsons, Former Client
I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.
James Caan, Investor
We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.
Marten Nielson, Former Client
We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.
Paul Duckworth, Former Client
I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.
Peter Bennett, Former Client
Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.
James Averdieck, Gü, Former Client
The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.
Jon Parslow, Former Client
“We selected Bluebox after a fairly long round of evaluating potential advisors because of their scientific, yet challenging approach to maximising value. During our initial meetings they showed us how far short of “ready” we were and consequently we completed more preparation in the early stages which meant we were equipped for what was to come. We were delighted with our choice of Corporate Finance partner. I do not hesitate in recommending Bluebox for any SME to consider.”
Simon English, Former Client
Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.
Henry Braham, Former Client
Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.
Matt Evans, Former Client
The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.
Victor Lewis, Former client
Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.
Simon Hulme, Former Client
Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.
Michael Clapper, Former Client
I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.
Mark Rodol, Former Client
I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.
Steven Davies, Former Client
With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter
Clive Hillier, Former Client
The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.
Harpal Singh, Former Client