Choosing the right buyer for your business
Karen Edwards is an Associate Solicitor in our specialist Corporate and Commercial Team. In the latest of her series of articles on selling a business, she looks at how to find a buyer, and how you can choose the right buyer for your business.
How to choose a buyer for your business
When it comes to selling your business, choosing the right buyer is critical.
If a seller can build a trusting relationship with the buyer this should pay dividends during the sales process and will be of even more importance where the seller continues to work alongside the buyer in the business following a sale.
How do I find potential buyers for my business?
There are many factors to consider in choosing a buyer, but a good starting point is to establish what options are out there. A buyer could be any one of the following:
A supplier or customer, or a competitor
Speak to key contacts as it may be that their company is looking to expand. Your market knowledge should mean you have a fair idea of who is looking for this type of opportunity.
New market entrants
A corporate finance adviser will have a database of possible buyers and may be able to identify less obvious candidates. You might also choose to instruct an agent to market your business.
Your own management team
They may wish to buy you out of the business (known as a management buyout). See below for how you can assist in making this a possibility. My colleague Wayne Spolander has written in detail about the management buyout process in an article you can read here.
Family members and succession
Succession by one or various family members - this could be a family member who is actively involved in the business.
The more possible buyers you can identify, the better the potential price is likely to be.
Choosing the right buyer for your business
When you have received offers, the next stage is to weigh these up and establish which you wish to pursue. The most important things to consider are:
Can the buyer actually afford the purchase price?
It is vital that you ensure they have sufficient funding and if necessary, ask to see evidence that this is in place.
Who is buying the business?
If it is a company, you might wish to ask for some security to protect any deferred element of the purchase price. This could be by way of a charge over the buying company, or the company you are selling, or the directors of the buying company personally guaranteeing any future payments.
How is the buyer proposing to pay for the business?
A cash payment up front is always the safest option but may not be the most tax efficient option for both parties, or indeed feasible. If payment of some or all of the purchase price is going to be deferred, again consider how this could be secured.
Likewise, if any future payments are linked to performance of the business, consider negotiating relevant safeguarding measures to protect your money. You may wish to retain some form of management control to enable performance targets to be met.
Are you going to be paid by way of shares in the buying company or another company?
If so, you should carry out some proper due diligence to ensure that the shares being given in place of cash have an equivalent value.
What is the buyer expecting of you?
You may be required to remain involved in the business for a certain time after the sale. It is worth remembering that you will no longer be in control of the business. You might also want to establish what plans the buyer has for the business to determine whether this is something you want to be a part of.
What comfort is the buyer looking for?
It is usual practice for the buyer to want to raise enquiries about the business and for the seller to stand behind the information they provide by way of warranties and indemnities. However, a buyer might be a less attractive prospect if they are seeking protection which is wholly disproportionate to the deal on the table.
Is the buyer seeking an exclusivity period?
This will usually be included in a heads of terms document which sets out the main agreed terms before moving to contract stage. Any exclusivity period will be legally binding and will prevent you from negotiating with any other potential buyer during that period.
Selling a business: A management buyout
Specifically, if a management buyout is the preferred option, there are some things a seller can do to make this a more viable option:
- Train your management team; their skills will be a key issue for any banks who are approached to fund the deal.
- Give the management team time to raise the money.
- Talk to them about how you might structure any deal and consider allowing them to acquire the business in stages, for example by buying part of it each year for a number of years out of their share of the profits (this way you continue to take your own share of the profits until the deal is complete). If you agree to this structure, make sure the sale agreement commits the buyer(s) to buy the whole business so that your exit takes full effect.
Selling a business to a family member
If, on the other hand, your exit is based on a family succession:
- Talk openly with possible successors, in a professional environment.
- There may be only one realistic candidate, but you still need to be sure this person has the necessary skills and commitment; allow them to work in your business or encourage them to work in a similar business elsewhere.
- If more than one person is taking over the business, make sure they have similar ideas and accept the part they will play in the overall responsibility of the business.
- Keep other employees fully informed and in particular, inform key staff about key decisions.
- Discuss your future expectations with your successor as this should make it easier to step back when you retire.
My colleague Matt Fretten worked on recent transfer of ownership to family members that you can read about here.
Getting the best price for your business
Finally, don’t be afraid to negotiate with potential buyers to try to achieve the best deal all round.
Until you have signed an exclusivity agreement, it is worth exploring all the options, so long as this is not going to affect any trust that is developing between you and a particular prospect.
How can I make my business more attractive to buyers?
I wrote in more detail about grooming a business for sale in a previous article that you can read here. It looks at how to be sure that the business is an attractive prospect for any buyer to put you in better stead to realise the maximum value.
Selling a business: Tax implications
It is also recommended that you consider your tax position at the earliest possible stage. Any tax implications will be determined according to the structure of the deal you agree with your buyer. It is important therefore that before agreeing any terms you take the appropriate tax, and legal, advice.
Specialist business sale solicitors
Our Corporate and Commercial Teams are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.
If you have any questions, you only have to ask us at Frettens. Please contact us here or call 01202 499255 and Karen or a member of the team will be happy to chat about your situation and your particular requirements.