At Ison Harrison Solicitors we regularly advise business owners on selling their businesses. Selling a business is however a complex process which requires planning, potentially many years before you intend to exit a business. With proper planning, business owners can maximise the value that they achieve from the sale of a business.
What are you selling?
One of the first points to consider is what it is that you are actually selling as this will then impact on how a deal is structured. For instance, if you are selling a limited company, would you be selling the shares in the company?
The advantage of this is that you would be selling the company as a complete package and all liabilities of the company would be automatically transferred to the buyer. However by selling the shares in the business, you would ordinarily be selling the entire business unless you are only selling part of the shares.
In the alternative, are you simply selling the assets or part of the assets in the business? This is called an Asset Purchase. This may involve you selling specific tangible assets, such as machinery, or it could be the rights and benefits of certain contracts or the goodwill of the business. By selling assets in a business, this may enable you to only sell a proportion of the business and continue trading with another portion of the business.
What steps should you take to prepare a business for sale?
One of the key considerations is to understand who will potentially buy the business as this will then impact on the other steps you take. For example, will your business by bought by an existing management team or family member who may already have knowledge of the business.
Alternatively is it more likely that the business would be sold to a competitor or private buyer? Is it a business which may attract private equity investment?
Identifying potential categories of purchasers is essential to understanding the next steps you should take and typically the key difference is whether the business will be bought by an individual(s) already involved in the business or an independent third party.
If you are selling to an individual(s) who are already engaged within the business then this has the advantage that they will already know the business, the customer base and how the business operates. The downside can be that these individuals may lack the knowledge of ‘running the business’ given that they will be assuming responsibilities which they may not have been previously aware of if the seller had assumed these duties. This can be a training issue. Another issue can be that existing management teams may find it more difficult to raise finance to fund the purchase of the business and this may result in a situation whereby the sale price is paid over a period of time, which is what we call ‘Deferred Consideration’. There is always a risk to a seller where payments are deferred particularly if the business starts to fail and therefore it is important that appropriate protection is in place.
If the business is to be bought by an independent entity, it is likely that they will want to conduct a more onerous Due Diligence process and negotiations may be more protracted.
What does Due Diligence entail and how can this impact on the value in the business?
Due Diligence is a process ordinarily undertaken by the Solicitors for the buyer in which the Seller will disclose extensive documents about the business which are then scrutinised by the Buyer. These documents are usually the basis on which the seller will provide certain warranties in the agreement and can also be the basis on which buyers seek to renegotiate purchase prices.
These documents would ordinarily include the business accounts, information on employees, information about key contracts, finance for the business and insurance arrangements.
It is therefore imperative that any issues in the business are resolved before the business is listed for sale. This may include:
- Resolving any disputes with employees;
- Ensuring that employees have appropriate employment contracts, handbooks and policies;
- Ensuring that all clients and suppliers are on suitable contracts;
- Ensuring that any insurance disputes are resolved;
- Ensuring that the business accounts are up to date and any deficiencies in the accounts can be explained;
- Ensuring that all finance arrangements have been adhered to;
- Minimising the extent of any debt the business has, insofar as possible.
- Ensure that any issues regarding the business premises are resolved, for instance in respect of any lease.
How can a deal be structured?
Typically a seller will sell a business for a sum of money, preferably to be paid in full on the day of completion. This is not always possible and deals can be structured in much more complex formats which may, for instance, involve a seller being paid sums of money over a period of months, if not years.
A Seller may also be obliged to continue working for a business for a period of time. This may be as a self-employed consultant or as an employee.
In some deals, a seller may take shares, a permanent or fixed term role or some other financial interest in the business which is acquiring the business which is being sold.
What Advice Will I Need?
Good quality expert advice is absolutely imperative. For many, the sale of a business will be the biggest financial transaction they will ever conduct.
Typically a business owner will need advice from some, if not all, of the following professions:
- Financial Advisor
- Business Advisor
- Business Broker
It is often beneficial for these professions to be involved during the process of preparing a business for sale so as to ensure you maximise the value of the business.
How can I make the most out of a sale?
There are many ways in which business owners can maximise the value of the business, too many to consider in just one article, and some recommendations may be specific to certain industries.
As a starting point it is always good to put yourself in the position of a buyer and see the business from the buyer’s perspective. Key factors which can negatively affect a business’s value include:
- Businesses in which a large proportion of a customer base are intrinsically linked to the business owner. Buyers will be concerned that customers may leave the business once a business owner has exited the business;
- Businesses which are too reliant on a small number of larger customers. Buyers will perceive there to be a risk of losing these customers unless, potentially, they are tied into long term contracts or are tied to the business in some other way;
- Businesses which have large outstanding debts, financial issues or large amounts of credit;
- Businesses with large amounts of ‘bad debtors’
- Businesses which face losing key staff members if a sale is completed. Consider whether key staff members should be incentivised by a sale or are subject to lengthy notice periods.
- Businesses which have consistently lost money in recent financial years or whose income is decreasing.
Conversely choosing the right time to sell a business can positively impact a sale value, for instance if a business has recently secured a lucrative long term contract, if there has been a recent legislative change to the benefit of a business or if a business has secured a valuable trademark or patent.
What is clear is that the business owners who achieve the best price for their business are those who ensure that they take expert legal advice. In many circumstances the cost of such advice will be more than covered by the elevated financial value of the sale and the time, expense and stress which can be caused during the sale of business which is not properly prepared for sale.
If you need expert advice on selling a business, please do not hesitate to contact Richard Coulthard, Partner and Head of Corporate, at Ison Harrison Solicitors who can guide you through the process of selling a business.
Call 0113 284 5095 or email firstname.lastname@example.org