how not to sell a business

How NOT to sell a business

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Table of Contents

The top 10 do’s and don’ts of business selling ........................................................ 3 1. DON’T – Spend valuable money on advertising without having a professional businessinformation memorandum (IM) prepared ............................................................................................... 4 DO – Provide credible information .............................................................................................................. 4 2. DON’T – Head into the sale process without first seeking advice on what your businessis REALLY worth .................................................................................................................................................. 5 DO – Get a professional valuation ................................................................................................................ 5 3. DON’T – Go into a sale process without getting advice on the taxation and othercorporate and entity impacts of selling ..................................................................................................... 7 DO – Understand the tax implications ....................................................................................................... 7 4. DON’T – Fail to disclose critical information material to the business performance ...... 8DO – Be forthcoming with potential purchasers ................................................................................... 8 5. DON’T – Consider the sale of your business simply as a chance to pay off your loansand debts .............................................................................................................................................................. 10 DO – Sell for the right reasons .................................................................................................................... 10 6. DON’T – Refuse to ‘stand behind’ your sale ...................................................................................... 11DO – Offer after-‐sales service ...................................................................................................................... 11 7. DON’T – Engage a solicitor who is not used to handling the sale of commercialbusinesses ............................................................................................................................................................. 13 DO – Get the right legal advice ................................................................................................................... 13 8. DON’T – Agree to onerous conditions you can't meet or which put you at undue risk . 14DO – Ensure the terms and conditions are commercially and legally sound ......................... 14 9. DON’T – Allow due diligence without commitment ..................................................................... 15DO – Prequalify potential purchasers ..................................................................................................... 15 10. DON’T – Choose the wrong advisor to assist you with your sale .......................................... 17DO – Engage an experienced sales team ................................................................................................ 17

Disclaimer: The information contained in this eBook is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and

obtain independent advice before making any decisions or taking any action.




The top 10 do’s and don’ts of business selling Comments by James Price JPAbusiness Pty Ltd

t JPAbusiness we have been advising our clients on their succession plans, business value and exit strategies for many years now.

Being involved in selling businesses and also conducting due diligence and negotiations on acquisitions for our clients, we see the best and worst of how business sales transpire.

As we always tell our clients, selling your business is not an exact science; it’s about planning, professional marketing, timing and finding the right match regarding value and terms.

So, as we have seen and experienced a few ‘war stories’, we decided to turn these learnings into Do’s and Don’ts for business owners looking to sell a business – just a few tips from hard-won experience and observing what can happen in the business selling market!

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1. DON’T – Spend valuable money on advertising without havinga professional business information memorandum (IM) prepared

DO – Provide credible information

critical rule of selling a business is that owners need to put together professional, credible, robust information about their business.

Selling your business is about trying to get someone to share the same or better perspective on your business that you have.

Often as a business owner we take things about our business for granted – things like our customer base, our supplier network, our product design, the way our business is structured, the team of people, relationships it has, the market it’s in, the financial performance of the business, the risks associated with the business – but knowing all these things is critical to a purchaser accepting the value of a business.

It’s also important that the information you provide is not just about the business’s current or past performance, but about its future performance as well.

Ultimately the person is buying the business for its future performance and that's what valuing goodwill is all about – it’s about assessing business maintainable earnings (BME – also known as sustainable earnings) into the future.

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http://www.jpabusiness.com.au/blog/posts/james-price/2013/09/08/how-to-calculate-sustainable-earnings


2. DON’T – Head into the sale process without first seekingadvice on what your business is REALLY worth

DO – Get a professional valuation

e all know that beauty is in the eye of the beholder. The first business I sold was two retail businesses that had been on the market for eight years.

The owners had worked for 30 years and built very successful businesses. They wanted to retire and had been marketing the businesses for sale for eight years and still hadn’t achieved a successful sale.

Why not, you may ask? Because the businesses were grossly overpriced.

They were grossly overpriced for two reasons:

1. the owners had a perception ofwhat the businesses were worthbased on what they had investedin the businesses, the debt theywanted to retire, and other factorsthat were relevant in terms ofmoving them to retirement; and

2. they had had some previousbrokers and advisors give them afairly ‘rosy’ view about the potential sale price in order to list theirbusiness.

The moral of the story is don’t wait eight years to find out what your business is worth.

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The first task I had in selling my very first business was to sit down with the owners and have a rather forthright discussion along the lines of “look, you think the business is worth $1.5m – it’s actually worth $750,000 on a good day because of X, Y, Z….”

If I could give only one tip to business owners wanting to sell their business, it’s this: make sure you get professional advice and, ideally, a business valuation on the fair market value of your business prior to progressing to a sale process. Also make sure you get such advice from a credible advisor closely involved in buying and selling businesses.

You can agree to disagree on the value, but ultimately you need strong decision support before you invest time, effort and money in a sales process.



http://www.jpabusiness.com.au/docs/default-source/e-books/how-to-assess-business-value-in-small--to-medium-sized-businesses.pdf?sfvrsn=0


3. DON’T – Go into a sale process without getting advice on thetaxation and other corporate and entity impacts of selling

DO – Understand the tax implications

ccasionally I find myself working with a business owner on a saleprocess and we are reviewing offers for the business from interested

parties based on an asking price and an IM that has been distributed on the business.

