Your business is ready for sale, now it’s time to think more carefully about what your perfect deal might look like. Although you want to get the best price, the final transaction won’t be all about the headline figure; it’ll be the combination of value and terms that is just right for you.
What’s for sale?
Are you selling your business or its assets? It’s an important distinction. If your buyer acquires the business in its entirety, they take it lock, stock and barrel – the assets as well as the liabilities - and they’ll want to mitigate risk as far as possible by undertaking their own due diligence process. From a tax liability point of view, many sellers will pay less tax on profits from the sale of the business as a whole, rather than from an asset sale; it’s important to get specialist advice at an early stage to make sure your best interests are served.
There may be implications for employees regardless of the deal structure. Under UK law (TUPE), any obligations the current business owner has towards their employees may automatically transfer to the new owner. That said, if staff are integral to the operation of your business, chances are the buyer will want to maintain the status quo. The important thing to do is to consult with staff as you go and get them on side.
Any deal structure will include details of the proposed handover period. It’ll specify whether you sever ties immediately or stay on for a transition period. It’s your call.
How a business is paid for is also up for discussion. Often a seller will stipulate cash on completion but other approaches can be taken, including a settlement of shares in the new company, for instance. In the case of a plc, share options may be a sound investment but taking shares in a small business can be risky, so make sure you explore the potential pitfalls if a share offer is on the table.
Backing a winner
Some buyers stipulate an ‘earn-out’ clause, especially if the value of the company has been calculated partly on future profit levels. Under an earn-out agreement, the seller will be paid an agreed value based on profit performance. But what’s to stop the buyer adversely affecting profits through mismanagement or high levels of re-investment? To prevent this, an earn-out could be set at a premium over and above the agreed level or could be based on a factor other than profit – customer retention, for instance.
Deferred payments offer the buyer the option of raising finance over a longer period of time, offering them the opportunity to spread the cost – essentially paying by instalments. In a similar approach, sellers may also choose to finance the deal themselves, offering the buyer the option of paying the agreed price split into a with-interest payment schedule. Both methods may enable the seller to get a better price or to secure a sale that would otherwise be difficult to find.