Thinking of selling your business?
Neil Jones, head of the corporate and commercial team at Ansons Solicitors, advises business owners not to rush in to making big decisions.
The Covid-19 outbreak and subsequent lockdown have had a serious impact on the UK economy, as businesses struggle to keep their doors open and continue trading.
Unfortunately, some sectors have been hit harder than others, with owners forced to close since the start of the crisis due to social distancing measures.
In a bid to make up for the loss of earnings, many business owners will now be contemplating selling their business. Although drastic, snap decisions should be avoided where possible.
There are potential buyers actively looking to secure businesses cheaply, as they understand that many owners are desperate to recoup some of the money they’ve lost. Therefore, sellers should exercise caution when it comes to issues like due diligence, warranties, indemnities, and price adjustment mechanisms.
If you’re adamant that selling your business is the right decision, then it’s crucial that you agree a fair deal that doesn’t take advantage of the current situation, as you could end up securing a lot less than you normally would.
Of course, if a deal was already agreed before the crisis unfolded, then it’s understandable if the buyer wants to renegotiate certain terms to reflect the current climate. However, if this is the case, you must stand your ground and ensure they do not try to alter the deal too much, as you could end up losing a significant amount of money.
Ultimately, buyers are interested in the long-term viability and potential of the business, which must be reflected in the terms of the deal.
Sellers should take steps to protect themselves, like asking for 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.
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.
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.