Then, right at the 11th hour, the business owner queries how that dollar value will impact them in terms of the tax they will have to pay and therefore the net proceeds they may receive from the sale.

Taxation implications depend on an array of issues, including how an individual business owner has their business and personal finances structured, including other income sources they may have.

Don’t wait until you’re getting offers on your business to understand the potential tax benefits and tax minimisation opportunities that may be available in the course of selling your business.

However, be careful not to let the tax ‘tail’ wag the business value ‘dog’. In other words, the market for businesses doesn’t assume a particular tax outcome when it’s valuing businesses.

But, if you’re armed with solid advice from your accountant or advisor on taxation impacts and different options, you’ll be better placed to consider the relative tax-based merits of offers that might come from the market.

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http://www.jpabusiness.com.au/docs/default-source/e-books/capital-gains-tax---issues-to-consider-when-selling-a-small-to-mid-sized-business.pdf?sfvrsn=0




4. DON’T – Fail to disclose critical information material to thebusiness performance

DO – Be forthcoming with potential purchasers

ight at the outset we talked about credible and robust information and establishing a purchaser’s confidence.

JPAbusiness is known for providing very detailed and robust information memorandums (IMs) on businesses we’re selling.

We do that for a number of reasons:

• We feel the more information one can provide upfront on anopportunity, albeit under confidentiality requirements, the betterplaced a purchaser is to appreciate the value of a business.

• Quality, detailed information allows the seller and buyer to‘prequalify’ each other.If, in this early stage, the purchaser can see the business ‘ticks all theirboxes’ you have a better chance of the initial enquiry progressing to asuccessful sale.If, however, it’s clear from the outset the business doesn’t offer theparticular opportunity the buyer is seeking, it will save you bothwasting time in the long run.

• If a purchaser, through a due diligence process, gets a feelinginformation is being held back or situations are being ‘airbrushed’to cover up potential issues, ultimately those things will be found out.They may be found out before a contract is signed or after, but eitherway it will lead to a difficult circumstance.

In selling your business you need to put it in its best light, but you also need to ensure the information provided is accurate and not misleading.

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Be forthcoming … but also protect ‘sensitive information’

I’d like to qualify my advice on being ‘forthcoming’.

While it’s important to be forthcoming with purchasers on information about the business, it’s also important to have a good advisor helping you manage the provision of commercial and sensitive information through the sales process.

It’s not unreasonable or unusual to want to hold back some very commercially sensitive information on your business until you have a binding position with a purchaser.

For instance, sometimes certain customer contracts or pricing details will be held back until the purchaser has signed a contract, and then that information will be a condition of completion.




5. DON’T – Consider the sale of your business simply as a chanceto pay off your loans and debts

DO – Sell for the right reasons

hink carefully as a business owner prior to taking your business to market with an advisor or broker, or selling it yourself, as to the reasons and

objectives you have for selling.

This helps you create a negotiation framework to determine what an acceptable offer might be.

Sometimes we see business owners wanting a certain amount for their business and that amount is not necessarily determined by what the market would likely pay for the business, but rather it’s determined by the amount of outstanding loans the business owner has with the bank.

It’s a legitimate objective to sell your business in order to consolidate your financial position and pay off loans, however if the value of the business is simply driven by your amount of outstanding loans, in many cases you may well be disappointed in the business sale process.

In other words your objectives aren’t necessarily lined up with what’s achievable.

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6. DON’T – Refuse to ‘stand behind’ your sale

DO – Offer after-sales service

hen a business sale price is over half a million dollars and into the several million dollars bracket, the concept of earnout clauses, or

deferred payment, often comes into the negotiations.

This is about the purchaser saying: “I’m buying a business’s future business maintainable earnings (BME) – I want to ensure that as I take over, the customers and suppliers will stay with the business, and the business will continue to perform as it has done over the period I’ve assessed in the due diligence.”

For a purchaser to manage this risk, they will often pay an amount of the purchase price upfront and then defer an amount based on certain terms.

These terms are designed to protect them against situations such as customers and supply contracts not being retained under the new ownership.

Be prepared to share the risk

We tell vendors in this sale price bracket they need to be prepared to consider ‘after-sales service’, in other words holding and sharing some of the risk over the transition period to a new owner of their business.

This is tricky because the old owner will think: “I don’t have control of the business anymore and yet I have funds outstanding – I’m taking a big risk.”

However if you have a strong business that you’re confident will continue to perform in the hands of a new owner and you’re willing to prove that by deferring payment, that will go to supporting the view the business has a significant goodwill value.

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http://www.jpabusiness.com.au/blog/posts/james-price/2014/10/12/cgt-issues-of-apportioning-asset-values-earnout-clauses-and-buying-pre-cgt-assets


…but don’t forget to protect your risk, as well

Be careful to ensure the terms of any earnout or deferred payment protect your risk as well – you must have a fair chance of getting your deferred payment.

