The risk and hard work have paid off. You now have a valuable asset in the form of an operating, profitable entity that could be a very attractive proposition, for the right investor.
Time to turn the dream of cashing out and perhaps spending time on other ventures, into reality.
Here are five key issues to consider when selling your business in the UAE:
A prospective buyer will want to know that you are properly licensed to undertake the activities that your company engages in. This means that if you are in a free zone carrying on manufacturing activities, that your license permits you to do that. In addition, any additional governmental approvals (for example, Dubai Municipality approval if you are engaged in construction activities or KHDA approval if you operate conduct certain activities in the Education sector, in the Emirate of Dubai) will need to be evidenced. To the extent that a relevant approval has not previously been obtained, a buyer may request that such approval is obtained prior to ‘closing’ of the transaction and/or ask for relevant representations and warranties.
A related point is that all employees of the business are properly ‘sponsored’ by the entity which actually employs them. This is important as the buyer will want comfort that the employees who actually contribute to the business will still be an available resource, post-‘closing’ of the transaction.
2. Books and Records
A prospective buyer of a business will want to review all relevant information about your business, including financial records, corporate records, employment records, commercial contracts, lease agreements, litigation information, intellectual property information and so on.
While reporting obligations in certain areas in the UAE may be considered to be ‘light’, it is imperative that the target entity has a well-developed document management and recording system.
In the initial stages of the transaction, the buyer’s counsel will undertake a ‘due diligence exercise’ and will provide you and your team with a due diligence questionnaire that sets out the documents they would want to review.
An entity that does not maintain its books and records in an organized, efficient manner, may well cause a potential buyer to have second thoughts about the transaction.
3. Nondisclosure/Confidentiality Agreement and Letter of Intent/Term Sheet
The due diligence process essentially allows a prospective buyer to ‘look under the hood’ of your business and gain access to extensive confidential information. Prior to entering into detailed discussions with a potential buyer, an owner should enter into a nondisclosure/confidentiality agreement that prohibits the prospective buyer from sharing information to which they have access, during the due diligence process.
Finally, the confidentiality agreement should remain in force until a definitive transaction document is executed. If the discussions break down, the agreement should provide that all of your confidential information will be returned to you.
The letter of intent or term sheet is (generally) a non-binding offer from the buyer that sets out the main transaction terms (such as the price, conditions, warranties, payment) and the structure of the transaction. If drafted accurately, the LOI/term sheet should enable the parties to agree on the definitive agreements quickly by bringing out potential areas of disagreement, which can then (hopefully) be negotiated in a swift manner.
Although the LOI is generally non-binding, there are a few key provisions such as expenses (each party pays its own transaction expenses), confidentiality, exclusivity and non-solicitation that are binding. The non-solicitation/no shop clause will usually state that the seller will not engage with or entertain discussions with any other party, relating to the sale of the business for a period of time, in order to allow the prospective buyer time to consider the potential investment and conduct its due diligence exercise.
4. Limitation of Liability
As a seller, you will be expected to stand behind your business and provide certain warranties in relation to the business. The buyer will want your liability to be limitless in the event that any of the warranties do not hold true. Your goal will be to limit your liability in that event. In certain cases, a part of the purchase price will be held back in an escrow account until the end of the ‘warranty period’, i.e. the period during which the warranties are valid.
As a seller, you do not want to be exposed to any potential claim for an indefinite period of time and, therefore, this is a very important provision in the transaction documents.
5. Employment/Service Agreements
In certain cases, if the business relies heavily on the founder’s/principal’s expertise, connections, knowledge or management, the buyer may want the seller to stay involved for a period of time post-closing. This should be discussed and agreed at the LOI/term sheet stage. If you are prepared to be involved in the business after the buyer takes over, the terms of any employment/service agreement should be agreed at the outset and, ideally, form part of the transaction documents for the deal. Certain buyers may and leave this until the end of a transaction, when they may have more leverage and when the seller is ‘tied in’ to the deal.
Given the potential issues that can arise during the course of deal-making (irrespective of the size of the target), it is important that specialist advice be obtained, either from close associates or external advisors, on the financial and legal aspects of the deal. The earlier such advice is sought, the more likely that you, the seller, would be able to (i) successfully negotiate a deal that makes sense for you; and (ii) increase the chances of the deal actually going through.
If you are a business owner thinking of a sale, you may wish to also read our post on how we helped a UAE business owner sell his business (at a premium) within 6 weeks.