Catherine Feechan: Selling your business? Think about the ‘Three P’s’
Experienced commercial and corporate lawyer Catherine Feechan writes about the considerations of selling a business and discusses the importance of due diligence, confidentiality, deal structure, and valuation to ensure a successful sale.
Selling your business is a big decision and one you want to get right. Thinking about the three P’s, Preparation, Process and Price, at the outset is the key to getting the best result. These three issues are very closely linked and will impact on each other, so putting together a plan at the outset is well worth the time and effort. What do you need to think about in your planning process?
One of the first steps in any deal will be the buyers carrying out a due diligence exercise, both financial and legal, in relation to the business. This will require a full review of all relevant legal and financial documentation so you will need to have all this information to hand and in a format that will make it easy to supply to any buyer. Are all your contracts with employees fully signed, do you have copies of all your bank facility documents, HP and lease agreements, do you have details of all grants you have received and copies of the paperwork, can you evidence compliance with data protection laws, have you complied with all legal requirements in the operation of the business? These are just a few of the areas you will need to think about.
Carrying out your own due diligence exercise in advance of a sale can help you to identify where there are any issues that need to be addressed in advance of any buyer starting a diligence process. It will also help identify any consents to the sale that will be required from funders, landlords, key customers or suppliers or other third parties, giving you time to work out how best to get these consents and how long that’s likely to take.
When you are thinking about selling it can be very helpful to get professional input on the valuation of the business so you are confident in your negotiations with any buyer. Up to date property and asset valuations can sometimes be helpful in the context of valuing the business as a whole. Appointing corporate finance advisers and any expert valuers early on will help maximise your returns. They may identify actions that can increase value in advance of the business being marketed and may also be able to suggest ways to minimise tax payable or address issues that they know will be of concern to a buyer.
Confidentiality is key so it’s a good idea to have a form of confidentiality agreement ready to provide to buyers before you get into any detailed discussions. That way you can be sure that details of any proposed sale and any confidential information you provide will stay under wraps. News of a deal or even a potential deal leaking into the public domain before you are ready can cause issue with employees, customers and suppliers, all of whom will have concerns about their positions.
The structure of the deal is something that also needs to be thought about in advance. There are lots of issues here, for example: Would you prefer a share deal or an asset deal? Are there things you want excluded from the deal? Will you give warranty cover and, if so, up to what value? Do you want all the cash on completion or are you prepared to accept deferred consideration? If so, on what terms? Thinking about these issues in advance means you will be in a position to progress negotiations on the terms of any deal quickly and to get agreed heads of terms in place. That is important to ensure that everyone understands the key points of the deal before incurring the costs of a full due diligence exercise and preparation of all the required legal documentation.
Doing your own due diligence exercise, taking professional input on valuation and working out what the key terms of any deal need to be, will put you in the best position to agree a deal that works for you and to maximise your returns. You can address any issues that come out of your own due diligence exercise, make sure the structure of the business maximises appeal to buyers and reach an understanding that there are possibly issues you don’t want to address pre-sale that will impact on the price paid.
As the saying goes “information is power”. Thinking about the three P’s well in advance of starting your sale process will pay dividends, you will maximise your returns, minimise your stress levels and speed up the sale process.
Catherine Feechan is a director at Davidson Chalmers Stewart. This article first appeared in The Scotsman.