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In Part 2 of our Selling a Business blog series, we discuss the planning stage of the process. This typically takes 4 to 8 weeks to complete, but can take many years depending on the particular circumstances of the business being sold.
4 to 8 weeks is usually achievable when the planning work is confined to the following components:
Drafting a confidentiality agreement;
Preparing a business information memorandum;
Preparing an anonymous teaser;
Compiling a prospective purchasers list; and
Preparing a due diligence data room containing the key documents of the business, reviewing them for issues and remediating them before the start of the sales process.
Many years of planning may however be necessitated by the following before the sales process can begin:
The due diligence data room is found to contain serious issues requiring remediation.
Tax planning advice is required that necessitates a restructuring of how the business' ownership is held to maximise the after tax proceeds from a sale.
The business is owner dependent and time is required build a team who can operate the business without them; and
The business is a growth business that needs to prepare and then demonstrate its achievement of a three-to-five year strategic plan to support a premium valuation in the sales process.
Each of the above are discussed below:
Drafting a confidentiality agreement
A confidentiality agreement protects the business by including clauses that provide for:
the confidentiality of the sale process itself; and
all information provided to prospective purchasers through the course of the process.
Confidentiality agreements are usually standard documents and therefore drafts are commonly available from mergers and acquisitions advisors. Lawyers may be required to prepare draft agreements if customisation is required.
Preparing a business information memorandum
The business information memorandum is the key marketing document in the sales process
It can take up to 4 weeks to write; and
will include the minimum information prospective purchasers reasonably require to understand the business in order to submit a meaningful non- binding indicative offer.
Significant time is usually spent with the business' accountant and m&a advisor on the historic and forecast financials included in the document as these are used by prospective buyers to value the business.
Businesses that demonstrate a long track record of delivering sustained levels of earnings and have a clear and realistic plan to grow them in the future can expect to be valued at a higher multiple of earnings than businesses with a short track record and limited future growth potential.
Preparing an anonymous teaser
An anonymous teaser is provided to prospective purchasers to help them decide if they'd be interested in entering into a confidentiality agreement to participate in the sales process.
It is therefore usual for the teaser to be modelled off the executive summary of the information memorandum, but:
with all references to the business' name; and
any other identifying features removed to preserve anonymity.
An information memorandum is made available to prospective purchasers after they've entered the confidentiality agreement.
Compiling a prospective purchasers list
A key part of preparing a business for sale is thinking about who might buy it. To do this properly, a comprehensive prospective purchasers list comprising all strategic and financial buyers and potentially wealthy individuals who might be interested in acquiring the business, needs to be compiled.
Strategic buyers might consist of:
domestic competitors, customers and suppliers;
businesses with similar core competencies; as well as
international players who may see an acquisition as an opportunity to enter the Australian market.
Financial buyers include private equity firms who may see the business as having significant growth opportunities which they can help to realise using their investment funds.
Individual buyers are entrepreneurs looking to buy a business.
It can take anywhere from 2 to 4 weeks to compile a comprehensive prospective purchasers list, depending on the breadth of the business' appeal to the above categories of buyers.
Once complete, the list can be further segmented into buyers most likely to acquire the business from those who are least likely. A decision is then made which prospects will be approached first following the launch of the sales process.
Preparing a due diligence data room
A due diligence data room is a folder that is made available for prospective purchasers to review in the due diligence phase of the sales process. It can either be created in:
a free file storage service such as Google Drive and Dropbox; or
a purpose- built m&a data room licensed by providers such as Ansarada and Intralinks.
It should:
include all the key financial, legal, operational and tax documents of the business; and
be reviewed by the business owner, their m&a advisor and potentially their lawyer and accountant for any issues that would cause concern to a buyer.
All issues identified from the review of the data room should be remediated before the start of the sales process.
Many business owners prefer preparing a data room only after they’ve received a satisfactory offer for their business. Whilst this is understandable given the time and effort involved, it is far more preferable to address issues before the start of the sales process than have prospective purchasers discover them during it.
Were this to occur, it could negatively impact the dynamic of the negotiations in the purchaser's favour, potentially affecting the price they're prepared to pay, or causing them to walk away from the deal.
A data room can take anywhere from one week to years to prepare depending on:
the simplicity of the business; and
the nature of any issues uncovered that necessitate remediation before the launch of the sales process.
Obtaining tax planning advice
The way the ownership of a business is structured using entities such as trusts and companies can have a significant impact on tax the individuals who ultimately own the business will have to pay when the business is sold.
In addition, different tax outcomes may arise depending on whether the sale is structured as a business asset sale, or the sale of the securities in the entity that owns the business.
Therefore, it is important to obtain advice from a specialist tax accountant to minimise tax leakage on the sale proceeds. Advice on how the business ownership should be structured should ideally occur years before the business is sold.
Reducing reliance on the owner where the business is owner dependent
A business that's completely owner dependent is less likely to be sold, let alone achieve an attractive price. In this case, it may be best to delay the process until a competent management team is built who can operate the business without the owner. This could take more than a year to do properly.
Demonstrating delivery of a three-to-five year strategic plan
Growth businesses usually sell for a premium compared to mature businesses and therefore should be supported by a clear and realistic three-to-five year strategic plan which demonstrates the business' ability to grow future earnings. This can:
take 3 to 6 months to prepare; and
should ideally be in the process of being successfully delivered for a further 12 to 24 months before launching the sales process.
When selling a business, there is therefore a significant amount of work required in the planning stage. This can range anywhere from 4 to 8 weeks to potentially years to complete, depending on the particular circumstances of the business being sold.
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