Selling your business

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When preparing to sell your small to medium-sized business to a large corporate keen to acquire it, make sure you have all the relevant paperwork to hand and consider using a professional advisor.

ATTRACTIVE SMALL to medium-sized New Zealand businesses have recently found themselves identified as potential acquisition targets by larger corporates, both New Zealand and international. Your business could be one that is a tempting target.

Take time preparing

Having helped several large corporates to purchase businesses this year, there are a few areas that are worth highlighting.

Taking the time to prepare for such a transaction will help it proceed smoothly and give a great first impression to the potential purchaser. It may even have an impact on value, as your business should be perceived to be well run and organised.

Timeframe can be 6–9 months

Be prepared for the acquisition to take longer than you expect or would like. Initially, you’ll be signing confidentiality agreements and agreeing on key terms, and you may sign a non-binding heads of agreement or term sheet that summarises those broad areas. This part of the process alone can take a few months, especially if the acquirer needs to obtain overseas approval for the transaction.

In the meantime, keep focused on running your business to ensure that performance doesn’t drop because you are distracted.

Once the due diligence process starts where the corporate and its advisors are verifying information about your business, another 2–3 months are likely to pass. Ideally, you’ll also start negotiating the sale and purchase agreement so that, once the due diligence is finished, you’ll be able to document any loose ends and complete the transaction.

Again, you may need to allow time for overseas approval, for negotiating terms and potentially changing the structure of the transaction if the results of the due diligence are less than favourable. In all, expect a minimum 6–9-month timeframe from the start of negotiations to completion.

Collect documentation

As soon as you decide that you want to sell all or part of your business, start gathering the information that will be required to demonstrate its value. Your accountant can gather the relevant financial data, such as sales and profitability trends; debtor, creditor and inventory analysis; and explanations for any unusual transactions or trends. If you are contemplating a share sale, taxation data will also need to be collected.

You will also need key documents such as sales contracts and pipeline, key supplier contracts, leases and evidence of your IT systems. You’ll need evidence of your key management team’s tenure and skills, your payroll data and especially whether you have correctly accounted for employee leave. The leave data is an area that has the potential to be a speed bump for many transactions, as errors in leave calculations are very common.

Employ professional advisors

Unless you already have experience in this area, using professional advisors will be crucial to a successful outcome. Involving your advisors at an early stage and potentially engaging specialists who have experience in such transactions can ensure that you are in the best possible position to secure favourable terms.

You may have been using a family lawyer or accountant for many years with a level of trust and deep understanding of your business. Consider engaging experts to work with them on key elements such as the due diligence and sale and purchase agreement negotiations.

You may also want to consider calling on an experienced business broker to assist with negotiations and act as an intermediary. This can be helpful if the situation is becoming tricky, as you may wish to preserve your future working relationship with the potential acquirer.

It is likely there will be at least a transition period where you will be required to act as consultant to the business to ensure a successful handover. If the transaction involves a deferred settlement, you will likely prefer to remain involved in the business to ensure that any performance goals are met.

Handling due diligence queries

Be prepared that the list of information required for due diligence from a corporate acquirer is likely to be extensive and farreaching. Start preparing to populate a due diligence data room so that, if and when the transaction progresses, you are ready with much of the information requested.

Once the corporate’s advisors start working through the data provided, be prepared for questions and assemble a team to respond for each area. Establish guidelines depending on your available resources – for example, you may want to ask for at least a 2–3-day turnaround to deal with any queries. You may also want to use your advisors to check information being uploaded to the data room to minimise areas for confusion.

As all the information you are providing may be used to support renegotiating terms or drafting warranty provisions, you may want to consider how you can mitigate any demands.

After the completion

Once the transaction is completed, be prepared to work with the new owner on integrating the business with its existing operations. Reporting requirements are likely to be more extensive in terms of coverage (financial, forecasting, operations, staffing and strategy) and timeframes (monthly reporting within a few days of month end). It will be necessary to clarify delegated authorities, approval processes and operating procedures.

Financial reporting, in particular, can be onerous, as the corporate may be reporting using international financial reporting standards, and there may be a requirement to transition to these post-acquisition with changes in accounting policies.

If you have sold your business assets, you may require advice on winding up your current ownership structures. Similarly, financial advice on investing the sale proceeds may be helpful.

Overall, the benefits of releasing equity and having access to resources through being part of a larger organisation are likely to far outweigh these short-term issues. Think of the problems that arise as speed bumps on the road towards future growth and security.

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Articles are correct at the time of publication but may have since become outdated.

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