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Limestone Grey

Dev-Bank Wales MBO
20 September 2023

Preparing Your Business for Sale

Written by:

Rob Cherry 


Peter Lynn and Partners



Selling a business may be the most significant and most important decision in your business life. A successful exit requires preparation well in advance of your proposed exit to maximise the value and opportunities to secure a sale.

Getting the right advice from the beginning of this thought process is vital, and the following crucial matters need to be considered:

Optimising the value of your business?

Key factors here are operating profit or EBITD (earnings before interest, tax and depreciation charges).

This is the classic benchmark for valuation – a profitable business would usually be valued as a multiple of this figure. The appropriate multiple will depend on a number of factors – economic conditions, robustness of customer base/revenue streams, whether the business is on a strong growth path amongst many others.

However, a clear plan (made years in advance) to maximise valuation at the time you put the business “on the market” will ensure you can achieve the best value.

Who Are My Prospective Buyers?

Do not assume that your only option will be to sell to a competitor.

Indeed, such an assumption can prove dangerous as, when the time comes, there may be no “trade” purchasers out there – and even if there are, they will likely simply have an eye for a bargain.

Do not overlook the possibility of a management or investor-led buy-out.

In particular, do not dismiss this on the grounds that your management team:

(a) isn’t up for it

(b) isn’t up to it

(c) can’t afford it!

If you have nurtured a management team over a few years leading up to your planned exit, this may well be an option available to you.

Introducing them to equity participation at an early stage through (for example) EMI options or growth shares can help encourage an appetite for ownership succession.

And if they prove themselves capable of taking the business forward, there are funders out there who will support them in putting an acceptable deal together.

Share Sale or Asset Transfer?

Business acquisitions will fall into one of these two categories, and we can fully advise on the merits of both.

A share sale may be preferable to a seller who wishes to achieve a “clean slate” sale – all assets and liabilities of the company transfer to the buyer. However, this is likely to involve a greater buyer requirement for warranties and indemnities to be given by the seller(s) to ensure the buyer doesn’t inherit unknown liabilities.

An asset purchase allows buyers and sellers to “cherry-pick” the assets and/or liabilities they wish to buy/sell. The target company remains in the control of the shareholders, with only the purchased assets/liabilities being sold.

We can help advise on the practical and taxation benefits of both.

How Do I Reduce Any Potential Liability as A Seller?

This is where an experienced corporate lawyer can make a major difference. The starting position with any business acquisition is the principle of “caveat emptor”, or “buyer beware”.

Sale agreements will contain warranties, guarantees and indemnities, as well as non-compete covenants, and the negotiation around these is very important. Having experienced advice on hand for the due diligence and disclosure process is vital to avoid future claims.

How Do I Keep Legal Fees Down?

By using a law firm with a proven track record in sales, mergers and acquisitions.

Our corporate lawyers have decades of experience advising on the sales of all sizes of business, from owner-managed SMEs to global, multi-million-pound corporations. We focus on coming up with mutually acceptable solutions to the inevitable negotiation stand-offs and will enable you to achieve the best available terms.

Our team is not only well-resourced but with seasoned lawyers on board who have extensive, sector-specific knowledge, we are well-placed to advise you.

What’s more, we can guide you from an early stage in your exit planning to ensure you put yourselves and your business in the best possible place to achieve a successful exit when the time comes.

How Should The Sale Be Structured?

In order to obtain the best overall valuation for your business on sale, it may be sensible to consider:

  • Deferred/Staged Payments

The purchase price is paid in a number of monthly/yearly instalments to assist with the buyer’s cash flow. This may yield a higher overall sale price. We can advise on the security for the staged payments, including personal guarantees and charges on property /assets or shares.

  • Retention

Careful advice is needed in circumstances where the buyer insists that a percentage of the purchase price be held in a retention or escrow account for a set period effectively to act as security in respect of claims by the buyer. Expert advice is needed on the precise wording or even the necessity for such clauses.

  • Earn-Out

Often a feature where sellers will stay on as part of the business management for a period after the sale (for example, to ensure customer relationships are passed seamlessly to the new management). These are sometimes complex terms where part of the purchase price is dependent upon increased revenues or profits (or maintaining them) in the year or two after the sale. There are many options to secure a fair return and enforce payment – having an expert fighting in your corner can make all the difference.

The above are just a few considerations, but whatever the business, you will want an experienced and expert team in your corner.

To arrange an initial meeting with our team to discuss your options and plan for a way forward, contact:

01792 450010

Peter Lynn and Partners

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