Common processes and issues for those who have decided to sell their business without an offer
After years of tireless hard work, the decision to sell your business or company is never an easy one. This decision is made even harder if you do not have an off-market unsolicited offer. Often an unsolicited offer helps bring the thought of a sale to the surface, which may not have occurred otherwise. But where the decision to sell is not prompted by an offer, making that decision starts a potentially long and complex but ultimately rewarding process.
Before you even get to signing on the dotted line, preparing for a sale process in a diligent way can significantly maximise value while also reducing risks of future warranty claims or other lawsuits, in addition to managing costs and resources (while you are still operating a business) in the most efficient way.
This article goes through some key steps sellers should take in getting ready for a sale, each designed to put you in the best position to sell your business for the highest amount possible whilst reducing your risk to the lowest amount possible. Although no business or company sale is the same, in our experience the below steps are the best way to prepare yourself for packing up shop for good.
Step 1 – Get your structure right
The way a transaction is structured is sometimes pre agreed between a buyer and a seller to optimise each party’s respective drivers. However, if you are commencing a sale process without an offer, you have the ability to shape the structure to more closely align with your goals.
A decision on stucture means asking an important question – why are you selling? For example, are you wanting to sell the business and retire? If this is your driver, you may be looking for as clean an exit as possible with no ongoing obligations, risks or deferred payments. However, if you are spinning off part of a business to focus on your core operations, you may be willing to have ongoing commitments to the business being spun off so as to maximise value. As such, it is fundamental for you to identify your main drivers so that the transaction structure can be appropriately designed to meet those goals.
One relevant factor that may inform the transaction structure is of course, tax. Whether the transaction is an asset sale, share sale, or a mixture of both, the tax treatment of the sale is likely to be a key driver. For example, if you held shares in a company that owned a business and those shares pre-date the introduction of capital gains tax (i.e., the company was established and business commenced before 1985) or the shareholders are eligible for CGT concessions, a share sale is likely to be the preferred option in terms of managing capital gains tax. However, structuring the exit as a share sale will often mean that pre-existing (or potential) liabilities to which the buyer may be exposed as the incoming owner of the company will need to be appropriately managed. Alternatively, if you are spinning off part of your business, which is presently intermingled with the core operations, an asset sale may be your only option with a period of transitional services being offered by the seller to the business being spun off.
Whatever structure is decided on, a clear understanding of the likely tax position in respect of the sale will ensure any future material consequences are appropriately managed.
Finally, liability. How do you want to manage this moving forward? The sale of the shares in a company is often the cleanest exit for a seller, as the liabilities go with the company. Unfortunately, as noted above, what benefits the seller in this case will not be an advantage to the buyer. If removing future risk is a key driver for you, the buyer will need to be comfortable with the potentially long history of liability it will be accepting with a share sale.
Although your structure should be set before commencing a sale process, flexibility is key. Being able to understand the buyer’s requests and finding a structure that works for both parties is always the best way to maximise value.
Step 2 – Pick your advisors
A sale process will consume a significant amount of your time and your team’s, to lighten this burden and ensure you are legally and financially protected, engaging appropriate advisors is essential. There will be a range of advisors potentially needed, including accountants, financial advisors, transition specialists, and lawyers. The nature of your business and the market in which you operate will often dictate who is required for a transaction. For example, using a financial advisor in a competitive sales process may result in further eligible bidders participating in the sale process that you may not have considered or known about, thereby creating competitive tension to ensure the seller is receiving the best price possible. However, if you have an existing relationship with a competitor who would likely be the only bidder, a financial advisor may not be needed.
Accountants and lawyers will provide fundamentally important transaction assistance, both ensuring that you get your business neat and tidy before a sale, but also in protecting and advocating for your interests as you move through the sale process to completion. Engaging in a material sale process should not be done without seeking adequate advice as a failure to consider tax, financial, and legal consequences or structures can result in significant risk and liability for you long into the future.
Step 3 – Build your data room
A data room is where all material documents that relate to the business will be compiled to provide potential bidders access to run any diligence and assessments of the value of the business that they require and building your data room is often an arduous and difficult process.
If you have an impeccable document record keeping system this can be a rather smooth process, however, generally the older and larger a business, the more difficult it is to track down records. Due to its time-consuming nature, your business should start this process early, and you will need to dedicate material resources to it.
