How do you maximise the sale of your business? When it comes to selling anything that we own, we seem to go through a similar process of preparing the item. How do we do this? If it’s selling an item online, it’s usually snapping a picture at its best angle possible or even polishing it so it shines that extra bit. Why do we go to the effort of doing this? It’s simple – we want the best possible price for it. This same principle applies when it comes to selling a business. Preparation will pay off if you polish the plus points and this is where our London commercial corporate law team can add value for you as we explain below.
For example, when you walk into a car showroom to buy a car, the car is polished and looks pretty good. This entices you to spend time looking around, checking the specifications, taking it for a test drive and most of all trying to knock the price down.
When you come to sell a business you similarly want to make it attractive to a buyer. The buyer will do a similar thing to you as the person in a car showroom. The buyer of a business will take part in a due diligence process designed to flush out the weaknesses and potential liabilities leading to price reductions if the seller can manage it. The buyer of a business will use their advisors to find out as much as possible about the state of the business being sold. Due diligence can range from looking at the businesses finances, evaluating what the business assets are and the costs of maintenance, taking a look at business performance, and trying to spot future risks that might reduce the value. The buyer will often use this process to argue a reduced purchase price. If the business promises recurring revenues, this will often push up the purchase price and naturally any buyer will want to review the business contracts carefully to evaluate the shape of recurring revenue in the future.
In some situations, a price reduction is just not enough. Sometimes the car showroom agent won’t move on the price – instead, what is offered is road-side assistance for one year. You may have to give similar promises with your business. For example, you may be required to promise that your biggest customer will not stop giving the business work for one year from the sale date. These types of promises are known aswarranties. Buyers will try and go a step further and ask for indemnities (i.e. agree to pay back some of the consideration paid for the sale as compensation for loss suffered as result of an inaccurate promise).
Ideally, you want to imagine what would concern you the most when it comes to buying your business. From this point, you can start to prepare the business for a sale. Every situation is different, although basic things you could look at would be to ensure:
- all important suppliers and customer contracts are recorded in writing;
- key personnel in the business are incentivised to stay and help build up for the sale;
- any liabilities with HMRC are agreed and settled;
- the reputation and the brand of the business is protected as a buyer will not want to be faced with claims of infringement of intellectual property; and
- good management of the business during post-completion.
Another area to review is the equity structure to make sure all of the shareholders can be reached and a minority cannot hold up the sale. Drag along provisions and powers of attorney signed in advance of sale can be very helpful and provide assurance to a buyer that the sale will proceed. If your business revolves around the amortisation of intellectual property your royalty agreements and license arrangements need to be in good shape. Getting your business in order can take time and the process is generally easier if not attempted once a sale is on the horizon and the pressure is on.
When all of these issues are settled before a buyer starts its due diligence of the business with its advisors, and you know what to expect, you will be in a stronger position. Based on our years of experience we can work with you in advance of the sale or purchase and flag up the areas which may need review. The sale process will generally be easier and will give you the confidence of knowing that you have done your best.
Prasan Modasia is a solicitor in our London corporate law team and regularly advises vendors, buyers and investors on the sale and purchase of businesses. In addition to dealing with the legal aspects the team can also handle the tax implications and valuation aspects to put in place the best structure for the corporate transaction.