Selling your privately owned or family business is likely to be one of the more complex – and potentially stressful - tasks you undertake. But there are ways to make the process smoother.
In this guide, Brendan Wykes, a Holding Redlich partner who recently sold his own family business, lists his top 20 tips:
Some things in life are free
1. Talk to advisors and pick their brains – sometimes they will give you valuable insights for free. It will also give you an opportunity to assess their expertise and understanding of your business and the likely buyers or investors.
2. Carry out optimal structuring early.
Splitting up is not always bad
3. Consider whether the business should be split into different parts.
Employee equity arrangements
4. Consider whether to offer equity in the business (or part of the business) to your key personnel either in exchange for their work performance or a cash investment (which could be wholly or partly loan funded). This could improve their commitment and your succession plan (see below).
5. While this may not be appealing at first glance, consider taking on an external investor early, especially if you need more capital and have a strong business plan for this. The advantages may include:
Investors of all shapes and sizes
6. Private equity and venture capital is much maligned. Of course, too much, or costly, debt or expensive equity could result in business stress or failure. Thankfully, there are lots of PE and VC funds with a range of investment approaches, as well as an increasing number of other investors of all shapes and sizes, who can provide capital and full or partial exit opportunities for business owners.
7. Business owners are now increasingly likely to find investors with the right capital availability and investment mandates as well as highly relevant expertise and strategic value-adding skills. Agreeing terms with investors is much easier now. Many investors can provide capital at relatively low costs with minimal fuss and considerable expertise. Alternative assets investors (including super funds) are also making more direct investments in businesses and offer points of distinction like longer preferred investment periods.
Ready to retire?
8. Most importantly, don’t wait until you’re ready to retire! Unless you have a strong succession plan, it is likely that you will need to continue to be engaged in the business for a substantial period of time after you have sold it. Often, you may receive incentives to do so, for example, by “earn outs” or other delayed purchase price components or retaining a stake in the business.
What’s your succession plan?
9. Try to de-personalise the business which in turn makes the customers less dependent on you as an individual. Consequently, you must secure important staff. There are a number of ways to achieve this including good employment agreements, bonus arrangements and equity plans often with performance hurdles.
Avoid obstacles to a sale
10. In your customer contracts, avoid express references, and specific requirements relating, to the business owners. Try to avoid customer consent requirements to changes in the ownership of the business.
Protect your business
11. Protect your confidential information and intellectual property including by appropriate registrations and assignments from employees and contractors.
Protect your value
12. Make your balance sheet attractive. For example, encourage employees to use their long service and other leave entitlements as far as possible. Otherwise, the value of some of these entitlements may be deducted from the sale price.
13. Secure important premises on favourable terms for the business.
15. If you are fortunate enough to own your business premises, then consider a sale to a third party to increase your capital returns but lease the premises back to the business at an appropriate rate. Remember though, if the rent is too high this may adversely affect the value of the business because of the detrimental effect on earnings. If the rent is too low, it may affect the value of the premises. A market-based rent is often used.
Sale time but sleep well
16. Make sure you have exit rights that are enforceable against any other stakeholders in your business. If you have been meaning to put in place a Shareholders Agreement, then now is the time to do it. Please do not delay this any longer.
17. Unfortunately, you are likely to have continued exposure in relation to the business for some time after you receive the sale proceeds because of warranties that you give to the buyer. However, there are increasingly useful insurance products to help you sleep better. Warranty & indemnity insurance is now a familiar product to experienced professionals. Sellers or buyers can take out policies with reasonable premiums provided that the process is undertaken properly.
18. You will also need to be prepared for potentially significant disruption to your business. Sale processes absorb a lot of time of business owners. This needs to be carefully managed as it may be detrimental to the business generally and affect the (successful) outcome of the sale process. Obviously, the more organised that you are at the start of the process, the less disruption there is likely to be during the process.
19. Identify for the buyers enough ideas for them to keep growing the business after your sale. Everyone loves low hanging fruit.
20. Importantly, when you identify a buyer, try not to grant them any (or, at least, not a long period of) “exclusivity”, ie an agreed period of time when only that buyer can buy (or negotiate with you to buy) your business. Just like selling your house by auction, you need to create and maintain as much competitive tension as possible to achieve a quick sale at the best price. Some buyers will insist on a minimum period of exclusivity before incurring their transaction costs so this will need to be considered by you and your advisors on the basis of the relevant circumstances.
Author: Brendan Wykes
Brendan Wykes, Partner
T: +61 2 8083 0432
Dan Pearce, Partner
T: +61 3 9321 9841
Trent Taylor, Partner
T: +61 7 3135 0668
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.
Published by Brendan Wykes