Selling a business is time consuming, emotive and can be costly if not executed correctly.
As our economy continues to prosper there is increased interest in small and medium enterprises across all sectors.
This coupled with the availability of funding makes it a great time to consider an exit strategy Once you have decided to sell the hard work begins!
In this article we explore a range of considerations when selling a business.
Preparation is key to achieving the best value. The preparatory phase is when you should engage with your advisor and carry out a thorough review of the business and it’s value drivers. Ask ‘why would someone want to buy my business’ and then focus on this.
Prospective purchasers will demand transparency, so dealing with potential red flags and ‘deal breakers’ in advance of the buyer due diligence process will help protect value.
Telling your business’s story is important and understanding how to present it’s financial information, both historic and forecast is a crucial element of the process.
What is the succession plan? With many owner managed businesses the owner is the business. A potential buyer will attribute little value to a business where it’s driving force (the owner) will be exiting or retiring in a short period after sale.
Tax planning in advance of sale will protect value.
You should firstly consider the shareholder structure.
Is there an opportunity to get family members (children and siblings) involved?
Is there an option to claim retirement relief or entrepreneur relief or through a holding company group structure to claim participation relief on exit?
Identify prospective purchasers
Understanding and researching the potential buyers for your business is a very important part of the process. Every business owner will be able to name a number of potential buyers, be that a management team or a key competitor.
However there might be other potential buyers who may not appear on a list, who may have other strategic reasons for buying and may pay a premium for the business, i.e. new market entry, to acquire IP or to gain access to resources (e.g. people).
Keeping the process confidential during these early stages is important as it may ‘spook’ potential customers or suppliers and may unsettle key employees. Having an advisor on board will help maintain confidentiality.
Negotiating the deal
Once potential purchasers are identified they may enter a period of limited due diligence.
A lot of valuable insight can be gained during this period for the seller in terms of how the due diligence is conducted the type of queries and questions raised. Having this insight early will help in the price negotiation phase.
You should never name your price, solicit offers for potential acquirers setting strict deadlines for offers. It is important that the seller maintains control of the process at this stage.
A second round of offers maybe required until a preferred bidder is selected after which they may enter a period of exclusivity to carry out a more detailed assessment of the company.
This selection criteria should not be based on price alone and factors such as the ability to execute the deal and sources of funding should also be considered.
Closing the deal
Negotiating the transaction documents is the final part of the process and also very important for both buyer and seller protection.
Considerations will need to be given to the deal structure. Will part of the consideration be based on an ‘earn out’ from future profits? Will the owner manager be required to remain with the business for a period post sale to help with handover of relationships and integration?
The sale process is a time consuming and involved process for the business owner and often management teams are distracted by the process taking their ‘eye off the ball’ to the detriment of the business.
Getting your advisers involved early in the process will help avoid many of the common pitfalls and ultimately protect the value that in many cases has been built up in business over many decades. At Roberts Nathan we have a wealth of experience advising owner mangers through the transaction process both on the sales side and buy side. Please contact us if you would like to understand more.