In my fifty years of business I have bought and sold a number of businesses but, even making the odd mistake along the way, the end result has been positive. There are a number of firms keen to buy in the residential sector if you want to sell your business, and there are even more businesses up for sale. It never ceases to amaze me that when someone decides to sell, they don’t work out the best way to go about it.
I hope the following pointers based on a lifetime’s experience will help you prepare for a sale so that when you find a buyer, you are ready and the transaction will go ahead as planned.
FIRST THINGS FIRST
Now you have decided to sell, the first thing you need to decide on who is going to represent you with regards to the sale. You need an experienced firm of solicitors who are used to buying and selling businesses. The temptation is to go to the firm you have always used, but they hardly ever sell a business. House conveyance, wills, probate and down to earth family lawyers are excellent at what they do, but may not have a specialist corporate department who are practiced in the transaction of a commercial business.
Yes the bigger firms do charge a lot, but if you negotiate properly some of the costs could be picked up by the purchaser if you complete and on time.
You then need to discuss the sale with your accountant. There are tax advantages to selling at the moment and you need to make sure that you benefit from those. You also need to decide if you will just sell the business, or the shares in the company, if it is a Limited company.
The advice generally, if you are selling – sell the shares, if you are buying – buy the business. What does this mean? Selling the business means that the staff, premises and business transacted therein is sold, but you retain the bank account and liabilities up to completion, and any issue that might crop up as a result of previous trading remains your problem.
Selling the shares is simply that. If the company is limited you sell the shares the purchaser gets everything so that is why there will be warranties and indemnities in the Sale and Purchase agreement.
Now you have your professional team assembled you need to know what you are selling. It is worth spending a weekend putting together a synopsis of the business; a brief history, detailing any acquisitions you made to get you to where you are. Set out the turnover for the last three years and the profit, but if the profit is reduced because of your income then take out of the costs any items which refer to you personally, as that will not be a cost to the purchaser. Make sure you make it clear what you have taken out of the accounts.
In a letting business the number of properties under management is important. Specify the different categories of management, some firms just do management, others have a rent collection service and other features that will be unique to you should be spelled out and indicate the number of properties the scheme applies to.
Give brief details of staff – don’t name them, job titles will do – set out the staff costs, bonus arrangements and any other benefits. Detail where you do business from the rent either payable to third party landlords or that will be paid to you, if you own and intend to keep the premises.
Once you have put your mini prospectus together the enquiries should follow. The first document you will be offered to sign before anything happens is a confidentiality agreement. This binds both parties to keep secret the discussions and documents you will exchange between you.
The next event is most likely a face to face meeting with the purchaser. You will immediately form an opinion of the purchaser at this meeting. Your experience in business and of people will give you a good idea if you will be comfortable pursuing a sale to them. Don’t forget it’s your business and even if you are keen to sell, follow your instinct. If you are uneasy, walk away. I wish I had done that once!
Your mini prospectus will be a great help both to the prospective purchaser and to you. It will reduce the length of meetings, show to a purchaser you are organised and you know your business.
You may then receive an offer. This is the moment you are either delighted or disappointed. The latter is more likely as everyone has an inflated idea of what their business is worth. So how to react? Firstly do you know on what basis the offer is made? Maybe the prospective purchaser has missed an important income stream, or maybe you forgot to include something like commissions or other small but now significant income. Do you know if the buyer’s calculation is it based on a multiple of turnover, of profit or something else? You must know their formula so you can check the numbers. Discuss it with your accountant, he will advise on the potential net value of a sale, so you know what you will end up with after tax.
HEADS OF TERMS
Assuming you arrive at a price that is acceptable, the purchaser will submit a document called ‘Heads of Terms’ (HOTs). This is not a contract for sale but sets out the steps to completing a sale, the people involved and special terms. This will be offered to you to sign. You should discuss these terms with your solicitor and see if any amendments are needed. Its important to make the case that it is YOUR sale and not let the solicitors re-negotiate the deal. Nothing irritates purchasers more and it could lose you the sale.
When the HOTs are agreed sign them (if you have partners or other shareholders they should also sign the HOTs). Now comes the hard work.
The HOTs will contain an agreed timescale and completion date. You need to be sure this date is realistic; neither you, your directors or partners will be on holiday, your professional team will be available, as the purchaser’s team will be working towards that date. It is for you to drive the process forward and ensure your solicitors and others involved can meet their obligations to that date. If you miss the completion date it can lead to increased fees, keep your team on track.
The next element is Due Diligence, which is effectively answering all the questions required by the purchaser’s solicitors. This involves sending them copies of just about every document you have in relation to the business – leases of premise, employment contract, details of accounts and client account, insurances, and many more.
Then comes the Sale and Purchase agreement (SPA). The purchaser’s solicitors usually submit this. I am referring to the SPA as one document, in practice it can often end up being a number of documents. At its simplest, and for the moment assuming a sale of ‘shares,’ the document will recite the details of the deal; price, payment arrangements, completion date. The element that confuses most people is the warranties, which will require you to warrant that what you said is true. You will also be required to provide indemnities for tax and any issue that may have happened in the past, like the recent dismissal of a member of staff (they may still launch a claim) or you had an argument with a client who has threatened legal action.
You can limit your liability to the purchaser by sending, on the day of completion, a disclosure letter. Your specialist solicitor will help, it is your opportunity to disclose everything that might crop up, so the purchaser is aware of it, and you have limited your liability by prior disclosure.
The sale of ‘the business’ will be more complex as it will involve a TUPE transfer of staff to the purchaser. This is a specialist area and you will need solicitors to ensure you follow the correct steps and don’t fall foul of the legislation. However you are required to tell your staff you are selling before the sale takes place. This can be a gamble and may cause issues.
The day set for completion in the HOTs will be approaching and last minute issues can occur. The important thing is that you should not do anything to affect the business without first advising the purchaser. If you get a rent review notice for a branch or a branch manager leaves or a large management client withdraws, you MUST disclose this as soon as it happens – as you would should you win a big management portfolio which would allow you to discuss an improvement in price.
THE DAY DAWNS
Completion day arrives and this often takes place over the phone, with you at your solicitor and the purchaser at theirs. You may all get together if the consideration is considerable. However, watch your bank account you are about to enjoy the fruits of all your hard work. The overriding message is to maintain a dialogue with the purchaser throughout and be honest. Don’t try to be clever, you will be found out and it may well mean he whole deal is lost. Good luck!
Robert Jordan FRICS, FARLA Hon., is well known in the residential lettings sector, having built the letting agency Jordans and as a former President of ARLA.
For specialist advice on valuing, selling or buying a business you can consult a specialist broker. The Haversley Group. Tel: 01933 356646. www.thehaversleygroup.com.
Adam J Walker & Associates Ltd. www.Adamjwalkerbusinesssales.couk. Tel: 0845 226 9053.