Should I sell up to my rival?
SJ writes: I have had an approach from a competitor to acquire or merge my manufacturing business. Over the past few years the business has struggled and I don’t see the corner being turned soon. What should I do?
An unsolicited approach from a competitor is fairly common. The offer may be attractive at this time of worsening economic forecasts, as there can be clear advantages to joining forces with a competitor, particularly for a manufacturer, writes Marc Fecher, corporate finance partner at Kingston Smith LLP.
One of the main advantages is a reduction in overheads, which, assuming the revenues and margins stay similar, should improve profitability.
A deal could provide an exit plan for some investors. They could benefit from entrepreneurs’ relief, in effect a 10% tax rate — highly attractive when compared with income tax of up to 50%.
The most important document will be the new shareholders’ agreement, addressing what should happen if you exit the business, as well as rules regarding how the business should be governed. Carry out due diligence on the potential partner, so you can be confident you are not combining your problems with theirs and weakening your business further.
Often, the question for business owners is: should I exit now or wait for better times? If you can see that by joining forces you are creating a bigger, more sustainable business with improved profitability, then the valuation of the business should prove higher in the longer run. The choice is: would you like a smaller share of a bigger cake or would you rather take chances on your own?