Deciding the right time to sell your business is a tricky exercise. Deciding to sell your business during tough times, and for high value, is even trickier yet.
Business owners need to carefully consider what has to be done to show potential purchasers that their business is worth the buy – even in the face of declining confidence in the market or economic downturn.
While each business is has its own unique features, strengths, weaknesses and risks, there are still key strategies that business owners can do to make their business more appealing to potential buyers.
What follows is an overview of general key legal aspects that can be done to increase your prospects of selling your business for high value.
- Review Your Readiness for Sale
Your business has to be sale ready before you can sell it for profit and walk away. Issues to make sure your business is more desirable for sale include but are not limited to:
- Making sure your business is not too reliant on you to operate (see 4 below);
- Addressing any liabilities or risk issues i.e. for poorly manufactured products;
- Increasing the scalability of your business (see 5 below);
- Making sure your assets are transferable;
- Making sure your business is litigation free;
- Consulting with your professional advisers about any taxation penalties or compliance problems;
- Reducing any long-term debt obligations.
- Do Your Own Due Diligence
In preparation for your potential buyers due diligence enquiries and before they send you their due diligence check lists, you should undertake your own legal, financial and, if required, technical due diligence of your business and prepare necessary documentation for review by your potential buyers.
Due diligence will reveal what needs to be fixed. For example, there may be old Personal Property Securities Register (PPSR) charges registered by your financiers over the whole of your company’s assets, even where there is no debt owed to them anymore. Such PPSR charges often stay on the register until you specifically ask your financiers to remove them.
Furthermore, there may be structural changes, asset transfers, dividend payments and legal documents that you need to complete before your business is ready for sale.
- Protect Your Business Intellectual Property
Ensuring you have a strong brand with a history of a good and continuously improving reputation among existing and potential customers is a strong indication of your business’ value.
Ensuring your brand has been correctly registered as a trademark will only strengthen the value of your business. This involves ensuring that all applicable ongoing fees for the trademark registration are paid to continue registration.
Furthermore, if your business uses other intellectual property, e.g. a design, invention, plant variety, website, software programs, other copyrighted materials or work, consider what registrations or other steps you have taken or should take to protect your business intellectual property.
- Reduce Key Person Risk
If your business is dependent on your skills and ‘know how’ or those of its director or the other few key staff members, potential buyers may be doubtful that they will be able to continue to operate the business on completion or in the near future in your absence.
Fully documented business processes and procedures that enable a business to be run by the other or new personnel will reduce this risk for potential buyers and make your business a more enticing buy.
Furthermore, consider whether you need to retain the existing key person or staff by offering them to join an employee share option plan or under alternative arrangements.
If you are yourself a key person of your business, you may want to consider ‘growing’ your successor within the business who can step in and replace you as its key person for the new owners. Businesses that can operate independently of their owners are much more attractive and perceived as passive income producing assets by potential buyers.
- Increase Scalability
A business that is highly scalable or has potential to develop into a highly scalable business, e.g. an IT company developing software products and selling them online as opposite to a merely software outsourcing company working with their customers on a project basis, can be a very attractive business to invest in.
Ensure that your business holds all intellectual property rights in respect to its products and assets and their development by employees or contractors to protect your intellectual property and confidential information.
- Maintain Up-to-date Contracts with a Variety of Customers
Generally, overdependence of business revenue on any single customer is an instant alert to a potential buyer and can result in a significant decrease of the sale price.
In this respect, consider whether all the contracts with long standing customers are being correctly renewed or extended and strategies to expand on your client market.
- Have Precedent Documents and Repeat Customers
If your business is not based on one-off sales but has many repeat customers ensuring recurring revenue, this will be much more attractive to potential buyers. Consider what precedent engagement letters, contract documents and other documentation you have developed and whether you keep them up-to-date to ensure continuous sales and increases to your recurring revenue.
- Avoid Relying on a Single Supplier and Service Provider
If your business relies on a single third-party supplier or service provider for the main products or critical services, with no feasible alternatives, this will raise concerns and result in close due diligence review by potential buyers. Consider whether you have correctly executed and sufficient contract documentation in place with your critical supplier or service provider and if there is any need for improvement.
Pavuk Legal can provide you with legal advice and assistance in respect of the proposed sale of your business, including due diligence review, restructure, assets transfer, corporate and other changes, preparation of the heads of terms and contract documentation, negotiations with the proposed buyer, payments and other completion requirements.
If you are considering selling or buying a business, one of our experienced solicitors will be able to assist you. Feel free to contact our office on 02 9251 3611 or email us at email@example.com.