You may have bought and sold many businesses, or the sale may be the first and last one you will ever undertake. Either way, getting it right is vital to achieving the best possible purchase price on the best possible terms, and to avoiding costly mistakes which are so easily made. The legal process is often the last hurdle of the sale process, although advisors will sometimes promote the idea of pre-sale ‘grooming’ (or in other words ‘putting the house in order’) which will typically involve input from commercial solicitors.
Who do I speak to first?
Very often a sale will be led by a seller’s accountant or specialist deal-maker. It cannot be understated how important it is to get the right person, and you will need to be confident that your advisor has the skill, experience and time to carefully guide you through the process. Solicitors can sometimes get involved at the beginning to assist with the negotiations, to help provide ideas about structure and to provide things like ‘confidentiality’ or ‘non disclosure’ agreements.
How much is my business worth?
This is the burning question for most sellers! The answer, unhelpfully, is that a business is worth ‘what someone is willing to pay’ or ‘market value’. So that was the unhelpful bit. As a guide, the starting point will be to apply one of a number of formula to arrive at a starting price. A very typical and basic starting point will be to work out the underlying profitability of a business, and to apply a multiplier to this which is not uncommonly between 3 and 5. This of course is a number crunching exercise based on the financials of the business and so is usually undertaken by your accountant. The value of a business can have a lot to do with the potential purchaser’s business and what ‘they can do with yours’. So for example, if the purchaser has a huge customer base into which it could sell your products or services, your business might be worth more to them than it might be to other buyers. Given a choice, you may need to choose your purchaser carefully, and not focus only on the price being offered. This is very much the case if the purchase price offered is payable on deferred and/or contingent terms or where you are being asked to continue working in the business for some time to come. If the purchaser is not financially robust, or there is a lack of trust in the integrity of the buyer, then you will run a greater risk than might otherwise be the case of not being paid the deferred price.
Finding a buyer
You might have a number of potential buyers in mind, who might be competitors, suppliers or even customers. If you do not have any buyers in mind, your accountant might, but if not a specialist advisor will be able to undertake research to help identify potential buyers. Once a buyer, or hopefully a list of potential buyers are identified, they will need to be approached to gauge their interest. This will usually need to be done carefully through your advisors and initially on a ‘no names’ basis. Keeping the sale process confidential can be very important to avoid unsettling customers and staff.
Striking a deal
Assisted by your accountant, you will aim to agree some of the basic terms of the sale which will include price, terms of payment, security for ‘deferred’ payments and possibly your continued involvement with the business. It is often prudent to record these terms in what is often referred to as a ‘heads of agreement’. It is important – to help maintain good relations through the course of the process – to get a clear understanding of the deal between the parties to avoid disputes later on, and it is usually a good idea to get solicitors involved at this stage to draft and negotiate this document. Further details of the sale process are explained in our other guides setting out the two main legal structures for selling a business.