Plan well ahead if you are thinking of selling your business. Joseph Miller explains where you may need to shape up in order to be fit for sale and maximise potential proceeds.
Selling your business is likely to be the largest and most important deal you will ever conclude. Like anything, you will only be able to sell if there is someone willing to buy and the better shape your business looks in, the more you are likely to receive.
The consequences of your business sale will be significant both financially and emotionally. If you want to achieve the right result, then you need to plan well ahead as some changes may not be possible overnight. You need to give yourself time to ensure the business is in good health before inviting potential buyers to "kick the tyres".
Sorting out any problem areas as you go along will create a negative impression, will invite much closer scrutiny from the buyer and will weaken your negotiating position.
So what are the key factors to consider?
Appoint expert advisers
Selling a business is like any negotiation. If you are going to maximise its potential you should seek the advice of experts who deal with business sale transactions on a daily basis. The right professional advisers will more than make up for their fees in the value they bring to the transaction.
The key advisers you need are:
- Accounting – the first and most important aspect of any buyer’s due diligence will be financial. You will need to appoint an accountant to make sure the finances of the business are in order, with accounts prepared in a clear format. Don’t forget that tax implications can play a fundamental part in the structure and timing of the transaction, so take advice on this from the outset.
- Legal – you will need the services of a specialist solicitor. Do not make the common mistake of appointing your usual solicitor if they do not have specific experience in business sales. Experienced corporate solicitors, such as ourselves will be able to help you put all the legal affairs of the business in order and plan for your personal security after the sale.
- Corporate finance – depending upon the nature of your business and your target buyer group, you may wish to use a business sale agent or a corporate finance adviser or to help you find the right buyer and negotiate the sale.
In most cases the buyer will be considering your business not only on current performance, but also on its potential. You will achieve greater value if you can sell a vision of an improved future for the business. A buyer will also feel more confident if they can see that forward planning is taking place. If you don’t have a business plan, create one. If you do have one, look at ways of updating and improving it.
Preparing for the buyer’s legal due diligence
Once your potential buyer is satisfied with the business prospects and financial performance of your business, they will want to make sure everything else is in order.
Your lawyer should be able to provide you with a legal healthcheck and advise you where action is required. The main areas to concentrate on are:
- Employees – make sure that all employees have employment contracts and that benefits packages are clear. Also try to avoid substantial changes to your workforce for a period before the sale, especially in key areas.
- Contracts – make sure (as far as possible) that you have clear and current contracts with your customers. Although a buyer can never be certain that customers will continue to use your business’s goods or services after the sale, a lack of customer contracts will fuel any uncertainty the buyer may have about this.
- Property – make sure you have good title to any premises the business uses. Bear in mind that negotiations with landlords can be protracted, so can result in delays if not dealt with in advance.
- Intellectual Property (IP) – depending upon the nature of your business, your IP may be one of your most fundamental assets. Make sure that any registrations have been carried out in the relevant jurisdictions and that any IP licences are current.
- Statutory obligations and business licences – check that you are complying with your statutory obligations and have current licences relevant to your industry.
- Corporate structure and documentation – if the transaction is a share sale (i.e. you are selling your company rather than its assets), you will need to make sure that the share structure is clear and that the company’s corporate records are up to date.
- Litigation/disputes – as far as possible, these should be concluded before the process starts.
If you have not dealt with them in advance, a properly conducted legal due diligence process will inevitably uncover any skeletons in your business’s closet. The more the buyer discovers, the greater the scrutiny will be and the lower their confidence in your business. You risk a more protracted sale process, achieving a lower sale price and possibly even losing your buyer altogether.
You should remember that you will be giving contractual promises, known as warranties, to your buyer about the state of your business, so sweeping issues under the carpet will just expose you to further liability down the line.
Timing of sale
Your business may be subject to some seasonal or other trends. If this is the case, you should aim to time the sale when finances and forecasts are on the up. You will also need to consider the state of the economy in general and in your specific sector.
The sooner you start planning, the more time you will have to achieve all of the above. Any attempt at quick fixes will likely be picked up by the buyer and may damage the trust between the parties. Furthermore, any operational changes will need time to bed in or they will be treated with scepticism from your buyer. In summary, if you are thinking of selling your business, it is never too early to start planning.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.