You need to be properly prepared and understand what is involved in selling your business: We will be discussing a number of important aspects in a series of articles.
Whether you are selling a well-established business, or are a start-up with your eye on building it to a point where investors are queuing at your door for a slice of the pie, there are some fundamental issues to be considered.
As this is a fairly extensive topic, I will be writing a series of articles over the next few months. For the purposes of this discussion, let’s assume that your business is owned by a company.
Is your house in order?
Before you even consider engaging with a potential investor it is imperative that your house is in order. It can be extremely off-putting or concerning for an investor if your company’s affairs are in disarray.
Make sure that your accounts and financials are up to date, have been prepared properly and give a complete and accurate representation of your company’s financial position. Remember that the financials will be scrutinised by your investor, when deciding the price he or she is prepared to pay.
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It is also important that all shareholders are like-minded in their desire to sell. We will deal with this in greater detail in a later article, but problems can arise if some or not all of the shareholders wish to sell. The memorandum of incorporation of the company (MOI), shareholders’ agreement and/or the Companies Act, 2008 (Companies Act) may also place restrictions on selling. You will need to examine these documents and the Companies Act carefully to understand exactly what restrictions there may be, and what processes need to be followed.
The investor will inevitably want to conduct due diligence into the affairs of your company. This can be an extremely intensive, time-consuming, costly and stressful process for you as seller. You will be asked in-depth questions about your business and may be required to furnish details and information about your finances, accounting, customers, suppliers, product lines, product warranties, assurances that you are legally compliant with all applicable laws, possible or historic litigation, employees and major contracts. Ensure that your files, processes, record keeping and business information is properly stored, is complete and easily accessible.
Partner with a professional team
Appoint a professional team to help and guide you through the business sale process carefully; and if possible discuss fee structures and scope of work upfront to avoid any unpleasant surprises down the line.
Your accountant will help ensure that your financial information is accessible and accurate. It is imperative that you discuss the possible tax consequences of a potential sale, as this could have significant impact on how the sale transaction is structured.
Your lawyer will be able to assist in identifying what processes must be followed in order to allow and effect the sale from a legal point of view. This can be a complex area of law, so ensure that you appoint an attorney who has experience in corporate transactions.
If you do not have a purchaser in mind, but want to sell, you may consider appointing a business broker or corporate advisor to help you find a suitable buyer. Some advisors work entirely at risk and are paid a commission on final completion of the deal, others may require a monthly retainer plus a success fee or commission. It is often useful to have a reputable advisor on board, as not only should he or she have access to a pool of vetted potential purchasers, but also experience in this type of transaction.
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Do not sign any indicative term sheets, or letters of intent, with a purchaser or investor without considering the provisions carefully and consulting with your professional advisors. A term sheet can be binding and define the parameters of a deal at a very early stage, committing you to a structure and terms that may not be desirable in the long-run.
Importantly, before disclosing any information about your business to a business broker or corporate advisor, ensure that a non-disclosure agreement is signed by them. This will restrict them from disclosing any confidential information relating to your business to any third party, including a potential investor, without your prior consent and without that party agreeing to similar restraints.
What you don’t want is a potential investor having access to confidential information (like customers, key employees, pricing), not proceeding with the deal, and then using that information for their own benefit.
In the next article in this series: We will discuss (i) what it is that you are selling – a business, shares or assets and (ii) whether you are entitled to sell - what restrictions there may be in your company’s MOI, shareholders agreement and/or the Companies Act which need to be considered, and possibly overcome.