In the majority of matters, clients approach us once they have already agreed the terms of a deal for the sale of their business. However, there are often tips and advice that we can share prior to that stage that can add value to their deal, either by ensuring they maximise value or that their position is as water-tight as it can be.
Today, I detail some of those key snippets of advice:
- Maximise day 1 value
Clients will often come to us having agreed X amount on day 1, with various elements of deferred consideration or perhaps even an earn out, where part of their consideration is reliant upon future performance of the business. It is important to consider the cash position of the business and whether, if it is cash rich, that can be used to maximise the day 1 payment. You should also bear in mind whether the business could generate sufficient profits to pay out a deferred amount with some element of certainty as to total value to be realised from the sale of the business, rather than a contingent amount dependent upon future performance. Once sold, the seller will have no control over performance but if it can be agreed that the profits are such that a certain amount can be committed to as deferred, then that gives the seller far more comfort as to total realisable value.
- Security
Talking of deferred consideration, if your purchase price includes an element of deferred, have you asked your buyer for some form of security? Agreeing deferred consideration is tantamount to giving the buyer a loan so it is perfectly reasonable that you ask that “loan” be secured. Whether you ask for a debenture over the company being sold (if a share sale) or the purchasing company (if an asset sale), or potentially a corporate or even personal guarantee from the target company or the main individual(s) behind the buying entity. Security ensures there is some recourse available to you to protect your position should the buyer fail to pay the deferred consideration.
- Confidentiality
Have you thought about the personal or commercially sensitive information that you might be sharing with an interested party when they are evaluating your business for a potential sale? What might they do with that information should they decide not to proceed with a purchase? It’s always prudent to consider putting a confidentiality agreement (sometimes called a non-disclosure agreement) in place prior to sharing any such information, to ensure use of that information is restricted only for the purpose of evaluating the business for purchase and should a buyer decide not to proceed, that they are contractually obliged to return or destroy such information.
- Deal structure
We are seeing more frequently that buyers seek to structure acquisitions as an asset purchase as opposed to share purchase. This is great from their perspective as they can cherry pick the assets they want whilst leaving behind potential liabilities. However, from your perspective, as seller, you end up left with a company containing potential liabilities and the costs associated with winding that company up and extracting the sale price. This can be more complex when you have an element of deferred as you must keep the company “live” in order that it can continue to receive the consideration under the sale documentation and with that incur ongoing administrative costs of owning a company (regular statutory filing requirements). Most importantly, it can impact your personal tax position such as potentially losing business asset disposal relief on the sale value. We would always suggest where someone is looking to sell their business that they work hand-in-hand with their accountant or tax advisor to ensure that the deal structure makes sense for their personal tax position too.
So if you are considering selling your business, do think about whether it is worth looping in professional advisors from the outset so you put yourself in the best possible position both legally but most importantly, financially too.
We’re always here to help and have pulled together a helpful guide as to what a business sale might entail and a guideline of expected timescales for a sale process. Please don't hesitate to contact me for a copy of this document.