You might have decided to call it a day. Or to cash in on your hard-earned capital accumulated or invested in the business. Or there has been a knock on the door from a competitor, or from private equity investors who can see the value in your business. Perhaps your senior management want to buy you out. Or you can see a future growth strategy by selling part of the business to new investors or going public and floating the business on the stock exchange.
Just how Prepared are You?
Most experienced lawyers and financial advisors will agree that they never cease to be surprised at how unprepared their clients are for the rigours of the sale process and for the need to position themselves to negotiate the best price from the purchaser. There are exceptions of course, but it is usually the case that most SME businesses, and many larger businesses as well, do not have the resources or the in-house expertise to have done this – or to know what to do.
It is a rare occasion when the price or the terms of the sale are not up for negotiation during the sale process. Experienced purchasers will always go into a deal expecting to find reasons to change the terms of the initial offer and to negotiate the seller down on the price. The psychology of deal-making is that once a vendor signifies a willingness to sell, then the benefits and the attractions of a swift and successful outcome (cash in the pocket, removal of debt, casting off the stresses of management, retiring to an easier life) become compelling reasons for a vendor to succumb to deal fatigue and be talked down on terms and price. Well-advised purchasers know that.
If the necessary steps have not been taken to prepare, to remove the red flags and to anticipate (and even rehearse) the inevitable negotiations, then the likelihood is that the sale will fail, or the business will end up going for a bargain basement price. The sensible alternative of being well-prepared, removing reasons for discounts and maximising the appeal of the business to purchasers is available. So, what then should you do?
Read – Selling a Business: Your Six-Step Guide to Get It Right (and Get Paid)
Call your (experienced) Lawyer … (or find one who is).
Very few businesses are successful without their leaders having trusted advisors who can be relied on to provide robust advice and fearless opinions. The more experienced and independent those advisors are, the more likely is the value that they will provide at the early stages of a prospective sale. Practising commercial lawyers offer the unique advantages to their clients of legal professional privilege. So, anything that you discuss, or disclose to them for the purpose of obtaining legal advice about the business and the sale, cannot be disclosed without you waiving that privilege. This can be important during the primary tasks of identifying potential problems and in tidying up the business for sale. Or later, post-sale, if a dispute arises.
An experienced lawyer will, usually, have no vested interest in the outcome of the sale other than for his or her legal fees for acting for you. They will quickly learn about your personal situation and your objectives and will assess your likely strengths and weaknesses in the negotiations to come. (There are often both). They will be your confidant, someone to bounce your ideas and decision-making off and someone who will use their experience in the negotiations and to anticipate and deal with hurdles along the way. And, of course, they will handle the documentation and the legal aspects of the sale process through to completion.
What does Being Prepared Mean?
At the opening discussion about a potential sale, your lawyer will want a snapshot of the business itself. They will want to see the latest financial statements and any management accounts and forecasts available. They will want to know how the business is currently structured and whether there are partners, minority interests and key personnel to be considered. They will ask about your main customers and material contracts.
At the same time, your lawyer will engage with your accountants and financial advisors to obtain their input, especially in relation to the business’ financial performance and its compliance with tax and other regulatory requirements. If there are actual or potential red flags, or if there are litigation risks, then he will ask about them and identify what needs to be done.
They will, of course, want to know about the potential purchaser and their commercial objectives in making the offer or the approach. If you require assistance in facilitating introductions to potential investors, or to brokers or investment bankers for a public offering, then they will offer their suggestions. Even at this early stage, your lawyer (usually along with your accountants and financial advisors) will foreshadow the sort of deal structures that might be considered or needed. Are we looking at a sale of shares, or sale of all or part of the business while retaining assets, tax losses or the company shell? What deal structure is likely to produce the best after-tax result? What assets need to be stripped out ahead of the sale? Are there related licences or IP interests that need to be dealt with? Are there executive handcuffs, restraints of trade or deferred payments or personal guarantees and indemnities involved. Are there any other ongoing post-completion risks?
