Do you want to exit your business?
What do you need to do to get your business ready for sale and achieve the best price?
Firstly, you need to ensure that all the financial and management information is up to date, and that historical information is also available for comparative purposes. This is the information that a potential purchaser will focus on when considering whether to make an offer or not.
Management information on your customers, the sales trends over the past years and the projected sales over the next few years will also be useful. If you have produced future budgets and cash flow forecasts, these will certainly add weight to the expectations for future growth in sales, or cost savings opportunities.
Documented policies and procedures should also be in place for aspects of the business. Your systems and processes need to be operating effectively and efficiently and the management reporting needs to be timely, accurate and comprehensive enough so management decisions can be made. This will be an important factor for a potential buyer.
One of the most difficult things for a business owner to do is to make a self assessment as to the value of their business. Most owners tend to work in the business, not on it, and accordingly get too close to make an impartial call on value.
If you are serious about selling you need to ensure that the business is priced to sell, is operating efficiently, has accurate financial data and that there are opportunities for profitable growth.
How should you go about marketing your business for sale and what options are there?
Traditionally businesses are marketed in a proactive way through Business Brokers, your Accountants or Real Estate Agents. A more passive option is to use newspapers or internet sites.
What is the sales process likely to include?
Normally, any interested party will request information on the business before a decision to proceed is made. It is ideal to put together a high level financial summary and overview of the business in a document called a “Sales Information Memorandum”.
Before any information is released to any party a Confidentiality Agreement should be signed by all parties. This gives some degree of protection as to how the information can be used, and by whom.
Having this information available may lead to an interested party either making an offer on the business, or consider a Heads of Agreement or Conditional Agreement. At this stage you need to consult with your legal advisor.
Normally, as a result of an agreement being signed, there will be a number of conditions that may need to be satisfied by either the prospective purchaser, or you as the vendor. One of these conditions is usually Due Diligence.
Due Diligence is a process normally undertaken over a two to four week period, when the prospective purchaser and their advisors effectively put the business under the microscope. The purchaser and their advisors basically audit the business to confirm the information that they have requested is accurate.
Where there are a number of potential purchasers and/or the vendor wishes to keep the potential sale of the business confidential, the vendor may collate all relevant information on behalf of prospective purchasers. This information can then be shown to a number of interested parties at the same time, without alerting staff, suppliers and customers to the potential sale of the business. Your accountant and solicitor may assist you in this regard.
The primary purpose of due diligence is to give a purchaser some comfort that the business is operating in such a manner as you have described to the buyer. As the vendor you must avoid making misrepresentation to the potential buyer.
In undertaking this process the advisors would normally have a comprehensive checklist which includes financial aspects, legal, and operational aspects. This will include but not be limited to, reviews of all contracts, leases, patents or trademarks through to verification of fixed assets, staff levels of remuneration and statutory compliance issues such as occupational health and safety records.
Although this process may be seen as time consuming and possibly inconvenient, it is necessary for the purchaser to gain an understanding of what the opportunities are, and if there are possible issues that may impact on the sustainability of the business in the future.
What are the outcomes of the Due Diligence process?
Based on all the information to hand, and in consultation with their advisors, the purchaser can make an informed decision on whether or not to proceed with the purchase of the business. Traditionally there may be discussions between the vendor and the purchaser on findings within the due diligence process.
This may then lead to a re-negotiation of the price offered or specific restraints of trade against the vendor or staff. If there is any doubt as to the accuracy or robustness of the sales / income figures, the purchaser may ask the vendor to insert a warranty clause into the agreement. This clause may stipulate that there be some legal remedy or “claw back” from the vendor if sales targets are not achieved by the purchaser.
Ultimately the sale of a business gives rise to other issues that we will explore in future articles. These areas include:
- Taxation implications as to what is being sold, i.e. shares in the company or the trading entity
- Business valuations
- Estate and taxation planning
- Passive or active investment
- Appropriate business and taxation structures.
Robbie Neilson is a Director with RHB Chartered Accountants Limited.
Disclaimer
It is recommended that you consult your advisor. No liability is assumed by RHB Chartered Accountants Ltd for any losses suffered by any person relying directly or indirectly upon the article above.
Published in Bay Business Times, February 2011
