Planning Your Business Sale: 3 ways a lawyer can add value

Lawyers are often the butt of jokes when it comes to how expensive we are. We get it. But if you are engaging a lawyer to sell (or buy) a business, the right lawyer can add value to your bottom line.

To make sure you get the most out of your lawyer, here are three (3) areas that you need to make sure they have covered:

1.          REDUCE UNCERTAINTY AND RISK

‘Huh?’, you might be thinking. This hardly adds value. Well then, let me give you a true and tested formula:

Increased risk/uncertainty = reduction in purchase price.

A sophisticated purchaser will price risk and uncertainty into the final price that they offer you for your business. It depends on what the risk is, but any risk that brings into question future revenue or profitability of the business will (most likely) reduce the purchase price.

To help identify and then reduce risk, a lawyer (with other advisors) can help you prepare for your transaction by assisting you to get ready for buyer due diligence (in other words the buyer pre-inspection).

If a buyer is about to make a significant investment decision, they want to know what you are telling them is accurate (especially in terms of historical and future performance) and to ensure there are no undisclosed risks or liabilities.

Your lawyer can help you reduce risk and uncertainty in the following ways:

• Make it easy for a potential buyer and reduce uncertainty - you can’t be fumbling around looking for key documents, or making it impossible for buyers and their advisors to access sale information. Have all information electronically filed and indexed, ideally using an online data room, to maintain confidentiality, provide all necessary information but also monitor buyer activity.

•  Make sure you own what you are selling – you don’t want a buyer to come and tell you someone else owns what you are selling them. It isn’t uncommon for a business to be started as sole traders or a partnership (or a simple structure) and then, when business is making some money, upgraded to a more sophisticated company or trust structure. But, it follows, assets and contracts can be left behind in the name of a former owner, spouse etc. With a bit of pre-work, this can be audited and tied-up.

•  Identify key areas of concern and come up with a fix – it is better to be on the front foot and know where the weaknesses are in your business. Some will be able to be corrected (for eg, getting your compliance obligations up-to-date such as tax and superannuation contributions; or where the term of a key customer contract has expired, negotiating a renewal to secure a future revenue stream). Some may able to be managed with a buyer – for example, obtaining consents from regulators, franchisors or key-counter parties. Some may be unavoidable such as litigation against the company or regulatory sanctions for the breach of a planning permit or development consent – such as a pollution abatement notice. In these circumstances, a specific indemnity may be required in the sale agreement.        

 2.          SHOWCASE WHAT ADDS VALUE TO YOUR BUSINESS

As a seller, you must be clear on what adds value to your business from a legal perspective (which if not documented, or not documented well, will likely reduce the purchase price).

 Some key areas to examine:

•  Do you have key agreements to supply goods to third parties or key customer contracts that contractually secure revenue for a period. For example, if you have just been awarded a construction contract or commenced a 3 year services contract with a local council or a government agency (eg IT or security services), that contractually supports your revenue forecasts. Financials are important, but if you can establish the contractual longevity of a revenue stream, that is a big tick.

•  Do you have important intellectual property (IP) such as a well-known brand or do you work with third party contractors to develop IP? A buyer will want to understand all IP used in the business and determine ownership rights or whether a contractual right or licence exists to use that IP in the business. Public registers will be used to verify patents, trademarks, domain names, designs, plant breeders rights and business names. Also keep a list all your social media accounts.

•  How significant are your premises to the business? For certain types of businesses that rely on location such as an iconic restaurant, shop or pub, a buyer will want to secure the location. What are the terms of your lease? Do you have a significant term left and is there an option to renew?

•  Governance documents, standard operating procedures and policies – you might view these documents as a pain in the neck but an incoming buyer can’t download on settlement the contents of an owner’s brain (well not yet) on how to run the business. An incoming purchaser wants to be able to be able to step into the business and pick up the reins, not start from scratch.  Well documented operating procedures, coupled with a generous seller handover period, will instill confidence and therefore value.

•  Your staff – do you have proper employment agreements in place for your key employees?

 3.          GOOD MANAGEMENT OF THE TRANSACTION PROCESS – BECAUSE TIME EQUALS MONEY

Again, how does this add value? There are some key ingredients to a well-managed transaction process that, if not adhered to, will either lose you money or lose you the sale.

• Confidentiality. Imagine inviting a prospective buyer into your business, showing them all of your business records, showing them your client lists, the rates you charge your clients and then the sale doesn’t proceed. Even worse, what if that prospective buyer was a competitor, who then used the information to contact your clients and offer them better rates? Or they start approaching key employees. This risk can be managed by a confidentiality agreement also known as a non-disclosure agreement. Remember, the timing of a confidentiality agreement is also important. It needs to be signed before any information is provided.

• Focus on what matters. It is important that you focus the negotiation on the key issues and not get bogged down in the reeds. A term sheet is a short form document that comes before the sale contract that summarises the key terms of a proposed sale transaction (also known has a heads of agreement, memorandum of understanding or letter of intent).

  A term sheet can be a very useful tool in focusing the energies of the parties on key issues early in the sale process, saving time and expense in getting lost in issues and unnecessary documentation. By raising any contentious issues early on through the term sheet, a party will minimise the risk that the other party feels ambushed down the track in the sale process.

• Beware of Deal Fatigue Syndrome (DFS). This flows on from the last point. Sometimes it feels like the transaction process may never-end. It is important that you agree a clear timetable from the beginning for the transaction to follow to manage party expectations, including:

  (i)    if exclusivity has been agreed, then how long and at what price;

  (ii)   a period for advisors to conduct their due diligence investigations including an opportunity for Q&A;

  (iii)  when formal documentation of a business sale contract will occur (a draft of which can be provided during buyer due diligence); and

  (iv)  timing for any board approvals and third-party approvals such as financing.

By anticipating the steps to be followed through the transaction, the buyer can manage their team, time and resources to prevent the onset of DFS.

If you require assistance getting transaction ready, or for further information please contact:

Anthony McFarlane
Principal Lawyer
T: 02 6041 0777
M: 0408 531 483
E: amcfarlane@ha.legal