Disposals

 The disposal of the company

Not always, but often, the disposal of a company represents one of those topical moments in life, like graduation or marriage.

If this were the case, it would be worthwhile approaching it in the best possible way, with the help of a specialized advisor, such as Atlhas Finance, but also taking the time to read up on the subject well in advance.

We would like to give you some points for consideration here, of course referring you to more comprehensive readings.

Expectations

We have occasionally had companies with a turnover of around one million euros, and a profit before depreciation, interest and taxes (the so-called EBITDA) of less than one hundred thousand euros, ask us for some advice on selling their company for a few million euros.

This is a typical example of unrealistic expectations: before embarking on a path ofsale, entrepreneurs should be aware of its feasibility and how much they could reasonably get out of it.

For this reason, it might be useful for the entrepreneur - if he does not exclude the possibility of selling his company in the more or less near future - to commission its valuation from time to time.

Company valuation

Having a valuation document for your company allows you to become more aware of its value, so we urge you to take the time and get your company appraised.

This is not the only advantage. Often the analysis carried out allows highlighting some weaknesses and some value drivers on which it might be worthwhile for the entrepreneur to focus his action, in an attempt to increase the valuation.

Mind you, there are no "magic" solutions of course, the only way to significantly increase the value is to cut costs in a stable manner, steadily increasing revenues, thus increasing EBITDA: very easy to say, much less to do.

There are, however, interventions of "cosmetics" and "plastic surgery" that, acting on some drivers of value, can make a contribution that is not to be underestimated and that we will try to present below.

Examples of value drivers

Each company is unique, so it is difficult to be very comprehensive on the subject, but EBITDA aside, there are some elements that cut across companies and industries, let's see which ones:

1. Customer portfolio - the degree of customer concentration is a considerable risk factor, to which a prudent buyer pays attention. Customers worth more than 10% of turnover are not a good sign. In view of a sale it would be advisable to act on an over-concentrated portfolio, or to be able to demonstrate that the risk of losing the most important customers after the sale of the business is remote (e.g. due to contractual protections, high replacement costs, particular intellectual property, etc);
2. Intellectual property - having patents and other instruments to protect the intellectual property underlying the products/services placed on the market, limiting competitive pressure, is a reason for greater value;
3. Human capital - the degree of concentration of corporate know-how is also a risk factor. The presence of employees whose loss could seriously damage the company's operations is an aspect that should be remedied, by sharing their knowledge and skills within the company and/or providing appropriate contractual protection (e.g. non-competition agreements);
4. Product/service portfolio - the degree of concentration of turnover on the product portfolio is also a risk element. In fact, product portfolios that are too limited could lead to the loss of customers if they rationalize the activities of their purchasing department;
5. Accounting data - since the most important driver of a company's value is its profitability and its ability to generate cash, the reliability of accounting data is crucial, and having audited financial statements in good time - i.e. for at least three years prior to the sale - is a sign of transparency that is appreciated by a buyer;
6. Development plan - having a clear and realistic vision of the growth path the company could/should take in the medium term is another element supporting the sale price. What 'medium term' means clearly depends on the industry. Just to give an example, the video games industry, with a product life cycle of just a few years, certainly differs in dynamism from the steel industry.

Timing

Timing is important. Selling after a poor financial year would certainly not help to maximize value.

So, what could be a criterion to be used to assess timing?

Good timing should allow for positive trends - so ideally at least 3 years - in the financials and value drivers (including those mentioned above).

The sales process

The sales process is important, not only because it can influence the final price, but also because it can determine the success or failure of the sale itself. It should be kept in mind that it is not uncommon to fail a first attempt at a sale  - when word of the sale spreads - can have negative consequences. In fact, on the occasion of subsequent attempts, the suspicion/fear may arise that there may be important reasons behind such a "failure", a suspicion that reassurances in this regard are unlikely to be sufficient to dispel.

For this reason, it is advisable to start off on the right foot from the outset.

Typically the three main parameters of a sales process are:

• the number of potential buyers involved, which can range from a few to several dozen;
• the nature of those buyers, either 'strategic' (usually industrial) or financial;
• the nature of the sale, negotiated or auctioned;

Without going into the characteristics of the different sales processes, to which we will probably devote a newsletter, let us say here that an auction process involving strategic buyers usually allows higher prices to be obtained, but is not suitable for all companies. For example, in the case of small companies, operating in niche industries, with few operators, it would usually be difficult to gather enough interested parties to justify a competitive auction and the choice of a negotiated sale would be obligatory.

This brief presentation is not intended to be comprehensive, but we hope that it will help to convey the message that the sale of a company is a complex process, more complex than the sale of a small real estate property, that it would be preferable to plan ahead, and for which it would be advisable to rely on an advisor specialized in managing this type of procedure.

If you would like to contact us to discuss the idea of selling your company, we would be happy to meet with you, and of course we guarantee complete confidentiality.