Many readers may well be very experienced in the subject of selling a business but this series of articles is derived from a presentation given at the Business Show at ExCel in May 2019 and is geared towards the SME business owner looking to sell their business who has had little experience of the selling process.
This is the third and last in a series of three articles in relation to the process of selling a business.
In our experience at Anderson Shaw, many business owners say, in retrospect, that they wish they had done more to prepare the business for the sale. This tends to come into particular focus as the due diligence and legal stages begin and after a buyer has signed the Heads of Terms.
STEP 3: Marketing the Business – the marketing strategy will need to be defined and this will depend on your view of how it needs to proceed. Some Sellers are mortified of the damage it may do to their business if there is even a sniff of them selling out in their marketplace. In this case it will be typical to determine exactly who you wish to sell to and arrange to make the right level of contact with them and in the right way. This may be through an existing contact or it may be via your current professional advisers (accountants or lawyers) or via a Business Transfer agent such as us.
Most sellers will not be this concerned, but nevertheless wish to keep things as quiet as possible. Generally this will mean some kind of advertising, in the relevant outlets, but anonymously and as widely as possible.
Other sellers will not be concerned about their business name being immediately publicised as being up for sale and again this will generally be done by advertising but on a full disclosed basis. When I refer to advertising I also include to other specialist business brokers, the professional advisers networks and to known potential buyer groups i.e. private equity players etc.
STEP 4: Buyer contacts and Negotiating the Deal – obviously dependent on your target Buyers, you should typically hope to have several interested parties who will look at your business in some detail – you’ll also no doubt get a whole lot of time-wasters who are not credible buyers and are just there out of interest or are chancing their arm trying to get a desperate seller and a real “bargain” price.
There is a current vogue for buyers to try to buy businesses “no money down” and effectively look to the business itself to pay for it’s own acquisition. This is typically done by the seller agreeing to deferred terms and maybe using any surplus cash in the business or generating cash by some form of asset-based financing.
Now in itself this is not an issue, but it probably does mean the seller agreeing to potentially a more significant deferral of when they receive their money than otherwise. Also watch out for burdening the business with excess borrowings that may be a real anchor to it and cause cashflow problems. If the sellers’ payment is only after finance costs have been paid (and maybe even some capital loan repayments) and the business cashflow goes awry then the seller may be penalised for this whilst they’ve got little or no control over the business.
Go into it with your eyes open and you can decide how and if you want to proceed with this potential type of buyer.
You will need to make sure that you only disclose confidential information to those buyers that you think are serious that can meet your target criteria (price, structure and timing) and have entered into full confidentiality agreements with you. You should expect to set aside a decent amount of your own personal time to meet up with these potential buyers and have your best sales hat on when you do meet them. The Buyer meetings are absolutely critical, as with most large transactions you will have been involved in, a lot of this will come down to chemistry and how both you get on with them and how they get on with you. It’s hard (but not impossible) to complete a business sale between parties who don’t get on, and don’t have some fundamental trust in each other, but it will be harder.
You will need to get to the point where you place your bets on one winning buyer and set-off with them; keep the other viable potential buyers warm if you can because a lot can go wrong post the decision as to who to choose and actually getting to completion and you may just need to go back to one of them. Ahead of the final contract and once you have agreed the outline terms, you will generally enter into the so called Heads of Terms document, this sets out all the key terms agreed between buyer and seller. Whilst legally non-binding (apart from things like agreeing an exclusivity period for the buyer), you should still try to make sure all the key things you’ve agreed between you are included. These heads of terms will form the starting point for the final contract itself.
Negotiating a deal isn’t necessary just all about the money; you may have some other drivers as well.
Here’s an example of what may have been a wily old buyer:
It is claimed that the four Goldberg brothers, Lowell, Norman, Hiram, and Max invented and developed the first automobile air-conditioner.
On July 17, 1946, the temperature in Detroit was 97 degrees!
The four brothers walked into old man Henry Ford's office and sweet-talked his secretary into telling him that four gentlemen were there with the most exciting innovation in the auto industry since the electric starter.
Good old Henry was curious and invited them into his office. They refused and instead insisted that he come out to the parking lot to their car.
They persuaded him to get into the car, at the time the temperature was about 130 degrees, they turned on the air conditioner, and the car cooled off immediately.
The old man got very excited and invited them back to the office, where he offered them $3 million for the patent.
