Current and potential business owners looking at selling or buying businesses need to understand that the purchase price is not the only factor to be considered. The handover arrangements are equally important.
I have previously discussed the earn-out clause in this blog, and since then I have been made aware of several businesses that have been courted by larger companies when business was booming, and then, after enduring significant distraction and interference, have had the buyout fall through.
In the meantime they have lost significant momentum, and often key staff. They must now regroup and refocus, which for many is hard to do after having one foot out the door.
On paper they may not have lost anything, some have even been able to keep the initial down-payment, but the business itself has usually lost plenty.
The earn-out clause or other handover arrangements should not be used as substitutes for due-diligence in the lead-up to the sale agreement. While the vendor may feel that the due diligence is an intrusion on the business, and potential problem for staff moral, it is a minor discomfort compared to the pain an aborted buyout will cause for both parties.
In preparing a business for sale, you need to not only get your financial records in order, you should also put yourself in the shoes of a range of potential purchasers and develop a Q&A style fact sheet that addresses any issues you have identified.
This fact-sheet will vary markedly from industry to industry, but should provide the potential buyer with the information they need in order to decide if the business is for them.
The handover can then be more one of the departing CEO to new CEO, and be limited to introductions to the relevant systems, staff, suppliers and customers.
If the owner also performs another role, such as lead consultant, then this can also be transitioned appropriately to the relevant person at the appropriate time. In this scenario, the departing owner would receive a salary for the duration of the transition, but the ownership responsibility and profits would be transferred on day one.
If you are going to enter into any sort of ongoing buyout or handover arrangement, then it is essential to match the transfer of money with the transfer of responsibility. It is also important to have a degree of comfort in your ability to work alongside the other party for that period of time.
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Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment. BizExchange has a directory of independent advisers and business brokers and information on valuations.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
