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Maximising the Return on the Sale of Your Business
For many business owners, it’s only when the contract negotiations commence and requisitions or warranties are being sought by a prospective purchaser’s solicitor, that problems inherent in the business are flushed out.
By that time, you’re too late. The price for the business has been severely discounted in the mind of the buyer.
Then, even if that purchaser walks away from the sale, there’s a risk that rumours of “problems” with the business leak into the marketplace, damaging your prospects of a profitable, seamless sale.
Experience shows that by bringing your business broker, accountant and lawyer together, to work for you as a team, well in advance of the negotiation process commencing, your business will be in better shape for sale; helping you achieve a better price and a smooth, speedy outcome.
Based upon our experience, there are some important elements to be considered prior to selling a small to medium sized business, including:
1. Employment Agreements
Ensure you have proper employment agreements in place for employees. Given employees are one of the biggest assets being transferred to a purchaser, it’s imperative to have suitable agreements and ensure they correctly reflect the arrangements between employer and employees.
In a recent case, we found that a seller had engaged his employees as consultants. When the sale of the business was being negotiated, it transpired the ‘consultants’ were actually employees and their add-on costs and superannuation benefits had not been paid for more than five years. The reputation and goodwill of the business was tarnished due to the owner’s oversight and the sale of the company delayed while issues were resolved.
2. Intellectual Property Rights
Ensure you have all the intellectual property rights owned by the business properly registered and protected. If not, your business could be given a lower valuation and its goodwill severely affected.
If you rent the premises from where your business operates, a thorough review of the lease is essential. You should consider how long the lease has to run, whether there’s an option to renew it, when a market review of the rent is due and what increases are allowed on the annual rental charge.
If a potential buyer has to relocate the business in the short term, it could potentially harm the sale price.
It is imperative to have a sound and favourable commercial lease in place prior to the sale and to get a lawyer to review it.
If you own the physical premises in which your business is located, and the property is included in the sale, make sure it is structurally sound and presents well. It can pay to have the building inspected to flush out any negative issues prior to reaching the negotiating table.
We recently reviewed a case where, in the course of due diligence, a buyer inspected a factory premises only to find asbestos in the roof. The proposed sale had fallen through and the business had been placed in the hands of a liquidator. This could have been avoided if the property had been inspected and brought up to standard beforehand. The seller could have saved millions of dollars.
5. Assets (excluding real property and intellectual property rights)
It’s imperative that all assets used in the business are correctly identified, including:
(a) leases and licenses applying to assets
(b) encumbrances, mortgages, charges and title retentions over assets
(c) asset location
(d) depreciation schedules and valuations of assets need to be readily available and up-to-date
(e) maintenance agreements and other contracts affecting assets should also be readily available and current
6. Environmental Issues and Licences, Permits
It’s important to ensure your business complies with any relevant environmental issues and has the necessary licences and permits in place that are required to properly conduct the business.
Business owners who have maximized the goodwill of their business reap significant financial reward from purchasers. A brand name, online presence, access to markets and general advertising all combine to create an image of a business and determine a buyer’s perception of a business’s true value. In some cases, buyers have been prepared to pay seven and eight time’s earnings for a business because of its strong goodwill component. Seeking early professional advice on as to how to maximize goodwill is vital to achieving the highest sale price.
8. Company Register
A buyer may wish to inspect the minutes from meetings held by directors and shareholders, so it’s important that these are taken down accurately and readily accessible, demonstrating proper business conduct.
A business that presents as well organised, structured and ‘clean’ has a much better chance of achieving a higher sale price than one that doesn’t. If there are flaws in your operations, contracts, licences, lease or services, you’re less likely to achieve real value. This is especially so when businesses are sold on a price earnings multiple.
Seeking professional advice from a team that includes an experienced business broker, commercial lawyer and accountant, when you first think about selling your business, can mean the difference between an ordinary, painful process and an extraordinary transaction. Conversely, entering the sale process without sufficient expertise risks losing the rewards for which you have worked so hard.
Hicksons Lawyers are highly skilled in helping business owners plan for, prepare and achieve the best outcomes for the sale of their businesses. Working with our clients, we assist them in identifying the issues before the contract is drafted, ensuring that their interests are always protected and that the sale progresses in the most cost efficient and timely manner.
Colin Steingold is a senior commercial lawyer and consultant at Hicksons Lawyers. His contact details are below.
t: +61 2 9293 5465
f: +61 2 9264 4790