The commonly known 5 P’s of success (“proper planning/preparation prevents poor performance”) are as relevant to the sale of your business as in other areas of life. If you are proposing to sell your business, proper planning and preparation before entering into any discussions with potential buyer(s) will assist you in obtaining the best possible price for your business, limit delays and reduce exposure to risks.
Over the next few weeks, we will highlight some of the top tips and traps for parties that are looking to sell their businesses.
Tip 1 - Consider the best corporate structure for a future sale of your business
Is your business operated through a company, unit or discretionary trust, or by you personally as a sole trader? Business operators typically consider business structuring issues from their own personal legal and financial risk minimisation perspective. But when structuring your business, always plan for the possibility of a future exit. Consider how each structure will impact on a future sale and how each option will impact a potential buyer.
If you need to restructure your business immediately before a sale, this could:
- delay the transaction;
- scare off buyers; and/or
- cause additional expense,
and may have adverse tax consequences (e.g. stamp duty or capital gains tax from shifting assets).
Tip 2 - Appoint your advisers early
- Seek help from professional advisers before approaching or engaging in discussions with any potential buyer(s). Advisers are less likely to act for you (particularly on a "success fee" basis) if your business has already been "shopped around". You will typically only get one opportunity to approach and impress a potential buyer, so ensure that you give the best possible impression by seeking advice on the optimal way to market your business and to rectify potential "deal killers" before they are discovered by a potential buyer.
- The necessary advisers for a M&A transaction typically include corporate advisers, lawyers and accountants/tax advisers. They need to be experienced in M&A transactions (as this is a specialist area).
- When engaging lawyers, accountants or tax advisers, get cost estimates up front, ideally with fee caps or fixed fees.
- When engaging corporate advisers, try to agree a fee structure that incentivises the corporate adviser to maximise sale price (e.g. a "success fee" with ratcheting increases for exceeding your expected valuation).
Tip 3 - Share sale vs asset sale
- Consider how the transaction is to be structured – i.e. the shareholders selling their shares in the company that operates the business or the operating entity selling its assets.
- The tax outcomes are often better for the seller if the transaction is a share sale – but buyers may be reluctant to take on all the historical liabilities associated with the company.
- Buyers often prefer an asset sale (as the buyer may choose the assets to be acquired and leave behind most liabilities).
- Further to Tip 1 above, if you operate your business as a sole trader or through a trust, the transaction will normally need to be structured as a sale of the assets (so your transaction structuring options become more limited).
To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist. The link to the download page is below:
Look out for the next article in this series, which will provide some tips and traps relating to due diligence and indicative offers.
For more information, please contact:
Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: firstname.lastname@example.org
Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: email@example.com