Thomas Clark, partner and corporate lawyer at Moore Barlow, highlights the most common pitfalls that business leaders fall into when planning and preparing for a sale.
Any M&A advisor will tell you about the mad rush in the run-up to a deal completing. But those final days and weeks are normally the culmination of months, if not years, of preparation.
Selling a business is a monumentally complex operation, with potential pitfalls at every stage.
Here are the biggest mistakes I see businesses make, and how to ensure you don’t do the same.
Leaving it too late
When a business owner starts thinking about selling for the first time they are, at best, 18 months to two years away from a successful completion.
That’s the length of time needed to get all your ducks in a row.
The majority of this planning is to make the business as attractive, organised and profitable as possible.
The legal work ahead of a deal focuses on ensuring the buyer does not find anything concerning in their due diligence. This includes: making sure company books up to date; ensuring agreements with suppliers and customers have change of control provisions; and checking the business has appropriate internal policies.
For example, employment contracts which follow best-practice and include realistic and enforceable restrictive covenants will make the business look well run.
Early tax planning is also vital. The higher the value of a business, the more complicated it becomes to structure it in a tax-efficient way, so owners should do this as soon as possible. Effective tax planning is difficult to do with a sale approaching.
Business owners should start personal tax and estate planning to manage any windfall they receive from the sale.
Underestimating the resource needed
Often owners don’t appreciate that Selling a business is a job in its own right. The drain on time and people power can impact business-as-usual activity.
Sales run most smoothly when the seller establishes a ‘deal team’ – people who are taken partially away from the day-to-day to manage the transaction. Included in this team will also be external legal and financial advisors.
Identifying the right external support early is essential – look to firms with specialist M&A experience.
It’s important that there is cover for the deal team. Sometimes this means hiring more senior resource or upskilling future leaders. This also makes the business more attractive because it is not so reliant on the founders and key board members.
Not thinking about post-sale
Owners can be caught up in getting the deal over the line and de-prioritise a crucial stage of a deal – what happens afterwards.
Quite often, a sale agreement will require the owners, board members or key leaders to stay on the pay roll for a period to manage the transition. It’s also common for a seller’s payout to be based on future earnings or other performance milestones.
This makes it essential to set the business up for further growth post-sale. Buyer’s will want to see, for example, that efforts are made to retain key staff – incentive schemes are useful here.
An Enterprise Management Incentive (EMI) may be useful. This is a share scheme approved by HMRC that facilitates low tax options for employees, alongside various tax reliefs for employers as well.
Growth shares or other equity arrangements can also ensure that key staff are retained, and performance continues to advance post sale.
There’s no easy way to sell a business and, while the rewards are often worth it, the process can be overwhelming. The key for any would-be-seller is appreciating the size of the task, finding the right colleagues and advisors, and starting the work immediately.
For more information on selling a business, please contact thomas.clark@moorebarlow.com.