Read: Business valuation. How much is your business worth?
The Advantages of Preliminary Due Diligence
Almost every sale and purchase involves a due diligence (DD) process by the purchaser to a greater or lesser degree. Many transactions do not survive the DD process and most purchasers will leverage their negotiations on terms and price against the results of the DD exercise. It is wise to assume at the outset that every purchaser will have legal and financial advisors (as clever as yours) who are well-versed in the role and the potential of DD in a sale and purchase transaction.
Preliminary DD involves you and your management being provided with a detailed request for legal, commercial and financial information (RFI) that will be relevant to the sale. If your lawyers and financial advisors are used to working together, much of this will already be available and easily accessed. The RFI will ask about the main aspects of the business including:
- The corporate and shareholding structure
- Shareholder agreements
- Employee contracts
- Trade agreements and possible restrictions on sale
- Loans and securities
- IP and licensing
- Regulatory compliance
- Company records and meeting minutes
- Related party arrangements
- Material contracts
- Legal risks and potential for litigation
- Insurances
- Financial statements (including statutory and management reports and forecasts, tax reviews, assessments of operating levels of working capital)
Your lawyer will work closely with your accountants and financial advisors on this and the results of this exercise will be measured against typical DD requirements by purchasers of similar businesses. Troublesome responses will be labelled as red flags for repair or removal. Potential DD requests from the purchaser will be anticipated and the information gathered will be assembled and, once in order, filed in an electronic data room and kept updated pending the sale.
Negotiating and Papering the Sale
Depending upon the stage to which the negotiations for the sale have reached, your lawyer will likely advise you on the need for confidentiality and non-disclosure agreements before information about you and the business is disclosed to purchasers and their advisors. Sensitive information about the business may need to be locked-boxed and you will be advised about that. Often, getting the parties to a terms sheet or heads of agreement will be desirable and, while these are usually not legally binding, some of the content may be, such as the confidentiality obligations, possible restraints and where a break-fee or similar is agreed.
These days, it is generally common practice for purchasers to prepare the sale and purchase agreement after the parties have agreed the deal structure. This can be a challenge for vendors and their advisors in what can be at times tedious, but vital, negotiations to protect the interests of the vendor and to reject the bias in favour of the purchaser, while keeping the transaction alive and relations between the parties positive.
Transactions involving, or having as their objective, a listed public company entail significant additional strategic and compliance issues in relation to the Corporations Act and the ASX Listing Rules. Your lawyer will need to have direct experience in matters of that sort and be familiar with typical collateral arrangements with brokers, investment bankers and the ASX.
Choosing your Lawyer
If you have a trusted relationship with your lawyer and if that lawyer has a record of having acted extensively in the area, then you are in good hands. Your lawyer is obliged to provide you with a scope of work and costs estimate appropriate to the size and complexity of the proposed transaction. Most lawyers will want to have assessed the details of the transaction before providing this with some measure of accuracy.
Be aware that lawyers do practice in different ways. If you choose a lawyer in a large CBD firm for example, you can expect a high level of competency, but at the considerably higher cost of the teams model that most large legal firms adopt in M&A transactions. There will usually be a partner who is involved in the initial planning and who remains involved overseeing the work of his associate lawyers and legal specialists who are often siloed and brought in to provide expert advice in their specialty areas. For some transactions, this can mean two, three or more lawyers at hourly rates aggregating to high legal fees.
Other lawyers with a breadth of experience prefer to act in the entirety of the legal work and only referring to specialists where needed. Lawyers of this type require a level of confidence to deal with the different legal specialists that are often their counterparts acting for the purchaser in the transaction.
Where lawyers and accounting and financial advisors work closely together on M&A transactions and where they share the same corporate philosophy in getting to a successful completion of the transaction, there can be real efficiencies as well as significant costs savings for the client. If you would like to know more about how we work together on commercial transactions at BridgePoint Group, we would be pleased to have a no-obligation discussion with you.
