When it’s time to cash in: Resource Guide to selling your business

Many people dream of selling their business. There is often much to be gained — both financial and otherwise — but there are many obstacles and pitfalls. Being calm, fair, reasonable and organised can be the difference between success and failure.

First, you must make your business saleable. It must be profitable, growing rapidly, own or have access to superior technology, or have another valuable point of difference. 

Ideally, the business could be run without the sellers, at least in the middle term.

Upon completion of the sale, you will need to ensure as far as possible that your important customers, suppliers and employees will remain with the business.

You can use the below SmartCompany Plus piece to see how well prepared you are for the sale. Try to do as many as possible in good time ahead of the sale process or, if that is not practical, before it is complete: 

Start here

1. Checklist: 20 things to do before selling your business

Initiating a sale process

It is often desirable to use a mergers and acquisitions (M&A) adviser or broker to sell your business. They will know likely buyers and possible purchase prices, as many of them specialise in particular sectors.

You will also need to discuss the sale with your accountants and lawyers. You will need to be aware of likely obstacles and outcomes at an early stage, including tax consequences. 

These advisors should work well together to advise you on the best way to proceed with your sale.

They will help you prepare a flyer and a more detailed “information memorandum” (or similar documents) to distribute to interested parties on a confidential basis.

They can also help you compile a data room for shortlisted buyers, respond to questions and run an auction process. Obviously, competition (or at least perceived competition) between buyers is likely to accelerate and optimise the sale of your business — just like it would if you were selling your home.

However, some buyers will not engage in competitive processes, at least beyond certain points (for example, when significant due diligence or other costs are likely to be incurred) and will insist on an exclusive period of time to finish their due diligence, negotiate the sale documents and obtain any necessary finance. Sellers should try to keep this period as short as possible, combined with the threat of introducing competing buyers if the exclusivity period ends.

Other less-tailored advice and more generic (often online) advertising platforms are provided by some brokers and can be more appropriate for smaller businesses with greater cost sensitivities.

It is often preferable at an early stage for a seller to require an offer letter or term sheet from the buyer to ensure that most of the key terms of the sale are agreed, subject to due diligence and other conditions before the sale process progresses very far.

Due diligence

You will need to be prepared for significant disruption to your business. 

Sale processes absorb a lot of time from business owners and management teams. This needs to be carefully managed to ensure it doesn’t impact the business and affect the outcome of the sale process. The more organised that you, your team and the advisors are at the start of the process, the less disruption there is likely to be during the process.

Due diligence can be exhausting, time consuming and frustrating. However, if you can quickly and carefully compile a data room of all your important documents (which are complete and, as far as possible, dated and fully executed) then this will help you considerably. 

Often a buyer and its advisors gain confidence from a well-organised data room (and clear, prompt responses to due diligence questions); it keeps costs lower and motivation higher. Importantly, it also provides you with a record of what you and your advisors have disclosed as part of the sale process to allow the parties to specifically agree how to allocate, qualify and limit risks and liabilities.

In addition to financial disagreements (such as on historical or sustainable earnings, normalisations, normal working capital and funding requirements or attainable forecasts) common obstacles and pitfalls include tax liabilities, regulatory and other consent requirements and non-compliance (especially regarding employment matters). 

If part of the purchase price is shares in the buyer, then you may want to do your own due diligence on the buyer.

Sale documents

The sale documents are typically prepared towards the end of a due diligence process to ensure that unnecessary costs are not incurred until the outcome of the transaction is more certain. They should reflect the proposed sale structure, conditions, pricing and risk allocation.

If the first drafts are not fairly reasonable and in line with market practice, then negotiations can be protracted, timetables can become delayed and, in worst cases, transactions might fail.

Unfortunately, sellers are likely to have continued exposure, at least in theory, in relation to the business for some time after they receive the sale proceeds due to warranties and indemnities that are typically required by the buyer. However, this can be reduced or eliminated by a well-run data room and information disclosure processes, as well as carefully reviewed warranties.

In addition, there are increasingly useful insurance products available. Warranty and indemnity insurance is now a familiar product to transactional lawyers and M&A professionals. Buyers (or sometimes sellers) can take out policies that allow little or no recourse to the sellers with reasonable premiums, if the sale process is undertaken by experienced advisors with good due diligence reporting, and with reasonable sale documents that have been prepared and negotiated in line with market practice.

Generally, negotiations have to be measured to fit the circumstances and the parties’ respective requirements. Understanding all objectives and viewpoints will help you to achieve a successful outcome.

Overseas buyers, for example, often take slightly different views and approaches.

Talk through the changes with your staff, and incentivise them to stay. Source: Unsplash/kyliehaulk

Conditions

As you would expect, conditions are included in the sale documents to ensure all necessary things are undertaken by the required time, especially before completion. These can protect both buyers and sellers depending on the circumstances.

Obtaining consent from and meeting with key customers are often important steps before a sale can be completed and the initial purchase price is paid.

Pricing and capital arrangements

The financing arrangements of buyers extend from simple cash offers to deals with high degrees of complexity. 

It depends on the size and value of the business, as well as the sophistication of the buyer. Lawyers are increasingly drafting and negotiating share considerations, payments by instalments, escrows and earn-outs, even for smaller transactions. 

Earn-outs are especially good for bridging price expectations between the parties and frequently based on achieving agreed earnings or revenue targets (often for one or two years) after completion. The initial agreed price is often also adjusted for various matters, including working capital and debt usually by reference to agreed target amounts.

Shareholders agreement

If you are only selling part of your business, or if you are receiving shares in the buyer, then a shareholders agreement may be required. 

This will govern important ongoing matters like board composition, decision making, information rights, further funding, additional incentives and exit requirements.

Similarly, sellers are often required to continue to work for, or consult to, the business — usually on fairly standard terms. However, you may have the ability to negotiate matters that are important to you.

Intellectual property

If the buyer is not acquiring all of the relevant intellectual property, then arrangements like licences and assignments between the parties may be required to ensure they can use the intellectual property in a manner to be agreed between them, including to protect and sustain the value of important trademarks.

Transitional, services agreements

Sometimes, information technology and other practical or technical business matters are agreed in service agreements — frequently with detailed schedules and service levels set out by the parties.

These can also provide important first steps or rules for the successful handover of a business.

From completion

Once a sale has been completed, there are a number of immediate actions to take, including notifying staff, customers and the market, if applicable. 

New business plans and budgets, “100 day plans”, or similar management tools are commonly used to coordinate the early stages and development of the business under new owners. Significant continuing input may be required from the sellers, at least in the short term.

Sellers are often required to agree not to (among other things) compete with the business or poach customers or staff for agreed periods and in certain areas after completion. 

These restraints can be enforced by the courts; they should be negotiated and documented carefully, including with necessary exceptions.

In summary, with good organisation and careful management using experienced advisors and well developed documents and processes, even complex business sales can be successfully completed on time, without unnecessary risks and with fair and reasonable outcomes.