The Situation/Problem
So, you’ve had success and now you’re spending more time thinking of your next big idea than the business you currently own (let’s call the current business ‘Business A’). No problem there. You then realise that to really make the new idea a success, you would need to devote most of your time to it. That means Business A needs to be sold. No problem there either. You also realise that you’ve spent so much time building the business, you don’t actually know what you need to be doing, from a commercial, operational, legal and general business perspective, in order to make your business attractive to a buyer. Ah. Problem.
Your financial statements haven’t been audited. Your corporate structure was put together on an ad hoc basis. You don’t have proper agreements in place for your customers/suppliers. Your IP isn’t adequately protected. And to top it all off, there may be a threat of (unjustified) litigation looming. Yikes!
The Implication
You may say: “So what? If a buyer is that interested in my business, surely they will know that every business faces challenges.”
Yes, you’re right. A sophisticated and discerning buyer would know that being in business means challenges and risks. However, they would also know that they could use such details to their advantage. If the buyer would have thought of paying a multiple of ‘X’ times your earnings for your business, they may now consider it worth only ‘Y’ (Y being substantially lower than X) given that they will likely have ‘issues to fix’ if they were to buy the business. The financial implications for you could, therefore, be massive.
The Solution
So, what should you do?
1. Look at the different components of your business – both ‘above the line’ (i.e. above the corporate entity), dealing with shareholder issues, and ‘below the line’ (i.e. below the corporate entity), dealing with operational and commercial issues. How is it all working? What are the weak points? Where are improvements needed? What can be done now to make things better?
2. Consider if you have the basics in place – (i) a clean corporate structure and requisite licences/authorizations to carry on the business, (ii) transparent and clean accounting practices and an audited set of financial statements, (iii) a good set of commercial agreements with customers and suppliers, (iv) adequate protection for your brand and intellectual property; and (v) proper policies and employment terms for your employees.
3. Identify the key risk areas following the analysis in 1 and 2 above, and strive to fix them, using internal or external help. That may be in the form of auditors, lawyers or other professionals.
A buyer will run a fine tooth comb over every inch of your business, looking for flaws that would result in an increased level of risk, which can then justify a price drop. Your job as a seller is to locate the flaws before a buyer does and do everything possible to correct them. If you are able to do this effectively, you will be well-positioned to be in the driver’s seat in any price negotiation with the buyer.
Check out our blog post on how restructuring your business can lead to an eventual sale or our case study on how we helped a UAE business owner sell his business within 6 weeks.
If you have questions, book a legal consultation now!
