What’s My Company Worth?
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.
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.
See below the typical step by step process of a SME sale as a Share Sale.
first step
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 other 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
Information about the Business
- History of the business
- How the business started
- Who works there
- The setup of the business
- Client details and percentage of client apportion
- What has happened over the years
- Motivation for selling the business
- Any family members working in the business
- Turnover, profit, and other important financial details
Questions for the Buyer
- How is the business being funded?
- Have they bought any similar businesses before?
- Do they currently own another business?
- How much experience do they have in the industry?
- What are their plans for the business?
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.
second step
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.
examples in another blog post: LINK
Legally Binding Aspects of Heads of Terms
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.
third step
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.
Collaboration for Mutual Success
When buyer and seller agree with each other, the nature of the deal is not to ‘gain the upper hand on the other party’ 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.
fourth step
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 selling company 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
- Insurance for the Business
- Legal Disputes
- HR
- Details about Assets in the Business
- Systems
- Client Contracts
- Stock in the Business
- Insurance for the Business
- Finance Contracts
- Lawsuits
- Safety
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.
fifth step
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 hoard lots of cash, especially with inflation, it will cost money to hold onto too much cash.
Financing the Transaction and Due Diligence Process
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.
