Thinking about selling your business?
Getting the best price and finding the right buyer for your company is so important after you’ve grown it from scratch. Don’t let your blood, sweat and tears go to waste. Read on, for our seven-step guide to a successful company sale!
1. Is your business sellable?
Before you start work trying to sell your company, you need to ascertain that it is sellable. Could you sell your business for an amount of money that would make all your hard work worthwhile?
If you’ve grown a business from ‘idea’ to ‘fully-fledged organisation’ it can be hard to accept that it’s not worth much to anyone else. Some companies are so reliant on the skills, personality, knowledge or connections of their founder that they can’t return a profit without that individual. Others have a great order book, but no idea how it got that way – and no clue what to do if the orders dry up.
Before pinning your hopes on a multi-million pound sale conduct a business MOT by talking to a corporate financier like Jo, Poonam and the team at FDS, to find out whether they believe your business is attractive to buyers. They can conduct a formal valuation, based on their market knowledge and research, giving you a good feel for what you might achieve in a sale.
2. Conduct your own pre-due diligence.
You believe your business is in a healthy state but is it? It’s time to check in the eyes of a potential acquirer, just as you would get your house ready for placing on the market. Take a critical look under the floorboards of your business at the areas a buyer would examine during the due diligence process.
The areas you could focus on include:
a) customer and supplier contracts
b) relationships with sales agents
c) employee matters
d) company documents and processes.
There are lots of areas that can reduce the value of your business, or require you to give onerous indemnities (we’ll explain more about those another time!) that will stop you sleeping soundly, post-sale. By identifying those early, without a potential buyer breathing down your neck, we can help you rectify them in good time and secure the value in your business. Talk to us about our pre-due diligence service to flag up potentially value-destroying issues that you can fix before finding a buyer for your business. We can also introduce you to specialists like Sanjiv Dodhia at ActionCOACH and Natalie Brewer, MD of Elephants Child, who will help you develop your company and increase its potential sale value.
3. Find your ideal buyer.
Some business owners find themselves receiving offers to buy their company out of the blue. While flattering, this can be problematic. If you have not prepared your business for sale or conducted your own due diligence internally, you may find that their initial high offer diminishes sharply when they start looking closely at your business. And once you’ve started considering the money on offer, it can be surprisingly hard to walk away – even when the offer shrinks dramatically.
Ideally, once you’ve prepared your business for sale at the optimum value, you’d engage the services of a corporate financier. They will look at your business and its saleability in different markets. Would it fetch a better price if sold to a trade competitor, to someone above or below you in the supply chain, or to a company whose portfolio would be dramatically improved by a company like yours? Or would your business appeal to a hands-off investor who just wants to buy a cash cow and has no interest in what it does?
Your corporate financier will prepare an Information Memorandum for you – effectively a brochure for selling the business. They will share this with potential buyers to gauge interest, only disclosing the identity of your company when the interested party has entered into an appropriate non-disclosure agreement (which Devant can prepare for you, of course!). If there are multiple potential buyers, you may choose to engage in some level of negotiation with several while you figure out which is likely to be the best fit, culturally and commercially.
Once you’ve secured some offers, you’ll probably want to choose a single buyer to negotiate with, although you may (on advice from your corporate financier) choose to proceed on a non-exclusive basis with two or more.
4. Agree Heads of Terms.
The next step is to agree the Heads of Terms. This is the high-level document setting out the core components of the deal. It will set out the purchase price (subject to the buyer’s due diligence process) and the deal structure, and may include some expectations about the legal terms that will apply to the deal.
So your Heads of Terms may say, for example, that you will receive all of the purchase price on Completion (the term for the point at which the transaction is completed, and the company officially passes from being yours to belonging to your buyer). Many deals these days have an earn-out period after Completion, so that the buyer pays a portion of the purchase price on Completion and the rest one, two or three years later. Often, these secondary payments (the ‘earn out’) will be subject to the company’s performance against certain targets.
We would always advise that you should not sell your business unless you’re satisfied with the amount of the purchase price you receive at Completion. This is because there are lots of ways that a buyer (or even just the market itself) can get in the way of you achieving your earn-out figure! While there are protections that we would seek to put into the SPA (see next step), if you must achieve 100% of your earn-out to reach a figure you’d be happy with, this probably isn’t the deal for you.
As part of your Heads of Terms, you and the buyer will agree whether the transaction will be a share sale or an asset sale. A share sale means the buyer takes on the company as a continuing legal entity, with all the staff, contracts, leases, bank accounts and other ancillary items staying in place. An asset sale enables the buyer to pick and choose which assets (including client and supplier contracts) they will take, and they will usually move these into a new legal entity, or transfer them to their existing company.