The data room building process often raises a crucial point, who from the business that you are getting ready to sell needs to know about the sale? Informing employees at the right time of a sale process is essential, but picking that moment can be hard. Too early, and a potential buyer may be exposed to future operational risk with staff exits. Too late, and the sale process could leak, and key individuals could be aggrieved that they were not informed earlier. At a minimum, a company CFO, financial controller, COO, and other key executive members should be brought into the tent early, as they have the information the buyer needs and will likely need to assist with any due diligence queries made by the buyer and its advisors.
The more information in the data room, the more protected you are in the future. This is because often the warranties given by a seller are subject to everything that is fairly disclosed in the data room. Financial and corporate information is often the most accessible and are populated first. Then moving on to material contracts, any pieces of material litigation, and essentially anything fundamental to a party understanding the value, nature, risk, and operation of the business they look to purchase.
Depending on your desired sale price, you may want to hire the services of a professional platform which helps organise and manage the documents, as well as any request for information process. These products can sometimes be expensive, but they are very helpful in larger business sales. If however, your sale price does not warrant that expenditure, we recommend you spend the time ensuring any free data room products available are still well organised, as this will save time and cost in the long run.
Step 4 – Vendor due diligence
It is common in larger sale processes for the seller to engage lawyers and accountants to conduct vendor due diligence prior to launching any sale process. Essentially, this process involves your own advisors running a ruler over your entire business to provide a succinct legal and financial summary to provide to bidders to expedite the sale process. The vendor due diligence process holds potential benefits for yourself, as your advisers may uncover issues you were not previously aware of, allowing such issues to be rectified ahead of the sale process commencing (and providing greater comfort to buyers in circumstances where they will acquire the company). Possible issues may include if your ASIC records are not entirely up to date or you inadvertently underpaid employee-related taxation obligations (e.g., fringe benefits tax, payroll tax, superannuation) in a previous year.
Although minor issues may not impact value, the occurrence and identification by a buyer of multiple minor issues will create the impression that there are potentially broader compliance and governance issues at play, and therefore, the ultimate price a buyer is prepared to pay needs to be discounted for known unknowns. Flushing these issues out early in advance of a buyer conducting its own due diligence on the business will mean the buyer, the seller, and their respective advisors can focus on more strategic matters as part of the sale.
Do you need an Information Memorandum?
Whether or not you need an Information Memorandum (IM) is again a deal dependent query. IMs can be a detailed analysis of the business showing financial and operational data while also highlighting opportunities as the way to maximise value. A competitive sale process will usually always have an IM, however if a clear purchaser exists, they might not need it to see the opportunities. In our experience, IMs are typically more common in larger sale processes. Discussing with your advisors early on the necessity of an IM should be a priority, as it can impact the timing of any launch for sale process.
Step 5 – Prepare your sale document
Your lawyers will prepare a base sale agreement following the decision on business structure and conclusion of the vendor due diligence process. This agreement will be framed as your best and preferred position, one that you would be happy with signing straight away.
Although any sale document is likely to be heavily negotiated, requiring your bidders to provide a marked-up copy will allow for the better assessment of a deal. For example, one bidder may require no conditions to sale and they are ready to go, while another, although offering a higher purchase price, has 20 conditions. What is the price for completion risk is the question here as the value of deal certainty is critical. Having an agreement that favours you as the Seller pre-prepared will put you in the best position to assess value, both in cash and conditions.
Timing
One of the most frequent questions we are asked is, how long will a sale process take? As is often the case, timing can vary, but for any medium to large business, we would expect the process to take six to ten months, from initial decision to completion. Sales processes are lengthy due to diligence required and inevitable negotiations. And then once signed, there will usually be conditions to satisfy, such as regulatory approvals, third-party consents, and placing financing.
Although it is important to maintain strong momentum at all times throughout a transaction you will need to understand that there are potentially items that will drag it out.
Conclusion
With all the above done, you are ready to launch your sale process. This can involve financial advisors going out to their network, or you knocking on some doors. What comes next can vary, but usually will involve parties signing confidentiality agreements before being granted access to the data room, management presentations and indicative bids being lodged by a deadline, and you and your advisors narrowing the field of bidders down to a serious few.
A sale process is difficult and at times a challenging process, but is sometimes an inevitable step in every business’s evolution. Getting a process right from the start will not only save time and costs, it will also increase your sale price.
Next steps
Our team of specialised mergers and acquisitions lawyers offer assistance for all corporate transactions. We provide support in commencing a sale and legal advice as the process continues, and advise on a range of legal solutions.
If you are considering a business sale, please get in touch with us so we can discuss a suitable structure and sale process, bespoke to you and your business.
