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Selling your business: getting your money's worth
10-May-2006
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Think of an Olympic sprinter. They work hard for years with the vision of a gold medal. They measure performance, improve processes, and make significant investment of time and resources. Sure they get satisfaction and reward along the way, but it is all about winning that Olympic Gold medal. After years and years of hard work it all comes down to a single event. For the athlete it is a ten-second race. For a business owner, after years of working and building a business, it is that short period of time when you sell.
It doesn’t matter what the preparation level has been, if you ‘screw up’ the sale, all that hard work has gone to waste. Of course, if you haven’t done the hard work beforehand, in business as in sport, you have little hope of the big win.
In other articles we cover the stages of the build up work: ‘Planning your Transition’ and ‘Managing for Transition’. The third and final stage of the business transition process is ‘Transaction Management’. This is the process of exiting the business in such a way that you achieve your transition objectives.
The key steps in the Transaction phase are:
- Marketing the Business
- Negotiating the Sale
- Settlement
- Moving On
Let’s have a look at these in a little more detail.
There are many important things to be done during this stage. It is essential to get an understanding of what value the market will put on the business. We all know you need a willing buyer and a willing seller to make a sale - and buyers will not buy an overpriced business. The real task then is to determine the value and do everything possible to present the business in a way that supports that value.
There is an unpopular three letter word that becomes very important here –TAX. We are interested in the after tax money, which means that the involvement of tax planners and lawyers to structure the sales transaction in the most tax effective manner is vital. Of course, much of the structuring should have occurred in the lead up work to this stage so that you come into this process in good shape. The key thing at this point is that what is good for you regarding tax, may not be so good for the buyer – which is why your tax and legal advisors need to be involved in the sale.
Depending on your country of residence, there are some restrictions around who is licensed to actually sell the business, so you may need to appoint a business broker. This person will actually advertise the sale and deal directly with potential buyers. Selecting a business broker that fits with your existing advisory team is a key decision.
We now need to prepare a document that provides information to the buyer. This is often called a Sales Memorandum, Information Memorandum or Prospectus and it is a critical document. Whilst it must present the business in the best light possible, if it contains errors or is misleading, the ramifications are significant. You need professional help with preparing this document.
And the final step in the marketing phase is to develop a marketing plan which covers how you will inform the potential buyers that your business is for sale. Like selling your house, the correct marketing will give rise to a greater level of interest and if we can create a contest amongst potential buyers then there is only one way the price will go.
This is where the fun starts. The business broker will receive expressions of interest from potential buyers and you are immediately in the negotiations. Buyers will react to every piece of information they experience, from how attractive the Sales Memorandum looks, to the professionalism and credibility of the team handling the sale. The role of the owner is critical in this as it is only the owner who really knows the business.
Your negotiating strategy needs to be in place. Are you going to play hard ball or be conciliatory? What areas are ‘must haves’ for you and what are tradeable? This needs to be sorted out before you start talking to buyers. The key factor in developing your negotiating strategy is the extent to which there is a contest amongst the buyers. Creating a contest is very important and a good sales approach is to keep the parties interested and in the game, even if you know they are not going to pay as much as your ‘favorite’ buyer. Contests, like auctions, are great for vendors, but they add a level of complexity and work load to the transaction process.
The negotiations conclude with a binding heads of agreement (or terms sheet) where both parties are committed and the main points are agreed. There are usually some conditions attached and one of these is that the business passes the due diligence process.
Due diligence is where the buyer examines the actual business records, properties, assets, liabilities and so on to make sure that they are consistent with the Sales Memorandum and any other information provided to the buyer. This raises an important point, and it is another good reason to have professionals involved to help you. If a buyer has been provided with additional information (by anyone representing the buyer) and that information is not accurate, then the buyer may well come back after the sale and demand compensation for all or part of the purchase. Great care needs to be taken in providing buyers with information – this needs to be a controlled and well managed process.
There are several key things that happen between signing a heads of agreement and banking your check. The buyer will complete the due diligence and may try to re-negotiate the ‘heads’ on the basis of some findings. This may be legitimate or it could simply be part of the buyers negotiating tactics.
The full contract is also prepared at this stage. There are many terms and conditions in most sales contracts and because these are common to most contracts they are sometimes referred to as boilerplate clauses. However, they are all there for a reason and they are certainly not boilerplate. Many cover warranties made by the vendor, others cover restraints on what the vendor can do after the sale, and so it goes on.
Your lawyer is there to protect you and will take a very conservative view in the contract. Always ask what the implications, probability and consequences of each clause means. In most cases, you have to work on the principle that you need to give to get, so don’t become too dogmatic during this stage.
Once you have settled the sale and have your money in the bank, a new day dawns. You are free, liberated personally and financially to create and enjoy a new future. But what might this mean?
You have just walked away from your baby, the creation that you built, nurtured and lived day and night for.
Finding the right advisors to help you set up and implement your plans might be worthwhile for you. Just as your business benefited from having a vision, goals and some structures to achieve them, life after business will be a another winner if you give it the same commitment.
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