When you eventually find that precious buyer for your business, you could be forgiven for wishing to shout praise from the rooftops to your favourite deity or hit the top end bars to celebrate. Finding the right buyer and securing a good price are what you have worked towards for so long. You have built your baby, enjoyed the income it has provided and now, it is time to hand the reigns over, cash out and head for the sun.
But before you skip on down to the nearest high-end motor dealership or start thumbing the brochures for hotels in Bora Bora with wall to wall cocktails, remember that the deal isn’t quite done yet. There a still some hard miles to cover before those $$$’s hit your bank account and the bubbles overflow from your glass.
Keep that champagne on ice. You are close but these can be very hard miles.
I can still recall vividly the first ‘proper’ deal on which I worked, back in 1997. As a young company lawyer I had been involved in sales and acquisitions before, but most of these had been little more than business versions of domestic conveyancing. This time around I was one of two lawyers acting for a group venture capitalists on the acquisition of a business from a party who desperately needed to sell. Being desperate to sell is not a good position to be in when encountering hard-nosed capitalists as the seller soon found out.
Working on that transaction I learned the stuff that they don’t teach you at law school. I came to understand comprehensively that a deal at the completion of the transaction can be very different to that at the start. Importantly I also learned how to make that happen and how to stop it happening.
There are various pressure points in a transaction after the buyer has been found. Each with their issues and opportunities. They begin with the offer arriving.
‘What is a term sheet?’
The offer to purchase a business will come in the form of a letter of offer, a term sheet. There is no set format for this document. It will typically explain the basic financial terms and the material conditions to purchase. Most sellers initially stop reading when they get to the line with the figure in. Often, they only started reading at the line with the figure in.
The arrival of the term sheet is the moment when you know formally that you have a buyer. Its arrival is usually met with the excitement of finding of a Willy Wonka golden ticket. As we all know from the book, it is a ticket to play and not necessarily, a guarantee of the grand prize. For that reason, it is crucial to stay calm and focused. Be the Charlie Bucket and not one of the other kids.
The offer coming in will be the trigger for the next stage of negotiations. This time probably as to the structure of the transaction. Incorporated businesses are sold by either an asset or a share sale. Business owners usually want to sell their shares whereas buyers want to buy only the assets. Share sales can result in potential liabilities transferring the buyer and understandably buyers are not too keen on these. Get ready for that debate.
‘How much do I get?’
So it might have to be an asset sale. If an asset sale is the process then so be it. You are still getting a good price for it. You are still happy with that figure.
Just about then your business adviser, accountant or lawyer, will gently whisper the word ‘tax.’ I even found myself whispering the word as I typed it. Tax will inevitably be a factor in any business sale and will always require specialist advice from your advisers. The top and bottom of it will be that some will be payable, so early advice when you first consider the sale of the business can be highly beneficial.
Clever tax planning can ensure you keep a sizeable amount of the sale proceeds.
‘Even after tax it is still a good price. Right?’
Well that depends. What your business is comprised of needs to be carefully appraised in order to decide whether the offer truly meets the value of the assets. It may seem a good price at first but once the company accountant has started to break it down against the business assets there may not be as much profit as you first hoped.
Remember the buyer’s business advisers will be starting from the position where they can secure the purchase for the least amount of outlay as possible. There is scope to re-negotiate the price if the offer isn’t sufficient.
‘What do you mean that I am not getting all of it on completion?’
Here comes the rub. Deals are often structured with the capital paid to the buyer in a variety of ways. A buyer may simply not have enough cash to pay the whole purchase price up front. The purchase price may include the requirement of a loan from the seller to the buyer or may come in the form of a series of performance based ‘earn out payments’. The latter are conditional, and if the business post sale does not perform, then these payments are not made. There may also be retention or holdback provisions. These operate where the part of the payment is placed in escrow until potential liabilities associated with the sale have crystallised.
The offer will also be subject to the right to conduct full due diligence. During this exercise, the buyer’s advisors will have full access to the businesses documents and the opportunity to review the security in the company’s client base, contracts and systems. Issues with compliance, poorly drafted contract terms or missing service agreements for key employees provide an ideal opportunity to revalue the offer price. As I frequently say to clients, ‘Get your house in order before you even get to that stage.’ As my VC clients first taught me all those years ago, everything becomes negotiable during due diligence. If you haven’t then you may want to start to revisit what you can expect to receive for that sale.
‘Bon voyage, adios, ciao ……Hang on a minute the buyer wants me to do what? I have to stay on for 24 months? It is part of the deal?’
Phew, you got through due diligence and there is still a decent wedge coming your way. Time to buy that RV and hit those open roads. Cape Tribulation here you come. Retired at last. Well, not just yet.
Continued employment for owner-managers can often be a requirement of the deal. It enables a buyer to ensure that their investment is protected which the business is transitioned into their ownership. Sometimes this arrangement is beneficial for the seller as it offers a further period of income to benefit from. I have however been involved in transactions where the strategy of the buyer is to pay some of the purchase price by way of salary to the seller and to see how hard that seller can be pushed during the post-sale employment period to avoid paying the salary. Certainly, if psychologically the seller thinks they have gone, only to find that they are tied down for a further 2 years or so, it sometimes doesn’t take much to encourage them to go.
‘To infinity and beyond…’
So okay, I appreciate it isn’t always as difficult as this. It is important to be alert to these as issues.
As I frequently say to client’s when that offer comes in, the receipt of a good offer is great news but it is important not to take our eyes of the end game. When the money is in the bank, then it is time to pop those corks.