Are you selling your company? The buyer will probably want to keep you as part of the new structure during the transition. How and why you can benefit from this is explained in this article.
If you own a business, the last time you signed a proper contract of employment probably goes back to... a previous life. Nonetheless, if you are selling, an opportunity - maybe unexpected - may come your way: the option of staying with your former company, but this time as a salaried employee, with or without defined objectives.
This type of arrangement is current business practice when it comes to managing a transition. Moreover, if you give it careful attention, this contract could well be a key part of your remuneration in the sale of your own company. Because the business transfer market is not just as simple as writing a cheque! While in recent years transfers of businesses within families have tended to decline (less than 10%), 59% of transactions involve structures which have no connection with the seller, an OSEO BDPME report shows. Which means an increased risk of failure in the transition period.
Therefore, to avoid this risk, 34% of transfers are completed with support from the seller, with the average period of this support being over a year (average: 15 months). The same study reveals that over 7 out of 10 companies transferred have been in existence for more than 10 years, which results in a more ‘emotional’ bond between the former directors and their company. One can understand the advantages of a short-term or medium-term support arrangement; sometimes this will be symbolic (to preserve the com pany's culture), sometimes it will be frankly operational.
Contract and/or earn-out?
"If you sell your company, it can be tempting to devote all of your energy to the agreement covering the transfer of assets and equity, but the second most important document to negotiate is none other than your contract of employment for the transition period following the sale." John Warrillow, founder of the Value Builder System.
Several forms of collaboration can be considered during your negotiations with the buyer. A conventional contract of employment and an earn-out are two types of agreement which can cause confusion, but which can also be complementary.
The contract of employment
This fixed-term/open-ended contract is nothing less than a contractual framework that governs your rights and obligations as an employee in the new structure, under the management of the new owner. It defines your salary, your benefits and the conditions governing your possible dismissal. The role of the seller must be clearly defined in it: to offer guidance, to advise, but also to relinquish former decision-making powers. Apart from the symbolic aspects already mentioned, the new functions are generally technical and commercial, rarely managerial.
The earn-out generally takes the form of an objective to be attained as head of a division in order to optimise the proceeds of the sale. This clause allows part of the transaction price to be indexed to the future results of the company purchased. It's also a clever way of bringing parties together who otherwise would not be able to reach agreement on a sale price.
This arrangement, which can complement a contract of employment, has advantages and disadvantages. If the financing of the purchase can be spread over time in this way, the price will depend on performance. For the buyer, this also means that the former owner is still present in a key position.
M&A in Belgium? Our country has transformed a disadvantage into solid gold
A small geographical market and linguistic and institutional complexities actually encourage openness and agility on the international business front. Interview of Gabriel Englebert, BNP Paribas Fortis.
The Merger and Acquisition (“M&A”) market in Belgium has been growing steadily since 2016, as the Vlerick Business School’s most recent M&A Monitor can attest. Our companies are once again showing their desire in 2018 to expand in Europe and even beyond. Gabriel Englebert, Head of Corporate Finance: « It’s not all about the BEL 20 companies, I assure you. I’m proud to confirm that the companies looking for acquisitions are among the top 300 Belgian firms ».
Looking beyond Belgium at a very early stage
In a narrow national market, made up of different regions and languages, our companies sometimes have to start exporting at a very early stage of their development. As a result, Belgian companies are natural exporters with a decentralised culture that is extremely favourable to M&A. Belgian companies have solid shareholders and management teams that are often multilingual, highly educated and able to recruit international profiles. Our country is also an ideal territory for niche sectors such as life sciences and healthcare, agri-food, aerospace, industry, building materials, services, consumer goods and technology.
"It’s not so much the absolute deal size that strikes me, but the valuation levels. Valuation levels are high, with rising EV/EBITDA multiples."
A combination of factors can explain such high valuations: the scarcity of opportunities, the amount of cash available and the low interest rate environment. "Current EV/EBITDA multiples can hit very high levels well above 10x. Those are big numbers for only the very best companies in the market!"
