Business Sellout, Business Exit, Business Retirement & Succession Planning
Selling products and selling business:
All the life businesspersons sell their products. They very well know all the aspects of selling their products including who are the clients, how to approach the clients, where to find the clients, what value my business adds to the clients, how to price my product, what should be the payment terms, how to change the prices depending upon the market situation, etc. The promoters of the the medium and mid size enterprises are very confident throughout their life about their marketing skills. However, we get a shock of life when personal circumstances or strategic objectives require them to sell the business. Selling a business is entirely different from selling the products of a business. These two things require entirely different types of skills. This is because, as a product, a business is a very different type of good and a typical technocrat businessman does not have any experience of selling it.
Liquidity and exit:
A private limited business is the most illiquid asset on the planet. This specifications and configuration of each business are widely different. You cannot find a matching business for an another business to price them exactly equally. The number of parameters that differentiate between two businesses run into thousands and thousands.Understanding investor perspective:
This is not all. A new investor may not be able to run a private limited business as the Goodwill of promoter is not reflected in any of the financial statements. The compliances for Private Limited businesses are very less; during the operational years they don’t feel like compiling a lot of information even for internal storage or use; and technocrat promoters do not know what are the parameters that are important to the investors. Investors find it very risky to invest in a private limited business on account of many reasons.Some of them are:
a) The investor may have a short-term outlook and it is very difficult for the incumbent to exit after the investment Horizon.
b) The investor cannot take out the money in emergency by selling the shares of private limited company quickly.
c) There is hardly any information available in the public domain to understand the exact risk of the business.
d) The financial performance of a private limited company may not be correctly reflected in the books of accounts because of related party transactions, lack of correlation between salaries and dividends, absence of any third party director, etc.
e) It is very difficult for investor to compute the existing, provisional, and contingent liabilities offer Private Limited business before accepting the valuation.
f) If the investor is not from the same business background, it is very difficult for him or her to understand the merits and potential of the business.
g) It is very difficult to determine the existing impact of fund shortage before the investment and to bet on the growth if adequate investment is made.
h) The language of corporate management, strategic management, transaction management, financial management, valuation, investment contract, investment process is entirely new to the technocrat promoter who has grown the company gradually. It becomes very difficult for an investor to interact with the businessman it becomes a strange case to bargain with a person who won one hand is highly knowledgeable about operating the business but hardly has any knowledge on how to sell the business or how to dilute the control.
i) The business has so far never seen an outsider investor, decision maker, profit taker or a person having independent opinions coming to share control or buy control from a single point decision-making authority that laid the company for so many years.
Importance of control:
The valuation of a business is is not directly proportional to the percentage of shareholding. There are certain threshold levels that enable the shareholders to take different type of important decisions and control the way company runs. Sharing of control between unrelated, unknown people is considered difficult at least in the medium and mid size businesses. If the valuation of 50% control is rupees 50, then valuation of 49% shareholding maybe Rs. 42 to 45 and the evaluation of 51% control would be from Rs. 55 to 60. This is not exact, but the control premiums and discounts may vary widely.Investor preference for 100% sellout:
Many investors prefer hundred percent sellout to operate the business in the future without any interference. Do this is not true for all the businesses, there are exactly opposite strategies in the market, if the promoters have unique personal strengths and a reputation in the market, and also if the business is not very typical the investors would like to retain the the existing promoters as co-owners.Why, how & when to completely sell the business?
How do you decide whether to sell the business completely? When to sell it completely? Whether to sell it now or some other time? Whether to sell it after doing some investment or as it is? Enroll for a counselling session with Apohan Corporate Consultants for decision making. Overall, you should be guided by individual objectives, business objectives, financial objectives of the business, individual financial objectives, personal circumstances and principle of maximization of personal financial networth.Important considerations for sellout:
a) Slump sale or share transfer: This tells you whether you want to retain the corporate identity for want to depart with it.b) Personal securities and guarantees: When you sell or dilute your control, you should get your personal securities and guarantees released from the lenders. If you are partially remaining in the business, all the stakeholders should provide securities and guarantees in the proportion of ownership.
c) Hand holding: The promoters are we face of the business; the new investors cannot run the business without their involvement for some initial period. In case of 100% sale, you can ask for Salary at the market level for doing this work.
d) Non-competition: As the businessperson you must be knowing what you are going to do after completely sending out your business. The buyers of the business will bind you not to enter into the same line of business for a certain number of years to avoid competition in the same space and market. You must be careful about what all you have been asked to refrain from.
