The Business Sales Process

Let us look at the business sale process. Many think it is a bit of a dark art selling a business, but in reality, it is not really that different to selling a house. Yeah, there is a bit more maths and financials involved but the process is quite similar.

Step 1: Presale
We start a step earlier than most people when we start describing the business sale process. I will start with presale. That step is about making sure that we get the business ready for sale and that we tidy it up to maximise the value of the business. There are several steps to this. It is a bit like staging your house but not just putting the furniture in it is making sure the house looks right in all areas.

Typically for a vendor we want to make sure that the stock is right in the business. We get rid of obsolete stock; we work hard to collect our debtors and we look at our work in progress. More importantly we reduce reliance on the vendor in the day-to-day activities of the business and if we can over a period of a year or two transit relationships to key staff as opposed to the owner themselves.

Most importantly it is important to have a strategic plan that shows blue sky going ahead, what the business can achieve and how it can achieve that going forward. This will add value. We are planning to put out a separate video on this subject in this series so keep your eyes open for that.

Step 2: Appoint a Broker
The second step in the process is to appoint a broker. The broker is going to be the one that basically advertises your business discretely, checks that the buyers are suitable and qualifies them and then handles the flow of information and the negotiations. It is important that you choose a good broker or a trusted advisor to handle this process. What we don’t often want is for your business to be in the for-sale section on Trade Me or a similar type of publication. Good brokers will find a buyer for your business discretely with the vendor preapproving anyone who is going to be given a confidential information memorandum so that the vendor is comfortable with who is looking at even very carefully redacted data that is provided to prospective purchasers.

Covisory can certainly assist here. It is also important to understand with a broker what the terms are. Are you up for some of the fees irrespective of whether the business sells or is it all success based? A broker will be keen for you to sell because they will only get paid if you sell. It is important to not lose sight of that fact. Sometimes the buyer that they have may not be the buyer that is right for your business, and it is also important to make sure that you maximise the sale price of the business a broker isn’t always incented to do this.

Step 3: Confidential Information Memorandum
The third step is to prepare a confidential information memorandum. This is a summary of not just the financials of the business going back, its prospects for the future. It also sets out broadly what the business does, how it does it, who its customers are and how it operates. These can range from one page to 10. They can be very detailed but more importantly it is about selling the sizzle and not the sausage. These documents are very important because the next step is that we get these shown to prospective purchasers. As noted before a broker or adviser should not show this information to any party who hasn’t been approved by the vendor. Even if it doesn’t mention the firm’s name that is being sold, simply because data gets out into the business community and people might be able to guess who it is that is for sale. You may have to be careful about the knowledge of whether your business is for sale because it could affect relations with customers and whether you get sales or contracts in the future if there is uncertainty about who is going to own the business. We can’t stress enough that maintaining confidentiality is very important.

Step 4: Non-Binding Indicative Offers
Once the data has gone out to the prospective purchasers, we would expect to get non-binding indicative offers back. We would normally set a time frame around this and to ensure that there is a competitive process. You are not going to take your house to auction if there is only one bidder and we are not going to get the best price if there is only one bidder, so it is important that we get competition. From the data that is provided purchasers should be able to make an indicative bid based on what they are prepared to pay for the business on the information that they have received. There is no use haggling over terms and letting them do due diligence if we don’t agree on the price up front. All you are going to do is waste a lot of time and incur one hell of a lot of cost and effort. So, we use the NBIOs to find out who is serious and more importantly who is prepared to pay the most for the business. It is important to work that out because that is the buyer that we want to encourage to bid more than the others and that is how the vendors can maximise their price. We don’t just want the business sold we want it sold for the best price that is possible. So once you have got the NBIOs it is really important to evaluate them and then to select who is going to go and do due diligence and make formal offers.

Step 5: Creating a secure data room
The next step is the creation of the data room. People underestimate the amount involved. There is a huge amount of financial business and contractual data that needs to be put into a secure data room program. There is no way you should ever use drop box, google drive or any other simple shared online folder. A data room package records who has access, controls who has access and it records who has looked at what. It also provides a mechanism for the prospective purchasers to ask questions of the vendor. In one recent sale and purchase that I went through we had 450 questions asked. Many of them were simple and straight forward but a lot of them took a fairly serious amount of time. If you think you know your business wait until you have been through a sale process and find out how much more, you will understand about it afterwards than you did before.

The data room needs to be controlled and operated by a person on behalf of the vendor often not the vendor themselves but a key staff member and we need to be careful about who not only knows about the sales process but who gets data and who gets to answer the questions. One of the things we will talk to the vendor about is who is going to know about the sale and who is going to be on the inside and who is not going to know.

We would normally allow 4-6 weeks for the data room to be open. The prospective purchasers will bring in external advisors, such as their accountants and lawyers to look at data as well as using some of their key management team to potentially look at the data. Often, they may be looking at funders like private equity to come in with them and they will also need access to the data room. Once we close the data room access off there may be a period of 2-3 weeks for residual questions to be asked and then to be answered.

Step 6 – The Final Offer
From this we will get a final offer which is now going to be binding which will transcend into a sale and purchase agreement. Naturally as a vendor you will need to have a lawyer on your team to handle this. If you think you are going to use an Auckland District Law Society standard sale and purchase agreement for most business sales, you would be wrong. Anything more than a simple sale is going to require a special one and they are going to be between 70-100 pages so the costs of doing this for a reasonable sized business are not insignificant. As part of the sale and purchase a vendor may be required to issue what is called a disclosure notice setting out any important information that the buyers should be aware of even if it is in the data room. Once that is disclosed there is no come back on the vendor for it. This disclosure is important because as part of the sale and purchase agreement the vendor will be asked to give warranties and indemnities. They are going to warrant that the information that the purchaser has been provided to look at is correct and to indemnify them if it is not, i.e., if they suffer loss to cover some of that so it is important to make sure that the data is correct, and the disclosure notice plays an important part of this.

It is interesting to note at this point that you can now get deal insurance so that if you do sell a business, you can get insurance if there is a claim against you in the future. It isn’t that costly, and it is not really that difficult, but it remains to be seen how effective it will be if there are claims in the future.

Step 7: Closing the business sale
The final part is then closing the sale, the signing of the documents, the transacting of the business and the vendor’s period of assistance. That might be a matter of weeks, or it might be a matter of years. Sometimes the amount that the vendor gets will be based on future earnings whereas in other cases it will be based on only earnings up to the closing date. There is plenty of documents to sign and there can be a lot involved. In a recent transaction I was involved in we had 72 separate documents that the vendors needed to sign, it was several and we needed 6 copies of them. We had to make sure that each document was signed correctly in the right place by the right person.

How Covisory Can Help You
Covisory can assist you if you are a business owner to evaluate not only what to do with your business but more importantly how to maximise the value. We are experienced in business sales with members of our team having extensive experience. The Covisory team can assist you to develop the best strategy for your business, help tidy it up before you go to sell, we can assist with the production of the information memorandum and to manage the buyer’s perspective and interactions.

We are very discrete, and we can ensure that the information remains confidential in the market and that your identity is protected. Most importantly we can ensure that we find the person who is going to pay the most for your business and extract that value from them.

It is a lot to think about but actually, it is not that different to selling your house. When you are ready to start the process, please get in touch with me.

Nigel Smith