Exploring new countries, new activities and technologies
Building on their success, Belgian companies are ready to invest in foreign target companies to gain new market access or knowledge of a country, or to test an adjacent product or service. In a third of all M&A deals, the target is a foreign one. On average, these transactions take six to twelve months to complete – the time needed to negotiate the price and terms, conduct due diligences and clear regulatory approvals, taking account all the while of cultural differences, that can be substantial in some cases.
Gabriel Englebert: « Lastly, I would pinpoint two trends for 2018 among the big Belgian groups: the pursuit of innovation – in many cases a specific technology or know-how – and continued investments in the field of sustainability. ».
The M&A market is changing, we need to be innovative
The traditional auction process involving a very large number of potential buyers, used to dominate the market in the past. This type of very standardised process was sometimes contrary to the desire for discretion of our Belgian clients, who favour highly discrete transactions.
Belgian business leaders do not expect the same from their investment banker in 2018 as they did in the past. Gabriel Englebert: « We are in a world of bespoke processes and tailor-made solutions, and I am absolutely delighted about that! Our ‘made-to-measure’ approach is perfectly suited to our bank, which nurtures long-term relationships with our clients. Our teams use their know-how to articulate in-depth solutions. It means, for instance, that we do not disclose all our recent transactions, even though they are very large in number and in quality. Our business is all about discretion and pure trust. »
What’s the investment banking business model in 2018?
We help and coach business leaders making the right decision in complex, life-changing merger and acquisition transactions, of which some are industry-transformational. Is artificial intelligence set to revolutionise our core business? Gabriel Englebert: « Not in my view. Why would a business leader still need us in 2018? The answer is that we completely trust our ability to offer effective but nuanced judgement regarding many complex M&A situations ».
Backed up by their internal experts, business leaders have massive amounts of information and analysis tools available, together with unlimited data available on the web and consultants’ reports on specific fields. But there is actually too much information out there these days and that can result in confusion. In this context of information obesity, we make a real difference in terms of tactical advice and decision-making timing. A profession like ours, which is founded on intangible factors like trust and confidentiality, demands dedication at every moment. Gabriel Englebert: « As for me, I have already made my choice: I am happy to jump on a plane if a client across the Atlantic needs my advice on a complex transaction ».
Timing in M&A: the key to success
Gabriel Englebert: « Our clients’ interests are our absolute priority. We’ll finalize the transaction in less than three months, if that’s what the parties want ». Other elements are sometimes at stake too, such as business succession or the transfer of shareholdings. Consulting your investment banker about family governance can also bring some helpful neutrality to the thinking process.
What about the future?
Gabriel Englebert: « I would pick out two structural factors: (1) The M&A market, which I believe is to stabilise. Central Banks intend to raise interest rates progressively, which can decisively reshape stock market valuations. (2) The profession: the investment banking model will evolve again: in five or ten years’ time, a new generation will pick up the profession that is fantastic on both human and professional terms. M&A ‘advisory boutiques’ are flourishing but a natural selection will be unavoidable and some will disappear. But we’ve been around for 200 years now and I expect us to be here for a lot more years to come ».
A true agreement on the way for family businesses
From September 2018, your family can sit down round a table and reach a negotiated agreement about the distribution of your estate. The aim is to avoid conflict and uncertainty.
In Belgium, it seems self-evident that you should set out a family arrangement for the inheritance of a business as a written agreement. But this agreement will not have any legal standing. A new law hopes to change that.
The purpose of the so-called "family agreement" is to authorise a balanced agreement between the testator and their likely heirs in the case of an inheritance that has not yet been processed, and without applying legal restrictions.
What does this mean specifically?
The first major change relates to the statutory or reserved portion of the inheritance. This no longer depends on the number of heirs, but consists of half the estate. The testator's relatives are therefore no longer regarded as automatically entitled to inherit. If necessary, they may well be able to make a claim for maintenance payments. All children must in any case agree to the distribution of the assets when it does not follow the normal practice.
Another important point for the area of company succession is that targeted agreements can be set up. The value of the shares in the family company that are handed over to an heir as a gift cannot be put back on the table by the other heirs. Goods that were gifted during the testator's lifetime, or bequeathed in a will, are no longer added to the estate in kind, but in value. The heir involved must therefore continue to hold the items as assets in kind. The family agreement can therefore consist of arriving at a subjective balance between the heirs. This means that the inheritance is settled without threatening the continuation of the business activity.
