Having spent years of hard work establishing your business, you need to consider carefully your exit plan.
Putting a plan in place
Your accountant and solicitor may be able to introduce you to potential buyers or recommend business sales agents. You may have nurtured a management team with a view to a buy out or have potential external buyers in mind. The nature of the buyer will raise different legal issues and you need to factor this into your planning.
Top tip: getting the right deal done takes time. You need to build in time to prepare your business for the sale process and tackle the inevitable housekeeping to present a ‘clean’ business. This may involve reviewing your contracts and policies (data protection the obvious hot topic) and resolving any disputes.
Hiring a professional adviser
Getting advice early saves time and money in the long run. Your solicitor and accountant should work together to help you structure a transaction that can be documented sensibly from a tax, accounting and legal point of view. You want to sell confident that the outcome is the one you want, and that you achieve a clean break with no lurking liability to the business/your buyer.
Top tip: your accountant and solicitor should have a strong appreciation of your motivation for the sale and your goals. This is key to determining the myriad of approaches in later stages of the transaction.
Business valuation and structure
Most advisers will say this is an ‘art rather than a science’. You will, no doubt, have a ball park figure in mind but seek advice from a suitably experienced valuer.
The vast majority of sales involve payments being made over a period of time so you need to focus on timing for payment and consider seeking security for any deferred payment arrangements. You may be willing to work in the business for a defined period after the sale and there may be an ‘earn out’ element payment to you depending on the performance of the business during that post sale period.
Top tip: deferred payment arrangements and earn outs deserve very careful attention early in negotiations. Involve your solicitor at the ‘heads of terms’ stage.
Bear in mind that you are likely to face a second round of negotiations effecting price when the due diligence is complete and the terms of the business/share sale agreement are being negotiated. Leave something in reserve.
The sale price is likely to be based on a formula and various assumptions set out in the business/share sale agreement, often tested against completion accounts which are prepared after the sale completes. This means your outcome is not certain as at the date of the sale.
Top tip: ensure you have any ‘legalise’ or ‘accountancy speak’ explained to you fully so that you can be confident of the various outcomes.
Finding the right buyer
You will need to weigh up various factors when assessing the bids you have received and consider the risk of a transaction becoming abortive especially if a buyer is a competitor. A cash buyer is usually the ideal buyer.
Top tip: if your buyer needs to borrow then understand how your buyer plans to finance the purchase so that you and your solicitor can properly assess the buyer’s ability to proceed and anticipate the likely hurdles.
The buyer (and possibly its lender too) will conduct financial and legal due diligence on your business to check what they are buying and spot any issues. This entails asking a suite of standardised or bespoke questions which you need to carefully answer with input from your accountant and solicitor. A confidentiality agreement should be in place and you will no doubt consider carefully the timing of release of your most sensitive business information especially when your buyer is a competitor.
Top tips: prepare your business for sale to pre-empt issues that will otherwise arise from the due diligence process. Speak to your solicitor about this to see what work you should be doing. If you tackle and resolve issues early on you can circumvent delay or the need to give potentially costly indemnities to your buyer in the sale agreement.
You might be expected to warrant the accuracy of the responses you give, so be careful. This is sometimes inappropriate and could result in unexpected liability for you.
The sale agreement
The devil is in the detail and the sale agreement will be a lengthy detailed document usually including a suite of warranties about all aspects of your business, its tax and VAT affairs. You need to be confident that you can make these various promises and to the extent that you cannot, your solicitor needs to prepare a disclosure letter (and related disclosure bundle of documents) to qualify those warranties in the appropriate way.
Top tip: this is key to protecting yourself against a warranty claim and you must be very thorough to ensure that the buyer understands the nature of the disclosure you are making.