What to consider when selling a business

What to consider when selling a business

Selling a business can be a painful process, especially when the reason for the decision is out of the owner’s hands. That’s why Neil Jones, Head of the Corporate and Commercial team at Ansons Solicitors, has set out exactly what you should consider if you find yourself in this situation.

The COVID-19 crisis and Government-imposed lockdown has had a serious impact on the UK economy, as small trade businesses struggle to keep their doors open and continue trading, despite not all being categorised as ‘essential services’. With some losing their entire revenue overnight, business owners are contemplating selling their business in a bid to recoup some of the lost earnings.

However, no matter how difficult the situation might be, snap decisions should be avoided at all costs, as there are buyers looking to take advantage of the situation and secure established businesses cheaply.

Avoid rushing in

If you are adamant that selling your business is the right decision, then you should exercise caution when dealing with issues like due diligence, warranties, indemnities and price adjustment mechanisms, so that the terms of the deal are fair.

Given the current uncertainty of the situation, there will be buyers who try and alter terms of the deal after it has been agreed. This should be avoided where possible, as it will usually be to the detriment of the seller.

Ultimately, the buyer is investing in the long-term viability and potential in the business, which must be reflected in the terms of the deal. If it was in the process of being negotiated before the outbreak, then the buyer may wish to revise the deal.

Sellers can take steps to protect themselves, like asking for more payments up-front to avoid the risk of deferred payments, as the current volatility could impact the buyer as much as it does the seller.

Any seller would need to go through the disclosure process again in order to mitigate the risk of any claims and revisit any relevant warranties in the agreement in light of Covid, in case they should be amended or qualified.

Simple steps

If you’re sure you want to sell the business, then it’s important to follow a set of clearly defined steps, including securing the positions of employees, minimising personal tax liabilities and deciding what expert advice is needed.

When taking on expert help, it’s crucial that the professionals you choose have the experience needed to deliver a positive outcome within your sector. A clear division of responsibilities and an agreed fee structure should also be in place, with both written down.

From there, it’s about securing the best deal possible. This can involve tidying up loose ends, selling under-used property or equipment, positioning major purchases or implementing strict stock management and credit control measures to maximise working capital and create a stable, longer term financial pattern.

Currently, sellers are more likely to be approached directly by buyers keen to offer a valuation that maximises their chances of securing the business as cheaply as possible. The seller must evaluate the status of the buyer as carefully as they would normally to understand if they can fund the purchase.

Although the current climate may encourage sellers to fast-track due diligence, this could play into the hands of many buyers, who want you to rush through the deal.

During the COVID-19 lockdown and the likely economic uncertainty to follow, it’s only natural buyers may place increased emphasis when performing due diligence, on aspects such as insurance, supply chain risks, business continuity and employee health and safety policies.

Ensure transparency

From the seller’s perspective, it’s important to be open and transparent, as this will help you build up trust with potential buyers and protect against future claims if information was not fully disclosed. Sellers should rely on their expert advisors to fully interrogate the details of any offer, which these advisers will view dispassionately.

With any deferred pricing mechanisms or earn-outs, the seller needs to ensure they are fully covered with reference to COVID-19’s impact on their business. The buyer may predict a business slowdown over the next six months and attempt to structure a deal based around continued pre-Covid earnings during that period, which may result in that earn-out being unachievable.

The seller needs to be clear about what a realistic prospect for future trading is (allied to their own ability to influence that trading post-sale) with clauses in the sales agreement reflecting that reality.

Selling might be the only option for some business owners but they must exercise caution. COVID-19 has created market conditions where speculators feel they can grab bargains, but wise sellers can still structure any agreement to ensure the business they have worked hard to build is not undervalued.

For more information on Ansons Solicitors, click here.

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