Succession planning:
Dhirubhai Ambani was a very visionary business leader. But remember the chaos in early 2000s, when his two sons were fighting for sharing inherited company? If it was not Kokilaben Ambani who mediated between them, we couldn’t be able to predict the future of the Reliance group.In personal capacity, every promoter of a private limited company is different. His or her children may or may not be interested in operating the business. Forget operating, continuing with the business ownership me not be also the option for many of them. This probably would involve substantial management outsourcing, participation in the Annual General meetings, monitoring the financial performance of the company in a passive way and all for handsome dividend. But in case of many SMEs, SMBs, the next generation is not simply interested in anything about the business. They might be settled abroad with white collar jobs. Specifically in Indian context, the daughters married off in other families do not involve in the father’s business even though they are capable of the same. In short, there are several permutations and combinations which decide what happens to a business after the promoter. The ability of the promoter to run the business reduces with age. Are the natural impact of this, the performance of the business goes down. The participation from the ageing directors gets reduced over every new year. And the business that commanded some premium, now starts getting sold at asset value or scrap value. Such business also may face financial distress and become NPA. There might be liquidation, auctioning of personal assets, auctioning of properties of the guarantors. There might be some civil court cases in the old age. To avoid this, a business person should do succession planning or start doing some sitting planning in the early fifties itself. Succession planning involves valuation of a business, appropriate distribution of the wealth among the heirs, avoiding property conflicts after death, preparation of a death will, getting onboard independent and competent managers, management outsourcing to reduce the involvement in the business, creation of the second running of management from within, deciding the director real compensation and dividend policy in all possible future circumstances, etc.
Corporate transaction:
Unlike equity funding, in case of sellout, the transaction involves share transfer in place of issue of additional shares.Tax implications:
The share transaction has tax implications in terms of capital gains tax which is different for Private Limited Corporates then listed companies. The method of computation of capital gains is also different.Apohan Services in Sellout, Exit, Retirement & Succession
| 1 | Client-Apohan non-disclosure agreement (NDA) |
| 2 | M&A consulting proposal |
| 3 | M&A consulting contract |
| 4 | M&A process presentation |
| 5 | Business profile/Promoter profile |
| 6 | Profile of target company/investor |
| 7 | Inception report |
| 8 | Schedule of investment requirement |
| 9 | Analysis of basic Financial documents |
| 10 | Analysis of basic corporate documentation |
| 11 | Consultant’s plant / facility visit |
| 12 | Teaser (MS Word) (Anonymous) |
| 13 | Business presentation (PPT) (Anonymous) |
| 14 | Information memorandum, if needed |
| 15 | Data sheet (if required) |
| 16 | Business plan |
| 17 | Formulation of deal strategy |
| 18 | Preparation of strategic options |
| 19 | Financial / Valuation model (MS Excel) |
| 20 | Advertisement drafts for online media |
| 21 | Advertisement drafts for physical media |
| 22 | Circulation of advertise to investors |
| 23 | Shortlisting of eligible investors |
| 24 | Identification of the investor |
| 25 | Mutual NDA (Client & Investor) |
| 26 | Investor’s plant/ facility visit |
| 27 | Preliminary due-deligence of investor |
| 28 | Presentation to investor |
| 29 | Investor proposal/ offer analysis |
| 30 | Financial / contractual negotiations |
| 31 | Deal Structure (transaction type, instrument type, transaction details) |
| 32 | Term-sheet for contract |
| 33 | Document list for data room |
| 34 | Assistance in seller due diligence |
| 35 | Assistance in reverse due diligence, if needed |
| 36 | Handling of investor’s query |
| 37 | Draft investment contract /BTA/scheme |
| 38 | Final Investment contract |
| 39 | Closure of Deal / Execution of contract |
| 40 | Amendment drafts in MOA/AOA |
| 41 | Board / GM resolution drafts |
| 42 | Disbursment of Funds |
| 43 | Accounting of M&A deal |
| 44 | Taxation of M&A deal |
| 45 | Issue of equity / securty to investor |
| 46 | Handholding for 6 months |
| 47 | Monthly Status Report |
Arun Joshi,
MD & Director, Strategic Transactions,
ApohanTM Corporate Consultants Pvt. Ltd.
Address: 301-309, C/o Rudranee Infra, 3rd Floor, Sohrab Hall, Sangamwadi, Pune, Maharashtra, India -411001 (Landmark – Jehangir Hospital)
Location Link: https://g.page/ApohanEquityFundingSME?share
Mobile: +91 9810481325
E-mail: arun.joshi@apohanconsultants.com
Website: www.apohanconsultants.com
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Company: https://www.linkedin.com/company/apohanconsultants
Company PPT: https://www.slideshare.net/ArunJoshi38/apohan-marketing-presentation-v61-21-032021-aj