Start Up magazine

Tony Goodwin shares his case study on signing a private equity deal in Russia.

When Tony Goodwin set up Antal International in 1993, he always had the idea that he would sell-off the international divisions of the company separately in the back of his mind. He had ambitions to create a major rival to the recruitment business Michael Page and international expansion was an inevitable part of this. Some 15 years later, with offices in 28 territories, he had achieved this aim.

Impressively, at the start of this year, Goodwin went one stage further, and managed to do what many people had told him wouldn’t be possible. In a multi-million pound deal, he sold off the Russian division of his business to FiveTen Group backed by Englefield Capital.

The deal means Goodwin has realised a significant amount of equity, but will also remain as the owner of a large business – the best of both worlds and the achievement of a long-standing ambition. “Right from when I set up this company I had always thought about selling them separately,” he says. “But a lot of people told me that I wouldn’t be able to do it, because no one would want to buy a company with the same name as one trading elsewhere.”

Indeed, the deal is unusual in the respect that the vendor is both selling the Antal name for use in Russia, but will continue to use it in the other territories. Also, the parties have agreed to a co-existence agreement, where the vendor refers Russian opportunities to the acquirer.

“We are still getting revenues from the Russian business because we have leads coming in from all over the world,” Goodwin explains.

Antal is one of the biggest names in recruitment on the Russian High Street and, therefore, was a real catch for its buyer. What’s more, the structure of the company, with a clearly defined market and proven business model, as well as a strong management team, made it possible.

What is being sold?

Carve-out deals can involve a lot of professional advice and help. In some respects, taking a business out of a business is a tougher decision than selling one in its entirety. Antal’s Russian arm was in many ways a separate business, albeit with centralised accounts in the UK. But the deal took several months to complete as the lawyers pored over the details.

“The amount of due diligence that has to be done by the acquirer is much greater than normal, but they were pleasantly surprised to find out that there was nothing untoward or untypical,” Goodwin explains. However, he had been planning an exit from day one and so was better prepared than many. If you are looking at selling off a part of your company then you must, of course, be able to clearly show what is up for grabs. This may sound obvious, but the due diligence process is a gruelling test of patience, while the professional costs involved in unpicking a business from an existing one can be prohibitive.

An acquirer’s lawyers are going to be asking lots of very pertinent questions before they will sign-off on a deal. Colin Mills, managing director of the FD Centre, has worked with several businesses that have approached his company to help them prepare for a partial disposal. He says that uncovering exactly what is being sold is often the biggest part of the challenge. “One of the things that can be difficult is getting visibility of the structure of a business,” he says. “To get good value, you need to look at the business in its entirety, understand how it will sit together with the new one, look to structure it and haul out profit.”

Mills recalls working with a holiday business with several revenue lines that totalled about £10m a year. Its offering included expensive skiing trips, as well as more standard package holidays. The owners were keen to sell off the skiing part, so they could concentrate on the package holidays, which they saw as being more profitable. “The chances of someone buying the whole group was remote, because people that buy businesses want to buy one that fits with their existing business,” explains Mills. He began to work through the costs and isolate how much each of the divisions was really worth.

By doing this, it became clear that a loss was being made on one side of the business. However, the information was far different from what the owners had expected, as it turned out that the skiing business was actually the most profitable part of the company, whereas the package holidays were making a loss.

“Through this process they made a decision not to carve-out, but to redirect resources into the business that was very profitable,” says Mills.

Start at the end

If you are looking for a partial disposal, then the best place to start is at the end result and then to work in reverse. You need to map the terrain of the market place and consider where the chunks of your business are going to sit when they are sold. This will help you get a clearer idea of how to prepare your company’s divisions for sale. You then need to shore-up that part of the business, clearly defining profit, loss and costs, so the acquirer can see what they are buying. With a standard accounts package, such as Sage, you can create divisions, so that even if they aren’t separate legal entities they will have their own profit-and-loss sheet. It can also create a much better understanding of where your business is profitable and where it isn’t.

A key decision when considering your sale is whether you are going to simply sell the assets or if you’re aiming for a shares deal. Asset sales usually suit the buyer more, as the liabilities remain with the vendor, whereas shares sales remove that risk, but take longer. If you want to sell shares then you must create a subsidiary company, and this takes longer and has tax implications. However, with a subsidiary company you can show a clearer trading history, and selling shares will normally increase the selling price.

The tax liabilities

There are certain tax implications involved when creating subsidiaries, and you would be well advised to seek professional advice before making a move to sell off any of the divisions of your business.

Essentially, because a subsidiary is actually a separate company, you will end up having to pay more tax. However, you won’t have to pay corporation tax at the creation of a subsidiary until you sell it.

Neil Simpson, a tax partner at Haysmacintyre, explains: “If you hive down the assets into a subsidiary, then there’s no immediate tax that needs to be paid. It is a non-event for tax purposes while the subsidiary remains in the ownership of the parent company. However, if you then sell the subsidiary to a third party, then the tax that was not charged on the hive down is triggered.”

Selling underperformers

After you’ve divided up the business into quantifiable lumps, you might well find that one part is unprofitable. Shutting it down is an option, but then so is selling it.

Even if a business is underperforming, it can still have a positive value to a buyer. Gross revenue and a proven sales history are all of value to an acquirer that can strip down the costs and make it profitable within their own framework.

The strength of your customer contracts is key, although in asset sales, the terms and conditions of these aren’t transferable without the consent of the client. However, more important than any of these is the level of competition involved in the bidding process. So it’s important to remember that businesses are only worth as much or as little as someone will be prepared to pay for them.