Early-stage negotiations for the sale of your business can be daunting for lots of reasons, but they are crucially important as they lay the foundations for the rest of the transaction.
Although initial discussions are rarely legally binding, you could put the sale at risk of falling through if you try to make drastic changes to the core terms you agree at the outset.
Here are 5 things that really need your attention at the start of the process in order to increase the chance of a successful sale.
1. What’s the sale price? You probably already have an idea about the bottom-line figure you will accept. But think wider than the sale price itself. How will it be paid? Do you want all cash on completion or will some of it be delayed, or conditional on future performance of the business? Will you accept any non-cash consideration, such as shares in the acquiring company which might enable you to reap additional rewards in the future? If you are agreeing to any performance-based payment, make sure this is clearly defined and can be objectively assessed.
2. What will happen with the debt/liabilities of the business? More often than not, buyers want to take your business over debt-free. Any mortgages and other liabilities will therefore need to be paid off on completion. If the business has a number of assets on lease / hire purchase, the buyer might be prepared to take those contracts over on completion (although the finance company would usually need to consent to that).
3. How will the sale be structured? Make sure you take appropriate advice from your accountant as to how to structure the sale in the most tax-efficient way for you. Ideally, you should work with your accountant for 12-18 months prior to the proposed sale to get the business in good shape and maximise the sale price.
4. Are you prepared to stay on in the business post-completion? For many owner-managed businesses, the buyer will want the owner to stay on for a specified period (usually 1 or 2 years) after completion to ensure smooth continuity for the business. The transition from being the business owner to an employee/ consultant can be difficult. Consider whether you are prepared to agree to that arrangement, and if so on what terms.
5. What will you do after the sale? If you’re planning to head into retirement after the sale, this won’t really be an issue for you. But for those who aren’t at that stage, think about your future plans. The buyer of your business will want some comfort that you won’t immediately set up in competition with the company you’ve just sold. Restrictions affecting your ability to be involved with competing businesses, dealing with customers/clients and even employees are required as a condition for most sales. The time period for these restrictions will vary, but typically buyers will want a non-compete clause for 2 years. Make sure that these are carefully worded to suit your future intentions, otherwise your options could be limited further down the line.
Putting together heads of terms setting out the key points you have agreed can be useful, however you probably will not want these to be legally-binding. We recommend taking legal advice when putting the heads of terms together, to avoid any ambiguity as to what you are committed to and what is non-binding.
Don’t forget! Make sure you have a suitable non-disclosure agreement in place with your prospective buyer before sharing details about your business – or even that you are planning to sell. Should the news leak out, this could cause unnecessary concern among staff, customers/clients and suppliers.