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Key Considerations when Selling a Multi-Divisional SME Business: Break it Up or Sell Whole?
A business with more than one division may generate a better return for the vendor if it is broken up and sold in parts rather than as one complete entity; but, as you may expect, there are many considerations in solving this particular equation - and some of these are briefly discussed below.
Is the whole greater than the sum of its parts?
The answer to this is ‘no – not always’. There are certain cases where the sum of the parts outweighs the whole. But how do you know?
One relatively simple initial approach is to apply a basic test involving two questions:
1. Is there significant sharing of customers between business divisions?
2. Is there an interdependence of products or services between divisions?
If the answer to both of these questions is ‘no’ then it is clearly worth considering breaking up the business.
Is there a clear benefit in breaking it up?
Next, you need to consider whether there is a demonstrable benefit in breaking the business up.
Naturally the objective is to see if a series of business units will have broader appeal in the market that will translate to a higher return for the vendor.
This market appeal would ideally be in the form of a greater volume and variety of buyers. In real terms this could mean several different things. For instance:
• Each individual division can be brought within financial reach of a broader group of buyers
• A particular division may be more tightly aligned with particular buyers’ existing businesses or expertise.
To properly evaluate the potential financial gains of a break-up scenario, a comparison must be made with a non-break-up scenario.
For a break up to be feasible, the vendor should expect an uplift of likely return of at least 25% - but preferably greater than 30%. Otherwise the extra work, time and risks involved may simply not be worth it.
Legal concerns and the other 'added extras'
Beyond the considerations of customer sharing and product/service interdependence, you must also factor in all the extra costs associated with presenting the business units as stand-alone entities: extra admin staff, sales staff, premises etc.
The workload involved with a business sale is intense for a short period; when you break the business up, this is multiplied – sometimes many times over.
It is therefore necessary for the transactions to be staged. There is often a self-evident sequence for selling off the business units. Sometimes there is an unprofitable ‘orphan’ that is relatively unattractive to buyers, and the best option is often to tag it onto the most logical profitable division as a buyer’s incentive.
When a business is broken up into units there is an increase in the complexity of the due diligence process, as there will often be a clear, individual trading history with associated financial statements and tax returns that one would normally expect. This means that the vendor’s due diligence costs will be higher – adding further to the extra expenses.
The human issues
A break-up strategy also needs to consider the people.
Once the first division is sold, many employees will start to understand what is happening and the rumour goes into overdrive. Consideration needs to be given to how the business break-up sale should be announced before false rumours start.
If done correctly, most of the high quality staff will see a business sale as an opportunity; there can be a tendency for vendors to fret over this too much.
Irrespective of the broker’s best efforts, the end-to-end sale process of business units will take longer than a single entity sale. This will mean that, at least for a short time, the business will need to trade in a dismembered state you need to consider how the business will handle trading during this transition period.
Possible problems to avoid
The solicitor should usually be involved in the divisional break-up discussions from the outset. It is critical that agreements with one party do not adversely affect the prospects of selling another division.
In one particular case I recall, one party had been granted the rights to all trademarks including those associated with divisions the buyer was not purchasing. Although these kinds of issues are uncommon it is something to be aware of and safeguard against.
In other cases, vendors have become liable for a property lease with no business to occupy it, as all the divisions have been relocated. This is another consideration and the vendor and broker need to consider the financial impact of such an eventuality.
Finally, don’t overlook the matter of loans being secured against the business assets. An external accountant should be involved in these discussions from the outset, to avoid plans backfiring.
If your business has multiple units with largely different customers and few interdependent products or services then your broker really should be appraising it from both a whole and divisional sale perspective.
Whilst it’s more work for the broker, it can be of significant benefit to the vendor.
Get in contact with LINK, the authority on selling businesses, to see how our brokers can help you buy, sell or value a business.
This article was written by Graham Peters – Business Broker at LINK Sydney.