Selling A Business – Pre-Offer Considerations
Picture the scene: You’re a business owner, and the business has been your baby for many years.
Then one day, someone comes along and makes you an offer for the business which is too good to be true. Are you in a position to sell the business there and then in a smooth, relatively painless transaction?
The answer to this question will, of course, depend on various things, including the nature of the business and the buyer.
However, some steps can be taken before any offer is received or a sale process commences to put you in a better position when that attractive offer finally lands.
Various circumstances can prompt the sale of a business.
Some are externally led, such as financial or trading difficulties, or, unfortunately, health conditions. In other cases, a sale may be a planned exit, for example, to enable the retirement or gradual winding down of a shareholder owner. However, interest can also arise unexpectedly from a potential purchaser, prompting the need for quick action to achieve that “too good to be true” deal.
Once an offer is accepted, any buyer will quickly want to gather as much information about the business as possible. This is typically done by issuing an all-encompassing due diligence questionnaire, followed by further questions once the buyer has had an opportunity to consider the seller’s initial responses. The buyer will be looking to find out literally everything there is to be known about the business. Should any problems be identified during the due diligence process, negotiations will typically be required to determine how the problem can be resolved or minimised, or, if that is not possible, how the buyer can become comfortable with the issue and manage their exposure to the associated risks.
Typically, this will involve indemnities being agreed upon, whereby any losses incurred by the buyer from such issues are recoverable in full from the seller.
Alternatively, a price reduction or at least a retention (whereby part of the purchase price is held back for an agreed period of time pending determination of any losses arising from resolving the issue, which may then be deducted from the amount paid to the seller) may be insisted upon, all of which will be documented in a share purchase agreement or similar.
Collectively, this causes additional stress for both parties and requires more time for drafting.
So, what type of issues do I see, and how can these be mitigated against?
1. Skeletons
What if the business has in the past done, or been involved in, something unorthodox or just wrong?
It may be that the issue first arose many years ago and has either been perpetuated since or left lurking and unaddressed. Any such issues will inevitably come to light during due diligence, but by this point, it’s likely too late to achieve an effective resolution while maintaining the proposed deal, assuming, of course, that the buyer is prepared to continue with the deal.
In some cases, the conduct may amount to serious, deliberate wrongdoing, but in many instances, I have seen it fall short of this.
What began as a well-intended plan may have had unexpected consequences, or perhaps the business acted in good faith but on incorrect advice. For example, in one case I had, on accountants’ advice, the company had issued shares to staff from the most lowly upwards, in order to pay dividends rather than salary. This inadvertently resulted in the company making all employees self-employed, consequently leading to a loss of employee contributions. This was immediately noticed by the buy side and resulted in costly payments being made by the seller to the employees concerned to compensate them for losses incurred.
Also, what if your company has shareholders who play no part in the business, are perhaps historic, and in the worst-case scenario, “missing” or uncontactable? This does happen. Steps need to be taken well before an offer is made to locate such shareholders. Ideally, their shares should be brought back under the control of either the company or the seller to prevent these shareholders from being entitled to a proportion of the sale price, despite their minimal contribution over recent years.
2. What is being Sold and to Whom?
A key pre-sale consideration is what is actually being sold? Is this to be structured as a share sale (if a company), or an asset sale (which even for a company may be advantageous to one or both parties)? Secondly however, is there something which may prevent one form of sale?
For example, if an offer is made by someone else in the same or similar industry, are they prepared to acquire the whole of the business? In some cases, not necessarily.
There may be duplicated staff and other issues that will need to be addressed as part of a sale. Also, what if the business has diversified over the years and operates in several distinct markets? One part of the business may be unattractive to the proposed buyer, and therefore, does the business need to be split?
A hive out or similar may be ideally done well before an offer is received to avoid another level of complexity, but it will also result in considerations about who retains the part of the business not being sold.
Similarly, what happens to financial obligations? Will a buyer be prepared to take these on?
In many cases, the answer will be no, as these have to be repaid at completion. In many cases, this will be straightforward, but not always, depending on the circumstances.
Also, does the business have a ready-made buyer?
It’s worth considering whether existing staff may be interested in a management buyout or, indeed, whether a direct approach should be made to a known competitor or even a supplier. Sometimes a simple solution works.
3. Record Keeping
Any due diligence exercise will need to be supported by documentary evidence, hence it’s worth getting records in order as soon as possible if a sale is contemplated.
However, what if records are incomplete or inaccurate? Trading records may need to be reconstructed so the complete picture is available.
Also, we have observed several instances where companies stopped keeping paper statutory books years ago but failed to ensure that electronic books were maintained in their place, resulting in awkward updating or even reconstruction exercises needed before any sale.
4. Conclusion
If you are contemplating selling a business, there are numerous things which are best addressed before any prospective purchasers are even spoken to.
A business sale involves a team of trusted advisors, including ourselves as solicitors specialising in business sales and purchases, accountants, and, depending on circumstances, a business sale broker and/or a corporate finance advisor.
The sooner you speak with each trusted advisor and get them on board as part of your team, the better. Being as prepared as possible and having the right team of experts in place is critical to a successful deal.
So, if you’re contemplating selling a business anytime in the next five years or so, please get in touch with either Nick Tompkin or Lauren Baillie, who will be delighted to have an initial conversation with you.