Planning to sell a business

You’ve taken that killer business idea, nurtured it over the years and eventually grown a successful enterprise, and now you’re keen to sell up and move on to whatever’s next.

This is where things can get complex, and there’s plenty to consider. Fundamentally though, business owners in this situation who think and plan ahead give themselves a clear advantage and are more likely to see both a higher financial return and be able to better shape the kind of deal they want.

With that in mind, here’s a quick guide to help you get the most out of your hard work on the business, and negotiating a sale.

Plan ahead

  • How much do you want or need? When? Are you willing to defer cash now for a potentially larger capital sum later?
  • Do you want to retire? Or would you prefer to stay involved with the business? Willingness to continue in an employment or consultancy role after sale may help to increase the price, and may be a non-negotiable criterion for the purchaser
  • Do you feel obliged to have a family member or longstanding employee carry on the business?
  • Is the preferred buyer part of, or the whole, management team? Current management might offer a lower price, but may ultimately be the only viable purchaser
  • Are you looking for a fixed sum on sale or would you consider an earn-out? Fixed cash consideration on completion provides the safest return, but you may see a larger return if you’re willing to consider deferred or contingent consideration. One thing that’s definitely to be avoided is taking risk without additional reward

Who is the likely purchaser?

As a seller, you’ll need to think carefully about the type of buyer you want to attract, and the benefits, or otherwise, that they may bring to the deal, such as —

  • A trade buyer, who may be able to offer a premium price
  • The existing management team, who may be an easy choice, but who may have funding constraints
  • A management buy-in team, who would offer fresh perspective, but whose price might be restricted as they would likely be looking for unrealised potential to make their investment worthwhile
  • A third-party investor, who would judge the acquisition on financial criteria only, and who would likely want continued commitment by you, the seller, in terms of a handover period as well as continued investment
  • The employees, by way of a tax-efficient employee ownership trust

What is to be sold?

You’ll also need to consider what the sale actually comprises. Is it assets or shares? A specific part of a larger business? Perhaps you’d be keen to exclude property from the sale, because the full value of this property may not be reflected in the price if it’s based on a multiple of profits, or because the purchaser has funding constraints.

Another thing to think about is whether you’d want to exclude certain assets such as intellectual property rights, and licence their use to the purchaser in turn: realising a greater return on investment.

Why will the purchaser buy?

In the same way that each purchaser and business is different, so will be the reasons for choosing to buy. They could include —

  • Profitability of the business — the purchaser will be concerned about historic profits and also anticipated future profit, so timing of the sale might be crucial
  • Existing management may be viewed as key, in which case the seller may wish to ensure there are service contracts in place with suitable restrictive covenants
  • Large customers or a wide customer base may be attractive to the purchaser — you as the seller avoid being indispensable to these relationships
  • Intellectual property rights could be important. Appropriate registration and documentation should be locked down accordingly

What’s clear is a great deal isn’t always about the best price: a number of other factors are undoubtedly important too such as attracting the right buyer — one with the right reputation, culture and ability to inspire trust — in a deal that works for both parties.

And that all starts with solid preparation.

This article originally appeared in The Leader in December, 2018

Andrew Stott

Senior associate Andrew Stott advises on a wide range of commercial and corporate matters for public and private sector clients: including corporate transactions, company and partnership issues, funding, commercial agreements, contracts and intellectual property matters.

Posted, 14 December 2018 by Andrew Stott
Categories: Commercial contracts | Corporate