Thursday, 18 April 2013

Due Diligence When Selling A Business

Selling a business yourself?

Business Owners negotiate and agree deals on a daily basis, whether this be with suppliers, clients or even agreeing staff terms and contracts.  This means when it comes to selling a business, they already have an abundance of skills and experience to ensure they achieve the best deal for their Company.  Quite rightly, when it comes to selling or buying a business numerous clients I meet with advise me that this is an area that they are confident of conducting themselves, and do not see much value in instructing an agent for something they are more than capable of handling.  Whilst this may be the case for some business owners, when I explain to them that the sale or acquisition of a Company is not just about the negotiation of the deal and agreeing terms at the outset, but a lengthy on-going process for sometimes 3-4 months, they seem surprised.   So why can the sale of a Company potentially become so complicated?

The first critical part of the sale of any Company is confidentiality.  Sellers are wary of the details of them selling a business becoming common knowledge, whether it is being leaked to staff, clients or competitors.  Therefore the process of providing information in a ‘drip feed’ manner to interested parties is a must, helping to protect the Company’s identity and eliminate casual interests.  Even when a purchaser is identified as being serious and they meet with the seller, it is common that details regarding clients and contracts are limited until the terms of a deal are agreed.  At this point, when both parties agree a deal, some sellers believe that negotiations are over and as with the sale of a house they just need to sit back and wait for the solicitors to draw up the contract and the cash to hit their bank account.  The buyer, however, quite rightly sees this just as the start of negotiations.  They have made an offer without seeing all of the required information, and until they have fully assessed every aspect of the Company in their minds the price is not finalised.

What is Due Diligence?

Due Diligence is the terminology given to the stage whereby the buyer will be allowed access to all areas of the Company, to fully allow them to assess every aspect of it, to confirm the suggested areas of strength and growth, as well as view any potential issues which had not been disclosed.  Due Diligence consists of 4 main areas – Legal, Property, Financial and Operational.

Organising and prioritising these 4 areas is critical to ensure that momentum is maintained and the deal progresses.  The Legal aspects will relate to providing evidence of the Company’s incorporation, registration at Companies House, allocation of shares and stock transfer documents to name but a few.  Instructing a solicitor who specialises in mergers & acquisitions is critical for this stage, as this information will tie closely in with the Warranties & Indemnities and Disclosure Letter.  The Property aspects will concern the current lease and novation of this across to the purchaser removing any personal guarantees in place, or in the case of a freehold carrying out an independent valuation or creation of a new lease.

When selling a business, what difficulties might you encounter in Due Diligence?

The main area where deals fall apart with buyer and sellers dealing directly is in relation to Financial Due Diligence.  Typically a buyer will base their offer on historical accounts, or on as up to date management figures as are available.  Sellers tend to assume that this is the end of negotiations; however this is not the case.  Experienced buyers will instruct chartered accountants to carry out an in-depth analysis of the Company’s financial performance, typically over the last 12 weeks.  This review will reconstitute the profit & loss, recalculating the current turnover, gross profit and expenditure costs in order to provide the latest figures in line with the method used to agree the initial valuation.  I am sure you have all heard horror stories of colleagues in the business world who recall how they had deals agreed only for the buyer to ‘move the goalposts’ or change the deal at the last minute.  These stories relate to the Financial Due Diligence, and whilst there are some buyers out there who will use information to their advantage to get the best deal for them, more often or not it is because the buyer is locating funding from a bank or venture capitalist who will only value based on the information provided by the chartered accountant, and therefore the deal falls apart. 

So how can a broker help?

Understanding how buyers, and in some cases their backers, will operate throughout Due Diligence is critical to maintaining momentum and successfully selling a business.  Instructing brokers who are aware of what is standard, what is commonplace and more importantly what is not, allows you to plan for potential problematic circumstances, and will ensure that you are being guided accurately through this crucial time.  Brokers will negotiate every aspect of Financial Due Diligence, ensuring the price you had agreed is not ‘chipped away’ during the process, eliminating buyers looking to wear down the sellers by prolonging the sale in order to achieve the best price.

Ian Charlesworth, Senior Valuer

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