When you decide to sell your business, you may be walking into a minefield of issues that you have not encountered before.
In this issue, we get down to the nitty gritty, and outline for you the remaining 6 top legal considerations to be aware of, as you prepare yourself for a sale:
1. Get ready for due diligence
As part of the sale process, a buyer will want to conduct due diligence of your business. This is when they will review the accounts, and investigate other areas of your business.
Being prepared for due diligence will make the process quicker and easier, and result in a higher likelihood of a smoother transaction.
I have known of many transactions that have fallen apart at this due diligence phase because the seller had not been prepared before hand – make sure that’s not you. Make sure you understand the financial and legal items that a prospective buyer will be looking for, so that you can show your business in the best sale-ready condition.
2. Get your contracts in order, and key clients and suppliers locked in
Make sure the key relationships in your business are supported by solid written agreements that are up to date. This includes relationships with any key clients, key suppliers, your contractors etc.
Your contracts should also be specifically geared up for a sale, and contain clauses that assist you in an easy transition to a new owner.
I highly recommend that you make sure all of these contracts are reviewed and updated regularly to ensure that when the time comes for a sale, your sale price is not diluted as a consequence of a buyer taking a dim view of the protections you have in your contracts.
Bear in mind that these contracts can often be pivotal in helping you to prove that your business has locked-in and transferable value.
3. Get your premises secure
Review your business leases and ensure that the lease does not expire during the time you are looking to sell the business. Be prepared to deal with an assignment of the lease to the buyers. Sometimes when sellers are in a hurry to sell, they forget that issues like the assignment of leases can take time.
If the premises are freehold, it may be worth considering if a sale and leaseback would be beneficial.
4. Get a good a confidentiality agreement ready to go
You should have a good quality confidentiality agreement ready to hand out to potential buyers before discussing any specifics about your business, and definitely before releasing any financials, client details or company documents. This document should be on hand and ready to go.
5. Once you find a buyer – consider carefully how you might want the sale to be structured
- Will the sale be structured as cash, shares, or cash and shares?
- If cash, will this be a one off cash payment? Or upfront plus a deferred payment?
- If you are taking part of the sale as a deferred payment, what are the conditions to the deferral – will this be an agreed amount, or will it be calculated by reference to the performance of the business after sale?
There are many important legal implications tied to each of these decisions. An upfront payment may be the most appealing option, but a buyer may often require that the deal is comprised of some deferred payment.
If part of your payment will be deferred (as is often the case) then it is very important to consider what steps you should be taking to secure those payments. Will the deferred payment be guaranteed? Will you be able to take some security over the purchaser, over the shares, or over the assets of the company?
If your payment is tied in part to an earn-out, you must ensure that you have worked through the details of the calculation of the earn-out payment very closely. This can often be an area of dispute – so it is very important that you work through these calculations carefully. And while earn-outs may increase the final amount you receive, you have to bear in mind that you may not receive as much as you expect (or at worst, you may not receive anything at all).
6. And finally – know your proposed timeframe – and get realistic about it
If you want to move quickly on a sale you need to make sure you have “all of your ducks in line”, so to speak. A sale can take a long time to negotiate, get the contract agreed, and do all of the steps required in transacting the sale – and sellers often badly misjudge how long the process will take. Make sure you get good solid advice from the start to help you build realistic timeframes around all of the key steps that are involved once you find a buyer.
Many of these items will need to be addressed a long time before you start down the path of gearing up for a sale. For example you may need to restructure the business to optimise it for sale – and if that is the case, this may need to be done years before a sale.
A large proportion of sellers that I meet have just not thought about these issues in the detail that they should have, and sometimes by the time I come along, its too late.
The message is that there is a lot to do to prepare yourself for a sale, and it is never too early to start planning towards achieving a great outcome. Contact us on [email protected] if you would like to discuss your business sale needs.
Joanna Oakey, the author of Buy Grow Exit, is the founder and Managing Partner of the commercial law firm, Aspect Legal and host of the successful business podcasts Talking Law & The Deal Room. She brings decades of experience-based insights from working with business owners (and their advisors) on acquisitions, exits, and general commercial legal matters.
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