February 7, 2022
Running a business comes with a litany of highs and lows. From your first successful fundraise, to terse chats with your finance team, venturing into business guarantees no day is the same. Depending on the nature of your business you may reach one fateful day when you're ready for your next adventure. You've taken your business as far as you can, and you're ready to hand over the keys to the kingdom.
For some, this moment is an exciting step forward, while for others it's a bittersweet pill to swallow. Regardless of the circumstances, this decision usually comes with a line of challenges. To lighten the load, our legal experts have put together a list of 10 things to consider before you put your business up for sale.
Are you ready for your next adventure? Then let's start.
To maximise your return and sell your business in the best possible way, you need to consider the market and whether it is a good time for the sale. You also need to set a realistic timescale to prepare and get your house in order.
Sure, there are circumstances when the business is running out of money and a quick sale seems like the only viable option. However, if this does not apply to you, give yourself some time to prepare a sale plan and put together the right team. For example, you could consult a corporate finance broker who has an in-depth knowledge of your market and the ability to guide you as to the timing of your business sale.
Most buyers want to ensure that the business they are looking to buy has good corporate governance in order to avoid losses in the future. It is therefore a good idea to evaluate your practices and ensure the business is fully compliant. You should consider engaging an appropriate advisor to help you. Such advisors would be able to evaluate your business, help you to polish your systems and processes, consult on internal documents and advise you on the best sale structure that would align with the interests of shareholders and investors.
There are many different ways in which a sale may be structured, and this will be largely driven by how the existing business is set up, and what a buyer wants from the purchase and tax considerations. The most common types are: (1) asset sales (which involves the sale of some or all of the assets of a company, while you still retain the ownership of the selling company) and (2) share sales (when you sell all shares of the company). While your corporate finance advisors will help you to choose the structure, your legal advisors will help you to implement it.
It can often be hard for entrepreneurs to put a value on their business particularly if their assets are largely intangible. Nevertheless, obtaining a valuation is an important step in a business sale as it helps to determine the economic worth of your business. It also makes sure you don't price your business too high or too low.
In order to get a valuation, you will need to prepare a detailed explanation of your business, goodwill, profits, key customers, do market research and consult with your advisors to put a realistic price tag on your business. You should discuss with your advisors the basis on which the business will be valued as there are many different ways in which to perform a valuation and some industries favour a particular method. It is important to remember that the true value of a business is what someone will pay for it.
Taking things one step further, Niall McGinnity, CEO of Nuvem 9 had this to say on gaining the best valuation for your business,
"A visible set of strategically relevant KPIs measured regularly and managed by the key players in the business will allow a company to gradually and steadily grow the company towards the target valuation in the months and years ahead of any acquisition event".
If you'd like to learn more about measuring KPIs and tracking metrics, here's a useful guide outlining the top 9 metrics to track for SaaS businesses.
It may be tempting to put off seeking help from outside advisors to avoid the fees. In reality, most businesses that do not engage legal and tax specialists usually incur higher fees and enjoy fewer net proceeds because the parties do not fully understand the business sale process. As such, it is a good practice to engage advisors at the early stages of your business sale as they will not only assist you with the sale structure, documents, and tax consequences, but also guide you through this process and give you peace of mind. They will be your first point contact for many issues so it is important to find legal and tax advisors that you trust and can rely on.
Once you accept an offer from a buyer, it is normal practice to enter into a process known as “due diligence”. This is an important process whereby you provide the proposed buyer with relevant documents from your business to support the proposed valuation, such as your key customer and supplier contracts, license agreements, your annual accounts, financial projections, and internal policies. To avoid delays and pitfalls along the way, it is worth organising all of your documents in one data room and allowing your legal advisors to review them before you go to market.
One of the common reasons why buyers are interested in acquiring some businesses is because they own valuable intellectual property rights. As such, you need to consider whether you are willing to sell all or some of your IP rights. If you do, you need to make sure that you actually own those IP rights and have the necessary license agreements in place. It might be worth engaging an IP specialist, especially when you are selling a patent, registered design or trade mark. Luckily for you, we have a team of IP specialists who can help you do just that.
A key part of selling a business is making it as attractive as possible to secure a buyer. Therefore, you should review your key employee, supplier and client contracts to make sure they are all up to date and clear. Moreover, many supplier agreements have “change of control” provisions that either oblige you to notify the supplier of the sale or automatically terminate that agreement. Be sure to keep an eye on those clauses and ensure your key suppliers are happy with the sale.
One of the key issues to consider when selling your business is how to protect the valuable confidential information of the business during the sales process. The main reason for this is that if your competitors knew about the sale, they may use this opportunity to either steal your customer base or information related to your products or services. As such, buyers and sellers usually enter into a confidentiality agreement which ensure that parties do not disclose secret information to third parties. It helps here to speak to legal advisors to help you prepare or review one.
If you have a successful business that makes a lot of profit and operates in an attractive market, you will probably have a stream of buyers at your door. However, if you are in a position whereby you are struggling to find a buyer, engaging a broker might be a good option. A business broker will help give your business market visibility where you want it, increase your chances of finding the best fit and even contact potential buyers on your behalf.
While passing the entrepreneurial torch might be an exciting prospect, it's important to approach the sale strategically. By following the above ten steps you can lay the foundations for a sale that does your business justice. By carefully considering your next moves, and putting together the right team, you can make the most of all your hard work.
At Stephenson Law we support businesses from idea stage to exit, meaning we're uniquely positioned to help businesses attain their true worth. If you're ready to make the leap, find out more about how we can help you here.
We're the corporate law experts in helping you plan the next route of your journey. Find out more about our corporate law offering here.
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