One last change that may apply to the succession for a company is omitting a generation by gifting. Very often the direct heirs are not actually able to run the inherited family business. The only option they then have is to sell the company. If a grandchild, for example, inherits a family business in the form of a gift, the parents will now be able to decide to include the inherited business in their own portion of the inheritance.
Please note that the family agreement that will be available from 1 September 2018 will not help solve all the problems in the world. Despite the fact that recent changes in the law provide more flexibility, succession planning remains a suitable way of preparing yourself against unpleasant surprises due to an inheritance that goes awry. With a fair distribution, you avoid the risk of a joint inheritance, keep the peace within the family, and guarantee the stability of the business activity.
Retaining talented staff is key to successful M&As
According to a Mercer study, wise companies use incentives to retain staff during M&A operations. Here's why.
The indicators are definitive: transactions related to mergers and acquisitions are rising for all markets and activity sectors, notably in Europe. Faced with this accelerating growth, employees sometimes seem to form the weak link in these transactions, whereas they are in fact a crucial asset. A suitable policy of retaining talented staff can be key to the success of the operations.
The Mercer Study (June 2017) provides several lessons for companies concerned about a policy of retaining staff during an acquisition:
- A policy of retaining staff is not limited to managers and directors. It must concern all profiles in a company, notably employees with critical skills. In general, it is the quality of the profiles rather than the number of employees concerned that should take precedence.
The relationship is inversely proportional between the cost of such a policy (overall allocated budget) and the value of the operation it relates to.
Personalised financial incentives, which are essential operational tools, vary depending on the timescale involved. The most common forms are bonuses or one-off monetary payments in the short-term and allocation of shares in the long-term.
Retention policies can vary in form, depending on the location of the companies acquired. Thus, in the United States the amounts (wages, benefits, etc.) in play will be the highest. In Japan, the incentive to remain is almost mandatory. Indeed, it enables compensation for the almost systematic lack of knowledge investors have of the special features of the local market.
Finally, a warning: in the long-term, financial incentives alone will not ensure the success of a policy of retaining talented staff during an M&A operation. Development prospects are also taken into account by employees in this type of transition, as is confirmed in a recent study by Willis Towers Watson.
Why retail needs to invest in grocers
In the UK, Tesco has got its hands on a chain of small independent retailers. The small shop is being reincarnated due to more spread-out consumer behaviour.
The convenience store market has attracted greater attention since the announcement of the acquisition by Tesco of the Booker chain in the United Kingdom for EUR 4.4 billion. This transaction should enable Tesco, which is beset by strong competition from other supermarkets, to diversify and become a big player in distribution to both private individuals and businesses.
Announced at the end of January, this acquisition should take effect in late 2017 or early 2018. The reasons that lead Tesco to Booker are clear: the group already represents 30% of the British grocery market and this share could increase by 2 or 3% once the acquisition has been validated by the shareholders.
This represents a shock wave in the UK. 80% of the 41,000 convenience stores in the UK were previously fully independent, or part of purchasing groups such as Costcutter and Nisa. These groups continue to play a big role on the local market, holding a substantial share of the food market: EUR 44 billion out of total sales of EUR 210 billion.
The Saturday food shop is a thing of the past
According to IGD, the market share of the small grocery should see growth of 11.7% in the next five years. This growth may be surprising, but it can be explained by a change in British habits. People are moving away from doing the weekly shopping in big supermarkets and instead go shopping more often when they need to, behaviour known as 'top-up shopping.'
"Our revenues have always been satisfactory, but there is now a lot more competition on our market and our margins have really reduced over the last few years," explains Vijay Patel to the Guardian, an independent retailer since the 80s.
He confirms the trend for the small shop:
"I used to know 98% of my customers by name. Now I would say I know about 50%. I see new faces all the time, but customers are also less loyal."
Joining with Tesco should give Booker breathing room. Around a decade after Aldi and Lidl set up shop on the English market, competition has grown fierce for small retailers.