Sizing up the way to sell or expand

Peter Hansen, partner with MA100 sponsor Sapient Corporate Finance, explains finance-raising and selling

Smaller companies have the same financial needs as larger companies. After all, the objective is the same: to obtain finance to assist with the growth of a company and, in time, to sell the company to new shareholders.

Of course, we frequently act for larger companies, as we did for Admiral Taverns in its £760m debt refinancing in July 2007. However, we also act for interesting and fast-growing smaller companies, as we did with Geronimo in its £25m equity and debt refinancing, and for Brockton Capital in its financing for Realpubs.

Although smaller companies have the same needs as larger companies, they certainly do not have the same internal resources available to cope with the demands of raising new finance, or the expertise required to assess financing alternatives.

After all, the day-to-day requirements of running a smaller company, managing the payroll, maintaining cash flow and so on, are enough of a challenge without the additional burden of raising new finance. So the smaller outfit's need for external professional advice is as great, or greater, than larger rivals.

Raising finance for a rollout or selling your business is a once-in-a-lifetime event for many smaller companies - and it's far from obvious how to do it. Most successful entrepreneurs are good at finding and motivating staff, building customer loyalty and creating excitement in their offer. Few have experience in selling or refinancing their business, and there are a number of potential pitfalls:

1. Sequential marketing

We frequently see companies approach one source of finance after another, never quite concluding their discussions with any one party. This confuses everyone and no one thinks you are serious. If you want to raise finance or sell your company, run in a horse race where everyone starts at the same point. Horses run faster when they know they have competition.

2. Giving information out too freely to would-be buyers

It is only natural to want to know what your business is worth, but when a friendly buyer rolls up having looked at your pubs and tells you how valuable your business is, how they would love to buy it, how they will pay the earth for it etc, resist the urge to provide them with financial information. Your business is not for sale and will not be for sale until the day you sell it. So listen politely to protestations of undying love, but make it clear that your business isn't on the market.

3. Falling for agents' patter

Here is a very common scenario. An agent approaches you with a harmless-sounding suggestion - to introduce you to a company interested in investing in your business. If you agree, however, what they are likely to do is tell everyone in their Rolodex that you are looking to raise finance, which can make your business look shop-worn.

4. Naming your price

When seeking new investors or selling a company, never provide a "guide price". Agents, bidders and professional advisers are all desperate for price guidance so they can determine the level of their bid. That is not in your interest. If you set it too high, you will scare off bidders; set it too low and you will look cheap. Recently, we sold New Century Inns and there was another tenanted pub company on the market at the same time with similar geography. The vendor's adviser asked for a high price. New Century, with no guide price, sold in seven weeks. The other business is still on the market, six months later.

5. Making a cosy deal

All too often, we hear the siren song: "Do a deal with us, we will pay top dollar, and you won't have to go through the aggravation of putting your business on the market."

Resist temptation - the cosy deal is in the purchaser's interest, not yours. Several family-owned regional brewers have sold on their businesses this way, at the expense of shareholder value.

Remember Burtonwood? Or Gales? Both sold on the cheap. Cosy deals benefit the buyer, not the seller.

6. Taking on tied leases

Many a small pubco has taken on a tied lease because the site is attractive and a tied lease is the low-cost way of getting into the sector.

Nevertheless, when it comes to selling your business, tied leases present complications. Although attitudes are changing, tied leases are of limited appeal to most purchasers. If you have tied leases, they should be kept separate from your freeholds and free-of-tie leases.

7. Holding back the crown jewels

No one wants to part with the crown jewels, but if you are selling your company, don't exclude prize assets, especially at the end of the process. Buyers hate it, and it ends up driving them away. In a bull market for assets, you might get away with this. But in today's

ultra-competitive market...

Whether you want to raise finance for expansion or to sell your business, it is incredibly important to prepare in advance of embarking on the process. Front-end preparation is essential to running an effective process because it ensures that your business looks professional and prepares you for all of the questions that will be asked by potential financial partners/acquisitors. You will be in control of the process, rather than responding to unforeseen events.

As part of this preparation, you will need to write a business plan, if you don't have one already. A business plan is an important communications tool for both investors and anyone looking to buy your business. It should contain three years of historic profit and loss accounts and cash-flow statements, key investment highlights and a review of future prospects, including profit and cash-flow projections.

This will allow investors to make an informed judgment about the future of your business. It is crucial that it gives a balanced view of the business and, above all, is credible and robust. The financial information must stand the test of critical query.

Given that refinancing or selling your business is often a one-off for many smaller company owners, adequate advance preparation can help to ensure that it is a smooth process.

Peter Hansen is a partner at Sapient Corporate Finance (formerly PC Hansen & Co). He will speak next Tuesday at the MA100 Conference on "How to refinance or sell your business".

PC hansen becomes sapient

PC Hansen & Co, the corporate finance advisor best known for its work in the pubs, bars and restaurant sectors, has renamed itself Sapient Corporate Finance.

The group, which since 2003 has worked on transactions worth a total of £5.9bn, said that the new name reflected its growing size, and a wider focus across the leisure industry.

Peter Hansen, founder and partner, said that some people still perceived the company as one that was purely focused on "big pub deals", whereas in reality it worked pan-leisure and advised on a range of corporate activity, including fund raisings, restructurings and refinancings.

The new name would help reinforce the wider range of skill sets present within the business. He said: "We're not a one-person company; we are a partnership, so we wanted to reflect that in our identity."

The founder established the business in 1997 after working in corporate finance at NatWest and at consulting firms Bain & Co and LEK.

Fraser Anderson, partner, joined the business in 2004 from Deutsche Bank Corporate Finance. Hansen and Anderson met when they worked together on the disposal of S&N Retail to Spirit and the Punch acquisition of Pubmaster.

Sapient has worked on a string of transactions in recent years, including eight deals with Admiral Taverns and eight deals with Punch Taverns.

Recently it advised Geronimo Inns on its refinancing with Penta Capital and the shareholders of New Century Inns on their sale to Greene King.

Sapient is f