Tips and traps for selling your business (Part 1 of 4) - Proper preparation prevents poor performance

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 individuals and companies that are looking to sell their business.

Tip 1 - Determine the best corporate structure for a future sale of your business

What is the best corporate structure for a future sale of your business?  A company, unit or discretionary trust, sole trader, other?  While the immediate considerations for most businesses are legal and financial risk minimisation in the operation of the business, when structuring your business, always plan for the possibility of a future exit.  Don’t wait for an exit (or possible transaction) to start thinking about the structure of your business.  If you are trying to restructure a business immediately before a sale, this could:

• delay the transaction;
• scare off buyers;
• cause additional expense; and
• have adverse tax consequences, for example if assets have to be moved across various entities.

Tip 2 - Appoint your advisers early

• Advisers could include corporate advisers, lawyers and accountants/tax advisers.
• Appointing your advisers early will limit the risk of things going in the wrong direction from the start and a seller agreeing to commercial terms with a buyer without understanding the full implications of those terms.
• Advisers need to be experienced in M&A transactions.
• Obtain cost estimates from advisers up front, ideally with fee caps or fixed fees and consider incentives for corporate advisers to maximise the sale price.

Tip 3 - Share sale vs asset sale

• Consider how the transaction is to be structured – for example, the shareholders selling their shares in a company (share sale) or the company selling its assets (asset sale).
• The tax outcomes may be better for the seller if the transaction is a share sale, but buyers may be reluctant to take on the historical liabilities associated with the company.
• Buyers may prefer an asset sale as they can choose the assets to be acquired and leave behind most unwanted liabilities.

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.