One way to protect your risk would be to restrict the terms under which the deferred payment is paid.

A reasonable term to agree to may be that existing contracts in the business need to be maintained post-sale.

However a term that asks you to achieve a certain BME can be fraught with danger, because a new owner may have a different attitude to things like business development and how they spend money in the business, and that will impact earnings.




7. DON’T – Engage a solicitor who is not used to handling the sale of commercial businesses

DO – Get the right legal advice

uite often we come across business transactions where the lawyers involved from either the purchaser or the seller, or both, have had quite a

bit of experience in conveyance of residential properties, and some experience of conveyance of commercial properties, but very limited experience in the sale of commercial businesses.

Our experience as a firm operating in this area is that there is a difference between selling real estate and selling businesses when it comes to legal advice.

It’s a bit like if you need a knee operation: rather than going to a GP who does a bit of surgeon work on the side, you’d go to a knee surgeon who does 10 operations a day.

You’re bound to get better, more robust, advice and results.

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8. DON’T – Agree to onerous conditions you can't meet or whichput you at undue risk

DO – Ensure the terms and conditions are commercially and legally sound

nevitably in a business sale process the purchaser will come forward with a whole range of terms and conditions to protect their risk prior to, and

following, the sale.

These may relate to:

• warranties and claims on workmanship, prior to sale completion, for work performed;

• restraint of trade, which restrains you from being involved in theactivity of the business for a period of time;

• retaining key employees in the business for a period of time;• maintaining certain contracts in the business post-completion.

It’s right to have your eye on the end point, which is a completed sale, and you shouldn’t lose sight of that.

However, you also need to ensure the conditions and terms of the sale are not overly onerous and/or difficult for you to meet, because if they are it will mean an unravelling of the value.

Make sure the terms you agree to are commercially and legally sound and get advice from your business advisor, broker and/or solicitor throughout this process.

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9. DON’T – Allow due diligence without commitment

DO – Prequalify potential purchasers

ritical in any sales process is to make sure you understand the objectivesand motivations of the potential purchaser, and the likelihood that they

have the funds available to make the purchase.

Whether you’re selling a suit in a shop, a mobile phone, or a business, the earlier you can understand the motivations and capabilities of the potential purchaser, the better placed you’ll be to determine the likelihood that they will actually commit to and complete the sale.

Often we see people selling their own businesses – including quite large businesses – who allow potential purchasers to do due diligence on very detailed, sensitive information about the business with little prequalification and/or commitment sought from the purchaser.

Here I’m using the word ‘commitment’ in the broadest sense. It can mean a number of things, such as:

• signing a heads of agreement documenting the non-binding termseach party is happy with prior to allowing them to do due diligence;

• the purchaser making a holding deposit to show their commitment tothe sale; or,

• simply having the purchaser document their offer price and keyterms.

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Prequalifying potential purchasers is critical to making sure a business owner isn’t exposed to someone simply doing a research project and then going into business themselves as a result of the information they’ve found.

Remember, of course, not all purchasers have a clear idea of their objectives up front.

As a business seller you need to protect yourself from this because people can change their minds.

By ensuring you have a good advisor helping you, or by ensuring you focus on prequalifying purchasers up front, you can sift the wheat from the chaff.




10. DON’T – Choose the wrong advisor to assist you with yoursale

DO – Engage an experienced sales team

f you decide you need an advisor to help you with a business sale, then I suggest you choose someone with experience who knows and

understands your business, or businesses like yours, and who you feel can represent your business in a professional light with potential purchasers.

Whilst ultimately a business sale is a transaction, working with an advisor in this space is not just a transaction, it’s a partnership.

This is because that advisor will have an interest in your sale and you need to feel confident you can work closely with them as the leader of your sales team.

Here are three key attributes to look for in an advisor:

1. Experience – They must be able to provide you with strategic advice,based on their experience, on negotiations, key terms andpotential purchasers.

2. Project management skills – They need to be good at projectmanaging the delivery of the sale process.This ‘project manager’ needs to display attention to detail and havean eye on the delivery and your objectives.Often we see sellers with extended sale processes because there is noone strongly involved as an advisor, project managing and bringingissues to a head in order to resolve a way forward.That brings us to attribute Number 3…

3. Communication skills – They must be a strong communicator whois prepared to ask hard questions and thrash out issues.Often owners selling their own business will prefer not to ask hardquestions.Instead of finding out either the good or bad news – for example, thepotential purchaser is not willing to pay the asking price – they will fluffaround and the issue will remain unresolved.

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So how do you determine if an advisor has these necessary attributes?

I suggest asking for the evidence:

• Ask them for examples of businesses like yours they have sold;

• Ask them for the shapes of the deals they’ve done with thesebusinesses;

• Ask them for an indication of the process they intend to implement tosell your business;

• Ask them about the level of communication and reporting – verbal,written, formal and informal – that will be provided as part of the saleprocess to keep you abreast of progress; and,

• Ask them for referees you can speak to i.e. business owners they haveworked with to sell their businesses.

For more information on selling a business, or to arrange a valuation, please contact the team at JPAbusiness.




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