Exit Strategies

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Exit Strategies Holiday Inn, Guildford, 17th
June 2008 Barlow Robbins LLP Roffe Swayne
Chartered Accountants and Lloyds TSB Bank plc
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Welcome Agenda

• Introduction
• Establish the Reasons for and Objectives of the
  Exit Jeremy Gardner
• Summary of Types of Exit Mark Lucas
• Preparation for Exit Jeremy Gardner
• The Legal Process Mark Lucas
• Managing the Process Andy Fish
• Questions

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Exit Strategies SeminarJune 2008

• Jeremy Gardner
• Partner, Roffe Swayne

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Reasons for exit

• Retirement
• To realise optimal value
• Opportunity
• Succession
• Competition
• Financial difficulties
• Death or Illness

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Objectives of the exit

• Optimise value consider
• What is a realistic value for the business?
• What valuation method is appropriate?
• What other deals have taken place in the market?
• Am I opting for a different lifestyle?
• What are the financial needs of family?
• What are investment yields?
• Will I continue working?
• What is my attitude to risk?
• Do I have provision for a pension?

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Objectives of the exit

• Timing consider
• Are we selling at the right time?
• Do growth trends support sale now?
• Do we have a deadline by which we must sell?
• Health considerations
• What if market conditions are not conducive to
  sale?
• Can we delay sale if it is to our advantage?
• Leave adequate time to plan

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Objectives of the exit

• The ongoing business consider
• Will the business be in safe hands after I exit?
• How will an exit affect my staff?
• Should there be any financial benefit for staff
  as a result of exit?
• How will an exit affect my customers?
• Will I be retaining any interest in the business,
  and how do I manage this risk?

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Exit Strategies Holiday Inn, Guildford, 17th
June 2008 Mark Lucas, Partner Barlow Robbins LLP

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Summary of Types of Exit

• Close the business
• Sell to family
• Sell to fellow shareholders
• Sell to management

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Summary of Types of Exit

• Sell to trade
• Sell to a financial investor
• IPO/Listing
• Others (Joint Venture/Franchise etc.)

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Preparation for exit

• Tax planning and considerations
• Grooming the business for sale
• How to find your buyer

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Tax planning and considerations

• Early consideration - seek the most tax efficient
  structure from the outset
• Capital Gains Tax likely to be biggest cost
• Asset sale or share sale?
• Purchasers perspective (goodwill)
• Sellers perspective (capital treatment)
• Earnouts and deferred consideration
• Property

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Tax planning and considerations

• New CGT rates from 6 April 2008
• Annual exemption 9,600
• Balance of gains taxed at 18 (but see ER below)
• Abolition of taper relief from 5 April 2008
• Entrepreneurs Relief introduced from 6 April 2008

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Tax planning and considerations

• Entrepreneurs Relief Overview
• Lifetime limit of 1m of qualifying gains
• Reduces effective tax rate from 18 to 10 up to
  this limit
• Excess gains taxed at 18
• Rules on qualification (e.g. for disposal of
  shares, in the year leading up to disposal,
  individual must be officer or employee of the
  company prior to disposal and must have owned at
  least 5 of the shares and voting rights)

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Grooming the business for sale

• Plan well in advance of sale
• Formal valuation
• Practical steps to increase value and
  marketability
• Enhance profitability
• Reduce uncertainty for purchaser
• Reduce complication and risk
• Work with advisers

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Grooming the business for sale

• Management team and key staff
• Rationalisation
• Profitability
• Information
• Streamline the balance sheet
• Market presence

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Grooming the business for sale

• Property
• Formal contracts
• Litigation
• Intellectual Property
• Minority shareholders

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Finding your buyer

• The optimal purchaser
• Willing to pay a premium (good strategic fit)
• Can add value e.g. synergies, management
• Has vision for the business
• Understands the business
• Available funding
• Realistic about deal terms
• Understand purchasers motivation

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Finding your buyer

• Direct competitors
• Related industries and sectors
• Suppliers or customers
• Fellow shareholders
• MBI / MBO team
• Individual entrepreneurs
• Private equity houses

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Finding your buyer

• Make contact through targeted approach
• Non-disclosure agreements
• The Sales Information Memorandum
• Managing the bid process
• Offers and engendering competition

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The Legal Process

• Confidentiality Agreement
• Heads of Terms
• Due Diligence
• Purchase Agreement

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The Legal Process

• Disclosure
• Other Documents
• Completion

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Andy FishCorporate Finance Director
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Managing the process

• Timings
• Pressure on the purchaser
• Briefly how the purchaser secures finance

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The transaction viewed through the eyes of the
purchaser

• All cash deals.
• The need to raise funding terminology
  leveraged or highly leveraged transactions.
• Specialist teams within Banks.
• Typically deals will involve secured and
  unsecured lending.
• Understanding of mutual issues through effective
  communication is key (where possible).

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Timing Key Steps

• Agreed Heads with suitable exclusivity.
• Receipt of an integrated Business Plan balance
  between financials non-financials. Focus on the
  management team key.
• Credit Sanction will remain subject to the Due
  Diligence process.
• Borrower/Banker agree on the indicative terms and
  conditions under which the money is to be lent.
• Due diligence financial and often commercial.
• Final sanction.
• Legal due diligence.
• Completion.

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• Be aware of the pressure on the
  purchaser

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How the purchaser secures finance

• Typically leveraged deals involve unsecured debt,
  at least in part.
• Banks will look to the following to balance the
  risk equation -
• Security freeholds, debtors, plant machinery
  secured debt.
• Vendor deferred cash left by you as sellers
  within the deal (sub-ordinated for repayment
  behind Bank debt).
• Contribution from the purchaser (pain or hurt
  money).
• Unsecured debt balanced against the
  sustainability of future cashflow.
• Carefully financially modelled and lent against
  financial covenants.

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Any Questions?