By JOHN FOUNDLING
CHOOSING the right time to sell a business can be a challenge. There’s often a temptation to wait and see whether organic opportunities emerge, perhaps in the form of an interested buyer offering a market price.
However, reality often doesn’t align with expectations. Pinpointing the right time to start planning, and understanding what to plan for, are crucial steps.
The key is ensuring that each aspect is as robust as possible. Ensure your financial and operational track records are good; this will increase the likelihood of a fair price and minimise the risk of the stalling the deal.
Step one: Optimise your business
Make a thorough assessment across key areas. Assessing the business’s fundamental health is pivotal — the basics must be in place. Scrutinise the financial history, focusing on its record of profitability and reliable reporting.
The people factor is also crucial. Review the status of customer contracts and relationships, and mitigate reliance on a few major clients. On the employee side, identify and address talent gaps within the organisation. Consider which individuals to retain in the case of a sale.
Governance and compliance form the backbone of a reputable business. Stay abreast of relevant regulations and certifications, ensure meticulous records are kept, and keep track of regulatory changes. On the tax front, ensure the business is compliant and seek specialised advice on risk areas such as IR35, CIS, or VAT.
Securing the supply chain is essential. Foster long-term relationships with suppliers and mitigate any risks of supply disruption.
Step two: Set a strategy
Assembling a reliable team of professional advisers is vital — but how do you know you have the right team?
Members should go beyond a surface-level view and understand the business from the inside out. They will minimise risk and keep an eye on the details. A sale is generally a high-contact process, and the best advisers will act in partnership with you.
When selecting advisers, evaluate their credibility. Are they from a reputable company? What experience do they bring to the table? Assess their support capacity: Can they handle the sale, and do they collaborate with your legal and professional teams? Check their skills match your needs. Have they successfully handled sales of similar-sized companies? Do they have access to specialists?
Integrity is key. It’s tempting to gravitate towards those that promise the highest valuation, but wiser to choose those offering a balanced approach. This ensures a smoother journey towards a successful sale.
It can take months to identify the adviser who is right for your business, so factor that into your timeline.
Step three: Deal preparation
Now the focus shifts towards strategic presentation. Collaborate with your advisers to develop an exit plan and show the business to suitable buyers. Again, this can take months.
The first step is to craft a confidential information memorandum (CIM). From business overview to financials, customer base, market analysis, and unique selling points, the CIM paints a vivid picture of your operations.
Once it’s ready, the hunt for buyers begins. This stage requires research skills and market experience. Leverage networks to tap into a wider audience.
Step four: Find a buyer
Market time. Now, your advisers take the reins, reviewing offers and managing negotiations. Maintain business as usual: limiting the impact on the business is crucial.
When in negotiations, bear in mind that this typically takes three to six months. Your adviser will maximise the price and establish the broad terms of the deal, while setting expectations and parameters for the rest of the process.
The best way to do this is by creating a Heads of Terms or Letter of Intent that outlines key terms. Both seller and buyer establish a clear understanding of the deal’s parameters.
Step five: Deal execution
After agreeing on headline terms, sellers often grant buyers a period of exclusivity to finalise the transaction. This phase allows time for due diligence. Plan for this from the outset — it can take six to 12 weeks, and typically covers financial, tax, and legal as a minimum.
While this takes place, negotiations will probably be ongoing on aspects such as the completion mechanism — Locked Box versus Completion Accounts — and adjustments related to net working capital and surplus cash.
This phase involves negotiating the Share Purchase Agreement (SPA), a legal contract outlining the terms and conditions of the sale and purchase of shares. It covers buyer and seller details, the number and price of shares, representations and warranties, conditions precedent to the sale, liabilities, indemnities, and any post-completion obligations. Communicate with your legal team to ensure the SPA aligns with the intentions of both parties.
Step six: Post completion
After all the hard work, the seller can finally reap the rewards. Remember: once the deal is complete, there’s no going back. This highlights the importance of careful planning and foresight.
There is likely to be a period of six months or more while documentation is drawn up. This might include completion accounts, which document the financial position of the business up to the point of completion — or earn-out accounts if a portion of the sale price is contingent on performance targets.
Ultimately, a successful sale often comes down to preparation. Patience and diligence will ensure a smooth transition and enhance the likelihood of the best possible deal.
John Foundling is corporate finance partner at Menzies LLP