Can you Find it – Business © 2017 Please click here, not forgetting to include your full contact details should we need to speak to you. THE FULL STORY…YOU CAN ONLY SELL YOUR BUSINESS ONCE – GETTING IT RIGHT IS CRUCIALPublished in Can you find it Business Edition on Friday, August 4th 2016
Grooming process: Considerable effort will have to be devoted to positioning the business for sale and maximising its valueFor most business owners the ability to sell their business on the best available terms is a critical issue.
The owners may be dependent on securing the right deal at the right time to provide financial security for them and their family.
Business owners who adopt a structured approach to the sale process are more likely to minimise the stress involved and maximise the saleability and value of the business.
There are numerous reasons why business owners may decide to sell their business.
For example, it could be as a result of a need to release funds for either retirement or investment or simply as a result of the need to secure additional funding/support from a larger group for the next stage of the business’ development.
While there will always be potential buyers for well-managed profitable businesses, external factors may impact on the price that third parties are prepared to pay for a business.
Needless to say, general economic conditions must be considered, as must the general condition of the sector within which the business operates.
Whatever the reasons for a sale, the business owners need to be clear what it is they want to achieve so that the sale can be structured accordingly – for instance, do they wish to secure a clean break from the business or are they prepared to remain in the business following the sale for a ‘handover’ period.
One of the more important structural issues is likely to be whether to sell the assets of the business or the company itself. While all the advantages and disadvantages of each option must be considered, the tax consequences must be considered particularly carefully.
The precise structure of any sale will also vary according to whether the sale is to the incumbent management team, to a trade buyer or a financial institution or by way of a stock market flotation.
Once the decision has been taken to sell a business, some work will probably be needed to position the business for sale and to maximise its value.
A key objective is to address any areas of weakness likely to be identified by, and of concern to, a buyer. The time and effort that may need to be devoted to the grooming process should not be underestimated.
Key issues to consider and address are likely to include:
n A strong management team being in place – the business should not be to be too reliant on the business owners.
Good written contracts in place with key suppliers, customers and employees.
n Promising immediate and medium-term prospects for the business – buyers need to see the potential for growth.
Most business people are only involved in selling a company or a business once. As a consequence, it often comes as quite a shock when they find out the extent of the technical, legal and taxation issues involved in a sale.
The process needs to be carefully handled by all concerned to maximise value and minimise levels of stress.
The process will involve:
n Preparing an information memorandum. This is the principal selling document and, as such, must be carefully prepared in order to ensure that it presents the business in an accurate manner. Commercially sensitive information should be withheld.
n Identifying potential buyers.
Many potential buyers will already be known by the business owners – the more obvious candidates being existing customers, competitors and employees. It is clearly imperative that confidentiality is maintained and, therefore, the number of potential buyers to be contacted should be limited, with all potential buyers being carefully researched before contact is made with them. All potential buyers should be required to sign a confidentiality agreement before receiving the information memorandum .
n Indicative offers. Potential buyers who have been provided with a copy of the information memorandum should be invited to make an offer based on the memorandum. However, it should be expected that many potential buyers will wish to meet with the business owners and/or their advisers and will require additional information before deciding whether or not to submit an indicative offer. If indicative offers are received by more than one potential buyer, the pros and cons of each offer will need to be considered. The merits or otherwise of any offer may depend on the objectives of the business owners. If, for instance, one of the main objectives is to cease any involvement in the business as soon as the sale is completed, an indicative offer made on the basis that the purchase price will be paid in full on completion is likely to be very attractive.
n Heads of agreement. Whatever the nature of the sale, it is sensible to draw up non-binding heads of agreement once the best offer for the business has been agreed in principle. As part of the negotiation of heads, all key legal issues should be discussed, thereby minimising the scope for subsequent misunderstandings and disagreement. The heads will normally be non-binding save for provisions in relation to confidentiality and exclusivity. Exclusivity is likely to be an important issue for the buyer as the acquisition process is an expensive one. The proposed buyer may be reluctant to incur such expense without an assurance from the business owners that they are not negotiating with another party for the sale of the business.
n Due diligence. Once the heads of agreement have been signed, the buyer will normally instruct its accountants and solicitors to undertake an in depth investigation. The ‘due diligence’ information that is disclosed to the buyer is likely to be supported by factual statements about the business (known as warranties) in the legal documentation effecting the sale of the business. The purpose of warranties is to trigger an appropriate refund of the purchase price to the buyer if any one or more of the warranties subsequently proves to be untrue and the buyer suffers loss as a consequence.
n Legal documents. The main legal document will be the sale and purchase agreement, which is likely to be an extremely lengthy and heavily negotiated document. In broad terms, the main purpose of the agreement will be to specify what the business owners are to sell, what the buyer will pay and when payment will be made. Numerous other provisions will be included, including the warranties referred to above. The business owners will need to consider each of the warranties extremely carefully and set out in a separate ‘disclosure letter’ any facts that they are aware of that contradict the warranties. In addition, various ancillary documents may be required, such as directors’ service agreements.
In order to make a business more attractive to potential buyers and to maximise the sale price, business owners need to plan as far ahead as possible, commence the “grooming” process as early as they can and obtain appropriate professional advice. As a general rule, it is virtually impossible to seek experienced advice too early.
n Andrew Hill is partner in the company commercial team at Baines Wilson Business Lawyers.