The Do's and Don'ts of a business sale
Posted 02 Feb 16 by Steve Perri
Business owners considering whether 2016 is the right time to begin a sale process are facing confusing times.
The 2015 M&A market was one of the busiest periods of activity since pre-GFC levels which may have left business owners hopeful that 2016 could be the appropriate time. The first few weeks of share market activity for 2016 saw one of the worst starts to a year in memory and it remains to be seen whether the uncertainty of the share market will impact the value of businesses in the private sector. Valuation theory would dictate that it must, although anecdotally, this may not be a foregone conclusion. It does however emphasise an important consideration. The requirement to be prepared should you be contemplating a sale, is critical. The value you have built in your business should be defended and the only way of ensuring this is achieved is to ensure you are prepared for a sale. A causal or ad hoc approach may cost you more than you realise.
On this basis PKF have formulated an important list of Dos and Don’ts which should be considered when preparing to sell your business.
1. Do understand the sale options available – sale of business assets compared to sale of equity instruments.
It is essential to understand the impact of selling your business assets compared to selling the shares or units in the corporate structure of your business.
2. Don’t overlook the business performance immediately prior to or post sale completion.
It is common for acquirers to ensure post completion conditions of sale are implicit in any sale agreement. Accordingly, this may have an impact on any earn out component of the sale agreement and will affect the vendor’s ability to maximise value and price.
3. Do understand the value of your business prior to commencing negotiations to ensure that you do not sell below market value.
Seeking a valuation of your business will allow the vendor to understand the value of the business and assist with the negotiation process.
4. Understand the working capital requirement of your business and its impact.
As part of the due diligence process, a potential acquirer may assess the working capital requirement of the business. This involves ensuring there are sufficient liquid asset to operate the business at the time of completion including trade debtors and inventory/stock. Any adjustment for working capital incorporated into the sale may impact the end dollars which are realised.
5. Do understand how to maximise the value of your business prior to approaching potential acquirers or any sale offer.
Maximising the value of your business prior to sale ensures you will achieve the highest return possible. Initial steps to maximise value may include ensuring key customer and supplier contracts are in place, employee contracts with key staff are renewed and lease agreements have extended terms or options.
6. Don’t overlook taxation consequences or considerations as doing so may impact the net realisation achievable from sale.
Understanding taxation consequences prior to sale ensures that the correct taxation structure is set up as well as key terms of the sale contract are negotiated.
7. Do understand and identify the net realisation achievable from sale to assist with negotiations and avoid any surprises post sale completion.
Understanding the net return on a sale is important in any sale deal and will be affected by any existing debt, taxation liabilities giving rise to the sale as well as any other liabilities which were excluded from the sale.
8. Don’t forget to negotiate!
Accepting the first offer may not always be the best offer. Everyone has room to move in a negotiation process. Having the right team to understand an offer and assist with the negotiation process is important to maximising the net realisation of your business.
9. Do consider engaging a corporate advisory expert to assist with ensuring the above aspects are covered and assist you with preparing for sale, maximising value and assisting with the sale process.
Having the right support is important in any transaction to ensure you are prepared, informed and gives you the best ability to achieve the highest price and most favourable sale terms.
If you are considering a sale or need assistance in preparation for a sale process contact either Steven Perri of our Melbourne office or alternatively any of our corporate finance specialists around the country.