Selling my business: What’s the process?

When selling your business there are many components involved, typically is not too dissimilar to a property transaction.

You have the financial side of things along one side of the transaction, the legals along the other side of the transaction and this comes together to formulate the process.

However, with a business transaction there is sometimes a transition period where the new owner and the old owner do a handover which can take from 1 week all the way to 18 months, in some cases the old owner stays on in the current business and works for the new owner.

See below the typical step by step process of a SME sale as a Share Sale.

There are two types of sale: Asset and Share, Asset is much easier and quicker because you are selling a piece of the business as opposed to the business as a whole, therefore there is no liability to the new buyer, meaning less risk attached to the business.

Initial Phone Call:

At SJ Acquisitions we usually start things off with a 15–20-minute phone call, this is the typical ‘dance’ where we understand each other over the phone. Mainly when buying or selling a business, you need to be compatible with one another, if you do not like each then there is simply no point, because the buyer and seller will be working in tandem with each other and if they do not get along, then resentment will only build up.

The initial call is finding out about each other, if I am buying the business I want to know all about the history, how the business started. Who works there. The setup, clients, percentage of client apportion, what has happened over the years, your motivation for selling, if any family members work there and of course the turnover, profit and anything else that may be of interest.

You may want to ask the buyer how he or she is funding the business, if they have bought any other business similar or owns a current business. How much experience they have and what their plans are.

Once both are happy, then they can move to a second date, this would usually be a face-to-face meeting where prior the buyer would have seen bank statements, figures, management accounts, accounts over the last 3 years including the Profit and Loss, as well as VAT Returns and corporation tax returns that can be seen so that the buyer can take a good view on the business prior to a face to face meeting.

Heads of Terms:

Let’s say the meeting goes well, the buyer and seller may agree on a head of terms. This will be an understanding of what deal can be agreed and the deal structure. Deal structure is the terms of the agreement, price can vary but this is usually dictated by the terms of the agreement.

Deal structure I have written about in further detailed examples in another blog post: LINK

Heads of Terms are not legally binding in themselves but there are 4 legally binding terms on a head of terms. 

Jurisdiction: UK Law governs the contract

Fees: Depending on what is written in the fee segment is legally enforceable once either party signs and then starts spending money.

Confidentiality: If the terms are not kept confidential and employees know about an acquisition and decide to leave the company, then this will erode the value of the company in question.

Exclusivity: Depending on the exclusivity term, this is also legally binding, again the buyer and seller would start to spend money.

Other than the above, heads of terms are simply a framework to work with so that the buyer’s team can start the due-diligence process.

Financial Due-Diligence:

This is a process in which the buyers, buyer’s accountants and maybe a specialist financial advisor or a Financial Director will look through the financial aspect of the business in question. This could be modelling future forecasts, financial forecasts and sifting through the tax returns of a business to see if there is anything negative in question or something that doesn’t seem right.

Again, the deal structure has to comply with the financials, for example, if the new buyer is going to go into debt within 2 months because the deal structure is ‘as it is’ then the buyer might want to renegotiate a deal structure that allows the business to flourish and stay alive.

When buyer and seller agree with each other, the nature of the deal is not to ‘do one another over’ as such but to work together for the bigger picture of the business in a fair and flourishing capacity that helps buyer, seller, staff and business flourish. If the seller is partaking in an earn out or a deferred payment of any kind, it is in their best interest to ensure that the business does well and doesn’t die, this means helping the buyer.

Once financials are done, the next stage of Legal due diligence can commence.

Legal Due-Diligence:

Legal due diligence can be quite extensive depending on the nature of the business, again more legals need to be done on a share purchase as opposed to an asset purchase because with a share purchase you are taking on all the liability as a buyer.

A buyer’s legal team will want to know everything that is happening, the bigger the company, usually the bigger the due diligence involved, which can take a few months indeed depending on how organised the company selling is.

For example, here are a few things that are covered in the legals (again, the seller will need to partake in supplying the buyers’ lawyers with information) a bit like a property sale in the UK.

Employee Contracts, HR, client contracts, finance contracts, insurance for the business, details about assets in the business, stock in the business, lawsuits, legal disputes, systems, processes and health and safety to name a few.

Obviously, this can take quite a while and as a seller it is best to get a lawyer involved, when you pay a lawyer you are paying for the time involved and also you are taking the emotion out of the transaction as at this stage questions may be asked of the sellers company by the buyer and things can get detailed which might be a frustration for both buyer and seller, but this aspect needs to be done.

Financials and Funding:

Usually some sort of loan is taken out against a business that is in question, a lot of sellers seem to think that selling a company for a one million pounds means that the buyer has one million in their back pocket, which is not really the case as most prudent buyers don’t really walk about with their cash, especially with inflation, it will cost money to hold onto too much cash.

Most buyers will fund some of the transaction and borrow against assets, debtors or an existing business. This may mean that the finance company wants to do their own due diligence to the company that is in question, this could mean visiting the company, having access to the CRM and logging into their accountancy software.

Once the finances and legals are done, there is a Sales and Purchase agreement that needs to be flipped through and finally signed by both parties involved.

An M&A transaction can take a mere matter of weeks up to many months depending on the deal, the people, the business and structure.

If you want a business valuation, please give us a call on 01245377510 or inquire with info@sjacquisitions.co.uk

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