As a business owner you were no doubt used to making important decisions on an almost daily basis. But faced with selling your own business you were – unless you’d sold a business before – moving out of your comfort zone into uncharted territory.
Having prepared your business for sale, put it on the market and found a credible buyer, you may now be feeling a bit more accustomed to the process.
As negotiations begin, here’s a walk-through of the value of professional advice in keeping negotiations on track and in your favour, the difference between an asset sale and a share sale, and the lowdown on warranties.
Brokers and professional advisors
Many issues related to day-to-day business operations will demand your attention as negotiations continue, often for weeks or months on end. Even if you’ve coped with little assistance until this point, additional advice or support from a business broker, accountant, solicitor or all three could be invaluable.
You may need advice and/or services in areas such as: law, finance and valuation, sell-side due diligence, confidentiality, and taxation and accountancy. In certain industries, you may require additional guidance – for example, on risk or environmental matters.
“It’s perfectly possible to sell a business without the aid of a broker,” acknowledges Rob Goddard, CEO of Reading-based business brokerage Evolution CBS. “But there are considerable risks in doing so.
“It takes a huge amount of time (not something that’s generally available for business owners), resource (to find and research potential buyers to assess their viability) and skills that most business owners lack – like writing the critically important sales prospectus, handling buyer negotiations and dealing with difficult and contentious issues that always arise.”
When selling your business to a third party, there are broadly two types of sale: asset sales and share sales.
With an asset sale, your buyer will negotiate to purchase the specific assets they wish to acquire. These may include tangible assets like property, equipment and stock and intangibles such as copyrights, accounts receivable and contractual agreements.
Negotiations will establish precisely what is to be included and each asset’s valuation.
An asset sale is a simpler transaction for the buyer than the alternative and their transaction costs may be considerably lower.
While the final sale and purchase agreement is usually fairly straightforward, complex transfer of ownership issues can arise from third-party agreements.
You should take advice on any possible tax implications which may flow from your agreed asset-transfer deal.
Negotiate the best deal: share sale
When a share sale is concluded, all assets and liabilities of your business form part of the deal. This ‘lock, stock and barrel’ transaction represents a greater risk for the buyer, who consequently can be expected to conduct a more robust and detailed due diligence process to minimise uncertainty.
The sale and purchase agreement will also necessarily be more comprehensive. The concerns of each party are generally thrashed out via rounds of intense negotiations – the buyer seeking warranties and indemnities to reduce their risk, which the seller attempts to resist, or at least minimise.
For all these complexities, it will be easier to transfer the title of your business via a share sale than an asset sale, and there are tax benefits that accrue to the seller.
Negotiate the best deal: warranties
A contractual undertaking that information provided about the business or its assets is true, warranties are sought by the buyer on things like accounts, contracts, and tax and legal requirements. Whereas they protect the buyer, a warranty leaves you, the seller, with an ongoing liability to the purchaser after the sale has gone through.
To protect yourself, you should make sure that warranties are defined as clearly and precisely as possible, lest there be disagreements about the nature and scope of your obligations down the track.
In part two of this article, we’ll explore the various ways that deals are structured and offer you some tips on how to handle negotiations.
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