Simon Wilson shares the pitfalls to avoid when selling a business
Having worked hard to build your successful business over a number of years, it’s important that you approach an exit or sale of your business in a way that sets you up to achieve the best outcome possible.
Equally, as a business owner, you don’t want to fall at the final hurdle when it comes to selling your business. Not least because the sale of a business can often be a once-in-a-lifetime event; it’s important that you are able to make the most of any opportunity by avoiding unsuspected perils.
Below is a short list of information on how to exit a business; as well as my top 5 pitfalls to avoid when approaching a sale of your business.
1. Not maximising value
It’s important to ensure you are maximizing your return when preparing to sell your business, not least because this is often a primary driver behind why you intend to sell a business. Maximising value could mean: –
- timing a sale in an optimum way and liaising with your professional advisers to obtain an overview of market conditions whilst considering business milestones that effect when you’re able to present your business in the best possible light, such as when sales are at their best or following a significant client win. Where sales are on an upward trajectory, delaying taking the business to market for a few months could significantly increase a potential sale price due to the earnings multiples applied by potential buyers to determine a sale price.
- creating competitive tension for the business to find a buyer – we have seen many businesses achieve sale prices far beyond expectations where they have a proper sale information memorandum prepared for their business and engage professionals to search databases and contacts for potentially interested buyers. A proper process can often produce at least a few interested buyers that will make offers and bid for the business. If a sale to a third party is not desired, promoting senior management to create scenarios for management buyouts or succession to a family member can also provide successful business exit strategies.
- ensuring the exit is properly structured – Having the correct legal structure for your sale is key to ensuring that you sell in the most tax efficient way. Also, the correct structure could enable excess cash within a business, above usual working capital, to be used to help increase the price of the business or to be extracted from the business in a way that is acceptable to a buyer. Optimising structure in these ways can add significant additional amounts to the net proceeds you receive.
- presenting your business in the right way – good internal practices and readiness for a sale process are a key part of this. For example, engaging a lawyer from an early stage to check your key business contracts and company books/registers are in order can avoid situations where buyers are put off or seek to use discrepancies to argue reductions in price which significantly reduce a price you are hoping to achieve.
2. Not minimising risk
There are a range of issues that arise and need to be dealt with as part of a sale process. Risks can arise even as early as your initial discussions with a potential buyer. For example, prudent buyers will often request certain financial and commercial information on your business before committing to a purchase; so it’s important to take care over what you are sharing and protect the information with a suitable confidentiality/non-disclosure agreement from a prospective buyer so that business confidential information can’t be taken and used by competitors to gain unfair advantage where a sale does not proceed. Once you are negotiating any sale, there would usually be a detailed purchase agreement under which you would have to make contractual promises (warranties) to the buyer relating to your business. Such warranties need to be considered carefully and limited where possible in a skilful way. Where there has been a warranty breach post-sale that was not properly limited, an unwary seller could be liable to potentially return/reimburse a buyer for the whole purchase price (or more!) and for a long period of time. To avoid this risk, a purchase agreement should be properly drafted and negotiated by legal experts in order to include limitations that curb breach of warranty claims in terms of amount, time periods and scope. A formal legal disclosure exercise should also be undertaken in order to disclose potentially problematic matters to a buyer that are then acknowledged as not constituting breaches to warranties.
3. Not preparing your business for sale properly
Prudent buyers will often conduct due diligence/research on a target business before committing to any purchase. As a seller, you need to be confident that your business will stand up to such scrutiny by preparing your business for sale in the right way.
Some sellers seem surprised to discover that errors within their legal compliance, administration and legal documentation of the business can dissuade potential buyers and ultimately scupper a sale. For example, if key business contracts are not documented properly, much of the deemed value in your business could disappear, potentially costing you millions in potential sale value or removing the possibility of a sale completely. Ensuring the business financials and accounts are in order is also crucial, regardless of whether a sale is in contemplation.
4. Taking your eye off the ball/business
Selling your business is often an intense process which can last several months in total. An unfortunate error made by many business owners involved in the sales process would be where they neglect running their business properly due to the distraction of the sales process. Where business sales drop off, a prudent prospective buyer may seek a reduction in the sale price which could be a lot more than expected given the multiples often used to determine a sale price. For example, a mere £20k drop in sales over a period could translate to a £100k price reduction when using a modest 5x multiple. Having the right internal and external teams in place can help obviate this pitfall; and much of the sales process can be managed by the right team of professionals, leaving you to stay involved in the business during this crucial process and allocate sufficient time to the running of the business.
5. Not obtaining the correct professional advice at an early stage
The value of having the correct professional advisers to guide you through every stage of the sales process should not be underestimated. Some business owners make the mistake of not involving professional advisers at an early stage due to a desire to reduce professional fees and save on costs. However, if truth be told, the right professional advisers should actually save on potential costs by helping you to minimise risk meaning you can have a cleaner break when selling your business and remove the potential for a costly dispute and/or for your sale proceeds to be clawed back by a buyer; and they should add value by helping you to maximise your sale. We have been engaged to advise sellers after Heads of Terms have been agreed; only to see that certain items agreed without our consultation expose a seller to avoidable risk or fail to structure the sale in a way that maximises value for a seller. Expert legal advisers, with experience in advising clients on selling their businesses, are key to any successful exit. It is also crucial to be aware of what tax is due when selling a business as it is usually necessary to pay capital gains tax. The right team of professionals should certainly be part of your business plan.
The intricacies of every sale differ and it’s important to turn to, and lean on, the right experienced experts from an early stage whenever contemplating an exit. This will help you to avoid unnecessary and undesirable pitfalls, with a view to achieving a successful and more enjoyable exit.
If you’d like to discuss any of the above, as well as how to sell a business in the UK in more depth, please call or email Simon Wilson for a complimentary initial 20-minute consultation to explore your options and next steps.