The brothers refused, saying they would settle for $2 million, but they wanted the recognition by having a label, ‘The Goldberg Air-Conditioner,' on the dashboard of each car in which it was installed.
Now old man Ford was more than just a little anti-Semitic, and there was no way he was going to put the Goldberg's name on two million Fords.
It is said that they haggled back and forth for about two hours and finally agreed on $4 million and that just their first names would be shown.
So, to this day, all Ford air conditioners show -- Lo, Norm, Hi, and Max -- on the controls!
It's a good story, and may or may not be true? … but wouldn’t it be great if it was??
But it goes to show that the pure cash in a deal may not be everything.
The flip side of you negotiating hard is that you don’t want the buyer to think that you’re getting away with murder. When something goes wrong during the sales process, and it almost always happens at some stage or another, you may need a little goodwill from the buyer or else they’ll either walk away (and then you have to start the whole process off again) or they’ll take the opportunity of “winning one back over you” as strongly as they can.
As Donald Tusk, president of the European Council, called on EU leaders to treat Britain with respect or risk poisoning future relations, the same goes for you selling the business. If both parties don’t treat each other with decent respect, it won’t work – if you don’t leave the other side at least wearing trousers at the end of the negotiation, they will lose all their dignity and could seriously pull out before you get to completion.
STEP 5: Legal Stages and Due diligence - whilst you may have thought the process up to now has been painful, I’m afraid that this is the stage when the pain goes up a gear. The buyer, or quite typically their advisers, will now start crawling all over your business and testing everything you’ve told them and what they believe about the business. This is generally when you have to produce mountains of documents, from your statutory records, through your last few sets of accounts (and allow some access to the underlying records), your insurance policies, your staff records and employment contracts not to mention all your customer contracts, orders and supplier contracts.
Sometimes (probably not even once in 50 sales) the due diligence may be quite superficial and rather easier than the picture I’ve portrayed, but prepare for the worst … and it’ll probably be even worse than that I’m afraid
The other “half” to this part is the legal stages … and at least here you don’t need to take such a hands-on approach, you should leave this in the hands of your legal advisers.
You really must get proper legal support at this stage and from someone who has good experience of this type of work.
Generally you can expect that the buyer will get the big guns out for this and you need someone strong and experienced to deal with them.
The guy you used to do your will or who dealt with the probate on your late uncle’s estate is probably not the right person.
I won’t go into detail about what the contract will contain, but for those of you who don’t have any experience in buying or selling businesses, you may well have bought or sold a house before and even if you didn’t read the whole contract word by word you’ll no doubt have picked up that there’s much more to it than you might have thought of.
The contract to sell a business, called a sale and purchase agreement normally, is generally a scale even above the house sale document.
Warranties & Indemnities
These will be in the SPA and are effectively you “promising” the buyer that certain things are true
Selling shares means selling history of the company
“warts & all” sale
Get your lawyer to explain exactly what your promising and what the implications are
Get your lawyer to explain about your “disclosure letter” this is part of your defence against potential liabilities and vital that you get as much in as possible
IP / Data Security / GDPR
Quite often sme business owners may not have the expertise to deal with enquiries around some areas; it’s worth getting specialist help to handle the dd from your end if you feel it will add value to your sales proposition.
Expect dd & legals to take at least 3 months
Get your advisers on board, fully briefed as far in advance of the dd starting as you can
Ask them for examples of what they’ve come across before in their dd experience
do a mock run through of what you’d look at if you were the buyer
Start preparing your dd documents well before the dd starts
Those are the 5 steps now completed
They may be the 5 steps to heaven as some of you will remember from Showaddywaddy
They probably won’t all go smoothly
Preparation is key in getting to a successful sale
But hopefully having gone through these 5 steps you’ve now sold the business
what are you going to do now you’ve sold the business?
This should be part of your initial planning
You’re going to find yourself with lots more spare time
well-earned holiday …. What next?
Expect non-compete clauses in the SPA
Take time in your decision making and planning for the sale and you can take it in your stride
As business brokers, we at Anderson Shaw Corporate Finance Ltd, are always happy to advise business owners about any aspect of selling a business and the processes involved. If you are thinking of selling your business, now or in the future, please contact us for a confidential, no commitment conversation. We will be pleased to provide a business valuation and discuss your plans in relation to your business.