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In Part 1 of our Selling a Business blog series, we begin by providing a sales process overview.
Most business sales are commonly structured as competitive tender processes. The typical phases of this are as follows:
The planning stage. Involves:
preparing an information memorandum and anonymous profile (teaser) of the business;
drafting a confidentiality agreement that provides for the confidentiality of the sale itself, as well as any business information disclosed during the course of the process;
compiling a a comprehensive prospective purchasers list comprising all strategic and financial buyers and potentially wealthy individuals who might be interested in acquiring the business; and
preparing a due diligence data room containing the key documents of the business, and remediating any issues contained in these before the start of the sales process.
The planning stage typically takes around 4 to 8 weeks to complete, if it is confined to the above components. Many years however may 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 to 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.
Approaching prospective purchasers.
The sales process begins by approaching prospective purchasers with an anonymous teaser, which they use to decide if they're interested in acquiring the business.
If so, they enter into a confidentiality agreement with the vendor and are then provided with an information memorandum and sales process letter that contains the key milestones and timings of the process.
Non-binding indicative offer letters submitted. Prospective purchasers submit non- binding indicative offers by the due date in the sales process timetable, which is typically 6 to 8 weeks after the launch of the process. Their letters should contain sections on:
offer price;
consideration and payment structure;
key offer terms;
due diligence requirements;
how they intend to fund the offer;
their conditions to submitting a final offer; and
confirmation that they can meet the key milestones and timings in the sales process letter.
Purchaser Due Diligence. Potential purchasers who submit the most attractive indicative offers are shortlisted to conduct due diligence:
A virtual data room containing the business' key financial, legal, operational and tax records and a draft sale agreement prepared by the vendor's lawyer is made available for them to review.
The parties have an opportunity to ask questions and conduct site visits, which are usually provided outside of business hours, or discreetly during them to protect the confidentiality of the process.
The virtual data room is closed after around 4 weeks.
Submission of final offer letters. Negotiation and entry into a sale agreement. Final offer letters and a mark-up of the sale agreement are submitted at the end of due diligence.
Negotiations take place to confirm all parties have submitted their best and final offers.
The party with the most attractive offer is then selected to work exclusively with the vendor to enter into a final sales agreement.
Transaction settlement. The sale is ready to complete when all conditions to completion in the sale agreement have been satisfied.
Staff are typically advised of the change in ownership between the date the agreement becomes unconditional and the transaction settlement date
The transaction settlement date is when the vendor is paid and the buyer takes possession of the business.
Overall, the whole process takes a minimum of 4 to 6 months to complete if:
there is plenty of buyer interest;
there are no major conditions to completion in the sale agreement; and
the business has been well prepared for sale, with all potential issues remediated before the start of the process.
The process can take significantly longer however if the opposite is true and since this is often the case, most transactions take more than 8 months to complete.
Process Customisation is Important
When selling a business, it is important to note that the process overview outlined above requires customisation for each sale, depending on the unique circumstances of the business being sold. This is particularly relevant when deciding how many prospective purchasers to invite to participate in the process:
In an ideal world, as many prospective purchasers as possible would be invited to leverage the competitive tension this generates to negotiate the highest selling price.
In reality, too many participants being involved places many businesses at greater risk of key competitors, customers, suppliers and employees finding out about the sale, which is potentially damaging to both the sale and the business.
It is often preferable therefore to confine the sales process to a small number of potential acquirers who have the most to strategically gain from an acquisition. This approach ensures confidentiality of the process can be carefully managed amongst the few parties most likely to pay the highest price.
Next blogs in the Selling a Business series
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