Preparing Your Business for Sale

If you want to successfully sell your business, you need to consider what you have to do to prepare it for sale and increase its appeal to potential buyers. All businesses are different due to their unique features, strengths, weaknesses and risks and so is yours. However, there are general key features attributable to most businesses that are sale ready and very attractive to potential buyers.

What follows is an overview of general key legal requirements that a sale ready business normally satisfies for the purposes of a sale for high value.

  1. Review Your Readiness for Sale

Your business has to be sale ready before you can sell it for profit and walk away. Issues to resolve that will affect your business’s readiness for sale include:

  • Being too dependent or significantly dependent on you (see (4) below);
  • Having liabilities, e.g. claims for poorly manufactured products;
  • Litigation or pending litigation;
  • Taxation penalties or compliance problems;
  • Product warranty obligations or litigation;
  • Long-term debt obligations.

Some of those issues may take years to resolve and chances are you may not be able to sell your business easily or will not get the total price from its sale paid upfront.

To avoid these problems you need to attend to preparing your business for sale, e.g. by ensuring up-to-date accounts and tax returns are readily available for review by a potential buyer, making the assets transferable by removing long-term debts, ensuring the business is tax and litigation problem free, simplifying your business structure.

  1. 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.

You need to review your business records and ensure all corporate documents, including in particular the company’s constitution, shareholders register, minutes of directors and shareholders meetings, and assets registers are in order. If your business operates under a trust structure, ensure you have the respective trust deed with its amendments and unitholders register correctly executed and on file.

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 where 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.

  1. Protect Your Business Intellectual Property

A brand under which your business is trading is generally strong if it has a history of a good and continuously improving reputation among your existing and potential customers on the market. In this respect, you should consider whether your brand has been correctly registered as a trade mark and applicable ongoing fees for the trade mark registration have been paid to continue its 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.

  1. 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 will query whether you or they are going to leave upon completion of the sale or in the near future and how this will affect the business.

A 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. 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.

  1. 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 is undertaken under contracts protecting your intellectual property and confidential information.

  1. 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. Furthermore, correctly executed contract documentation with all your customers is essential for the new owners to be able to continue your business they are buying.

In this respect, consider whether all the contracts with long standing customers are being correctly renewed or extended in a timely manner and customers’ files are in order and readily available for due diligence review.

  1. Have Precedent Documents and Repeat Customers

If your business is not based on one-off sales but has many repeat customers ensuring recurring revenue, it will be much more attractive to potential buyers. In this respect, 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 increase of your recurring revenue.

  1. 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. In this respect, consider whether you have correctly executed and sufficient contract documentation is in place with your critical supplier or service provider and what needs improvement.

Our Services

Sydney Business Lawyers at 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.

Many other essential hot topics for business owners is all found in the book Nobody Else’s Business. Nobody Else’s Business is about helping business owners live the life they want to live, now and in the future. It is the ultimate guidebook for succession planning of modern Australian businesses.

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