We often have business owners ask us this question: Why should I restructure my business? In the same breath, we are told that the owner is considering selling a part or all of his/her business. Hopefully, this short piece will shed light on the ‘why’ and give you food for thought on the importance of restructuring before/when potential buyers come knocking.
You set up business after a ‘back of the napkin’ assessment of your business idea.
You then went out to look for the most cost/time efficient way to start generating revenue.
You quickly realized that the simplest way would be to become a sole shareholder in a free zone company or partner up with someone in order to incorporate a limited liability entity.
You thought to yourself: “I’ll fix it later”. That is, you would regularize your business structure at some point.
Maybe you then got cracking with actually doing business and made ad hoc decisions on (or completely forgot about) the ‘legal stuff’. You faced a few ups and downs but the business stabilized, money came in and all was good.
A potential investor is showing a genuine interest in your business.
You think handing over the business or a stake in it isn’t a bad thing. That vacation home in Bali or that Aston Martin DB10 (metallic grey) looks enticing.
However the buyer starts asking all sorts of questions. Where are your customers based? How do you get your supplies? How do you deal with customs? What licenses do you hold? Are all your employees properly registered with the authorities? What are your contractual protections? What happens if you, the main promoter of the business, are unable to perform your role going forward?
You slowly realize (or are made to realize) that the way you do business may not match the way you should be doing business…all thanks to the ‘legal stuff’.
So just like you wouldn’t buy a car without the checking under the hood and getting the seller to fix any issues, or you wouldn’t buy a house with a leaking roof without getting the homeowner to patch the roof, a potential buyer of a business is unlikely to hand over cash to you, whether for a small stake or the whole business, until you have resolved the areas that they consider to be risks.
That means you need to focus on these risk areas if you want to make your business an attractive proposition for buyers. These may involve, for example, ensuring that the business is supported with an appropriate corporate structure in place, the right licenses have been obtained, adequate contractual protections are inserted in agreements with key customers or that warehouse lease terms are re-negotiated.
It is better to present a business that is ‘market ready’ than to present one that is in ‘housekeeping’ mode. Think of it like slapping a coat of paint on your walls before you sell your house. It takes time and a bit of investment, but ultimately it often increases the value of the house. The same applies to any business.
Why work with professional advisors? I can do this myself.
Sure, you could. However, there is also a risk attached to that. The risk is you don’t get it right and end up spending more money, time and effort in fixing something that could have been done correctly right from the start. It’s like self-medicating only to eventually see a doctor, or fixing a plumbing issue only to call in a handyman when things go wrong. You wish you had done it at the start, as you would have achieved your objective quicker and without incurring as much expense.
Similarly, when restructuring a business and getting it ready for third parties to have a look, it is about minimizing risk, giving yourself peace of mind and achieving your goal of selling efficiently and at a cost that works for you.
To read more about selling a business, head to our post on the 5 Key Legal Issues to consider when selling your business or check out our (broader) post on Acquisitions & Sales.
You could also read about one of our completed sell-side transactions.