5. Negotiate the Sale Agreement.
Depending on which structure you choose, the buyer’s lawyers will draft a Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA). Your advisors would then review and negotiate it.
There are lots of areas of the sale agreement that will be negotiated, as the buyer seeks to minimise its risk in buying the business, and the seller attempts to sell without the potential for big claims against it post-transaction. Some of these will be addressed in step 6, which may begin as soon as Heads of Terms have been signed and continue throughout the negotiation process.
Negotiating the sale agreement may be a simple exercise, but it is often long and drawn out. Matters may come to light during step 6 that cause the buyer to ask for extra protections, or to reduce the price or to change the deal structure. Part of our job (together with your corporate financier, if you have one) is to help you protect the purchase price and deal structure, and to minimise your liabilities, throughout this process.
We will also provide a shoulder to lean on. Selling your company is very stressful, and there are times you’ll just need to let off steam with someone who understands the pressure you’re under. Family and friends who have never been in this position may not appreciate what you’re going through, and confidentiality obligations will make it risky to discuss the deal with others. Your Devant consultants will be here to listen and act as a wise sounding board.
6. Due Diligence, Warranties and Disclosures.
You might think your business is fairly simple. If you’ve been trading for any length of time, though, there will be all sorts of issues lurking in your filing cabinets/servers that a buyer would want to know about!
For a seller, due diligence is rather like inviting a stranger into your home and standing by while they not only look in all the rooms, but rummage through your drawers and cupboards, and ask you to explain exactly how your central heating system works! For a buyer, it’s an essential part of getting to understand exactly what they will be buying.
The purpose of due diligence is:
a) to identify whether there are any skeletons in the closet (e.g. legal, financial, property, HR issues) that might make it worth less than the price they’ve offered
b) to identify potential areas of concern where they may seek additional assurances/indemnities from you
c) to make sure they’ve valued it properly based on your actual financial performance, revenue recognition rules, etc
d) to assess the potential synergies/challenges they’ll face in integrating it into their portfolio and/or achieving their objectives realising the value post-acquisition.
Within the SPA there will be a section on ‘warranties’. This could be anything from a few pages to over a hundred, depending on the value of the deal and the complexity of the business being sold. Each of these warranties is a statement about the business that the seller warrants is true. Unfortunately, lots of them won’t be!
For example, you may have a warranty stating that the company has had no staff disputes. Upon checking in your business, you may remember that you were taken to a tribunal by a staff member three years ago, so the warranty statement is not true. This situation would be dealt with through ‘disclosure’. We can draft the disclosures for you, to help you manage your risk of warranty claims post-transaction.
As you can imagine, this ‘step’ is often a long process! It’s also one that you need to be actively involved in. If there are others in the business who are ‘in the know’ about your deal, they can help you to collect information. It remains your responsibility to disclose all relevant matters – and your liability if you miss something that later results in a warranty claim. Devant can manage your online data room (the repository where all the due diligence and disclosure documents are stored). We can help you understand the warranties, and what sort of things you might disclose against them.
7. Completion (and earn out!).
Eventually, after many late nights, you will arrive at Completion day. This is the day when all of the documents related to the transaction are agreed in their final form. You’ve finalised all the disclosures, assembled all of your company books, dug out your share certificates, prepared all the necessary Board and Shareholder resolutions, and you’re ready to do the deal.
There are various different ways to conduct the Completion itself (especially if buyer and seller are in different countries, or if you have multiple sellers). But essentially, it’s the mechanism by which the sale agreement and any other documents required for the deal get signed, and the money the buyer has agreed to pay for the business on Completion finds its way into the seller’s bank account(s).
It would be nice to think Completion was the end of the story, but often it is just the beginning of the end. After Completion, you may still have to think about:
a) if part of the purchase price is based on an earn-out, how will you achieve any targets needed hit your numbers?
b) keeping aside some of the purchase price in case it’s needed to satisfy any claims made by the buyer against warranties or indemnities
c) complying with any non-compete/no poaching provisions or restrictive covenants the buyer requested in the SPA.
But first… pour yourself a cool drink and book yourself a holiday. You’ll have earned it!
If you’re considering selling your company in the next three years, give me a call for a confidential chat. The earlier you start to prepare, the better the price you’ll realise for your business – and the less stressful the process will be! If someone has made an offer and you’re considering whether now is the time to sell (and whether this offer represents a fair price), get in touch too! We can provide objective advice, and help you ensure you get what your business is truly worth.
Founder and Managing Director, Devant