It’s that time of the year when you’re thinking of selling your business. You’ve had this thought process before. And each time you think you will get more information, do some research, talk to people in the know and just do it. Nike style. However, things get in the way (read: you don’t know what you need to do) and you end up back where you started.
Well, you’re in luck. You’ve come to the right place to educate yourself on what selling your business really entails. Luck or clicking the button to read this blog post. 🙂
Here are the main stages of selling a business – some stages may change/vary depending on the size of your business, where you operate, how you’re regulated and a number of other factors, so take this as an indicative process rather than one set in stone.
Pre-Sale Preparation
This stage involves getting your business ready for the sale.
Look at the different components of your business. How is it all working? What are the weak points? Where are improvements needed? What can be done now to make things better?
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.
Identify the key risk areas following the analysis above, and strive to fix them, using internal or external help. Consider if you need to engage in some form of restructuring to help with the sale.
Teaser/Information Memorandum
Put together a summary, teaser or information memorandum together, with the assistance of your financial advisor/broker. This should be a short document that describes what your business is and the opportunity it represents. It should give enough information to create interest while being anonymous and confidential.
Identify Buyer(s) and Sign Term Sheet/MOU
Work with your financial advisor to identify potential buyer(s) and agree an auction/bid process (if there is more than one interested party).
Prior to disclosing any information, sign confidentiality agreements with all interested parties.
Once a bidder has been chosen, sign a term sheet with that party.
Due Diligence
The due diligence process involves a review of your business’ information by the buyer, to confirm the basis on which an offer has been made. The due diligence would cover financial, legal, commercial, operational areas of the business.
This will typically involve the preparation by the buyer/its advisors of a list of questions and requests for copies of documentation.
Share Purchase Agreement and Disclosure Letter
During or after the due diligence phase, parties will begin negotiating the Share Purchase (or Sale and Purchase) Agreement (SPA). This is the document that will ultimately govern the terms on which the shares are sold. The document will outline the payment terms, completion arrangements and the warranties and indemnities to be given by the seller. Negotiations over warranties and indemnities can be lengthy and this is often the biggest issue in agreeing the final documentation.
The key ‘insurance policy’ for the seller, in relation to the warranties, is through disclosure. This involves the preparation by the seller’s lawyers of a disclosure letter which sets out exceptions to the factual statements in the warranties and shifts the risk to the buyer. This will also be subject to negotiation and can take considerable time to finalise.
Signing
Once the SPA and disclosure letter are in agreed form (and the loose ends in the due diligence process have been tied up), the parties can sign the SPA!
Note however that in most cases, this does not mean the deal has completed. Read on!
Conditions
There may be a gap between signing of the SPA and actual completion of the deal (i.e. when you get paid and the shares/assets are transferred to the buyer). This period allows the seller and buyer to complete any conditions to the sale (for example, obtaining third party approvals, fixing any legal/operational issues, etc).
Completion
Once the conditions have been completed, the parties would attend the offices of the relevant authority to sign the transfer forms, and would also sign any ancillary documentation (board resolutions, resignation letters, appointment letters, etc).
Timelines
You want it done and you want it done like yesterday. If only life were that simple!
The answer to the timeline question is: be prepared to spend up to 6 months on this process. It may be less or it may be more. It depends on a number of factors including:
(i) the level of due diligence being conducted by the potential buyer;
(ii) the sector in which you operate;
(iii) the number of external (government/third party) approvals required for the sale;
(iv) whether you are selling shares or assets; and
(v) to what extent the parties are reasonable/aggressive/fair during negotiations.
As mentioned above, just because you sign an agreement to sell may not mean that you have completed the sale. There may be a gap between signing and completion during which you/the buyer may have to complete certain conditions (such as, for example, obtaining third party consents, fixing operational issues, amending critical documents, etc).
Talk about timelines, with both the buyer and your advisors, early on in the process!
For more on the sales process, read how to make your business attractive to a potential buyer or some key legal issues to consider.
