In the last of a three-part series in association with BusinessesForSale.com, we focus on best practice when completing the sale.
The first part explored the most common reasons why entrepreneurs decide to sell their businesses.
Part two takes you through every key stage of the sales process, from hiring a business-transfer agent to closing the deal.
Now we’re going to linger a little longer on the final stage of selling your business: completing the sale.
Due diligence
Before the buyer commits to one of the biggest investments of their life, they’ll want reassurance that they’re getting what you’ve promised. Any deal agreed in principle is made on the basis of certain claims made about the business’s financial health, physical and non-physical assets and reputation, among other things.
The buyer will therefore request to conduct due diligence. This the process by which your buyer examines your business closely to check the veracity of those claims.
The process involves an inspection of your physical assets (premises, equipment, inventory and so on), as well as all paperwork (financial accounts, tax records, licences, employee, customer and supplier contracts, etc).
As a seller you shouldn’t agree to due diligence until you have agreed a price and terms with the buyer. The duration of the process is negotiable and generally undertaken in tandem with the preparation of the legal paperwork needed to close the sale.
For clarity, here is a list of things the buyer will probably request evidence of:
- Accounts
- Historic and projected financial performance
- Valuation of property and other assets
- Legal and tax compliance
- Major customer contracts
- Intellectual property protection
- Any pending legal action against the business
- The final sale agreement
The more cooperative you are with the buyer (within reason) the quicker you can close the deal, and the lower the chance of a frustrated buyer pulling out of the sale.
Cooperation also requires preparation, so get your documents up-to-date and in order and your premises in a fit state for due diligence.
Be prepared
Before the buyer requests to carry out due diligence, you need to be ready. It is wise to have a professional look through your books, legal affairs and other business to make sure that there are no red flags that will put a buyer off or give them too much leverage in the negotiations.
Preparing for due diligence will be easier the earlier you start. Running your business with the exit in mind means that you will have been recording all your transactions in meticulous fashion and have all your contracts up to date.
Your employees should have clearly defined roles and secure contracts and any intellectual property should be protected with trademarks or copyrights.
The sale agreement
When the due diligence process approaches its conclusion, this is the time to finalise the sale agreement with the help of your advisers. Outline clearly the precise terms of the sale, as the agreement is broadly based on what was initially sketched out in the heads of terms.
Even though you’ve already reached an agreement over the heads of terms, be sure to consult with the buyer in the formulation of the sale agreement. And be clear in your own mind of exactly what future liabilities, indemnities and warranties you are taking on as part of the agreement.
Professional advice is invaluable when it comes to preparing and finalising paperwork in consultation with the buyer. Even if you’ve got this far without professional assistance, it might be worth appointing a solicitor or business transfer agent to help you get the deal over the line.
On rare occasions, buyers will try to renegotiate the price downwards based on something uncovered during the due diligence process.
If it’s something genuinely at odds with the information you’ve already provided, there could be justification for renegotiation – that’s a judgment call to make with the help of your advisers. However, if their reasoning seems spurious, resist their overtures, even if they threaten to walk away.
Once a final price is agreed by both parties, the buyer will sign a binding contract of sale. At this point the deal is done and all those years of graft and financial investment will finally reap you a well-deserved financial reward!
Further reading on selling a business and completing the sale
