Co-authored by Anthony Bekker, Chris Spillman with the assistance of Dion English and Casper Xiao

Ready to make your business exit a success? Selling a business is more than just a transaction – it’s the culmination of your hard work, dedication, and dreams. The journey can be exhilarating yet complex. That’s where we come in. Navigating the world of mergers and acquisitions demands finesse, strategy, and savvy. We’ve distilled our expertise into 10 rules that guide you through the process. Whether you’re seasoned or a first-time seller, these rules will equip you for a smooth, successful business exit, whether through a share sale or asset sale.

1. Internal Due Diligence

The first step in any potential sale scenario is to conduct your own internal due diligence. Put yourself in the shoes of a discerning potential buyer and look for any gaps in your corporate information that could raise red flags. Buyers want to know exactly what they’re paying for, and the risks they’re taking on, under the acquisition. To instill confidence in prospective buyers, you will need:

• Sufficient records to prove ownership over the business’ assets
• Precise records of corporate structures and shareholdings 
• Clearly documented employee option or bonus schemes (not just verbal agreements)
• Up-to-date business records and contract database
• Evidence of compliance with regulatory requirements (as applicable) 
• Accurate tax records and financial statements
  

You also need to ensure that you are aware of all liabilities of the business and that these are properly accounted for. This means taking a close look at your financial records and identifying any outstanding debts, legal claims, or other liabilities that could impact the value of your business or become sticking points in negotiations. It is essential that there are no skeletons in the closet waiting to be found during the due diligence process that may give leverage to the prospective buyer in renegotiating the terms of the deal.

By conducting your own internal due diligence, you can proactively address these issues and provide prospective buyers with the confidence they need to move forward with the transaction.

2. Coherent Board Structure

When it comes to attracting potential buyers, it is essential that your board is well structured, having the necessary capacity to arrive at negotiated outcomes. Generally speaking, the board should include the founders and investor representatives. Companies can benefit from appointing independent directors with relevant domain expertise either directly to the board or as advisors. When it comes time to sell, the board will be instrumental in negotiating the key commercial drivers of the sale including price, deal structure and timing. Ensuring the board is aligned on the sale and capable of agreeing these terms is critical to a smooth sale process. Additionally, a strong, reputable board will help assure prospective buyers that the business has been run effectively to date, streamlining the due diligence process.

3. Pick the Right Advisors 

Picking and proactively engaging with appropriate professional advisors is an essential step in running a smooth sale process. Engaging reputable advisors is a strong signal to prospective buyers that you are serious about the sale. Competent advisors will also recognise the importance of speed of execution, helping you maintain momentum to keep the deal moving toward close. Additionally, by engaging experienced advisors you will get more than just transactional guidance; you will get proactive partners that will identify and resolve potential deal roadblocks with you.

Legal and financial advisors play a crucial role in helping ensure that your company books and records are up to date and complete, in negotiating the terms of your sale and advising you on the risks arising under these sale terms. Important nuances and bespoke structural details may be relevant, such as structuring the deal to take advantage of allowable tax benefits for small businesses, roll-over relief or capital gains discounts. Both legal and tax advisers will therefore typically advise on any business sale, helping you to achieve the best after tax outcome.

Additionally, as prospective buyers will seek to obtain warranties from you regarding tax, insurance, title, capacity and more, engaging with your advisors early will streamline the negotiation process. A company that has its records in order is easy to acquire and is worth more than one that requires significant time and effort to in order and assess post-acquisition. Selling a business is like selling a house, you get a better price when the house is clean, tidy and not in need of major repairs.

4. Expert Communicators

Effective communication is an essential necessity that helps facilitate agreements between parties and complete any transaction. If you have appointed a broker or banker to assist with your deal, they will likely operate as a key middleman in negotiating the commercial terms of your business sale. Your legal team will generally manage communications regarding deal documentation, engaging directly with the buyer’s lawyers. Given the range of commercial considerations that arise during a business sale, your legal team will also need to effectively summarise and explain key risks and decisions to you throughout the deal process.   

Skilled communicators will effectively smooth out key terms of the agreement upfront. This alignment leads to efficiencies in finalising the long form documentation, as all parties are working together toward a shared goal, as outlined in a term sheet or heads of agreement.

A term sheet will typically include the following key provisions (amongst others):

• Purchase price and payment structure
• Deferred consideration / earn-out mechanics 
• Timing of payments
• Confidentiality provisions 
• Break fees where a party back-outs of the deal 
• Deal specific clauses to address particular facts and risks
• An exclusivity period for negotiation of the documentation 

During an exclusivity period, the seller is prohibited from selling or negotiating the sale of the business to another party. This period will often range between 30 to 60 days, but may be longer for large or complex transactions. During this period, the prospective buyer will usually undertake its own due diligence to satisfy itself that the acquisition target has been represented transparently and is a good investment. Effective and clear communication during this period is particularly important, as delays or confusion in the provision of due diligence materials can dramatically increase the length of the process and, by extension, legal fees. 

5. Preparing for External Due Diligence

Potential buyers will often want to thoroughly understand the business and assets they are acquiring, and typically will prepare an extensive list of questions at the start of the process in order to gather information and assess the risks associated with the acquisition. As such, it is vital for the seller to have sufficient internal resources available to promptly respond to these due diligence requests. 

The seller will therefore need to assemble and brief a deal team to handle external due diligence and the transaction more broadly. This team will generally include the board, company executives and any information gatekeepers (such as accounting, human resources and operations leads). It is important to structure this process in a way that ensures there is alignment between the interests of the deal team and the interests of the seller in successfully completing the deal. If someone’s position may be eliminated as a result of redundancy arising from the transaction, this should be considered.

6. Key Employees

Astute acquirers will be aware that the value of the business they are buying is often heavily tied to the talent of the personnel operating the business. Where you have a share sale, the entire company is acquired and the employment contracts with current employees will stay in place. However, where you have an asset sale, employees will not automatically transition with the business. In this case, prospective buyers will often negotiate directly with key employees to try and persuade them to work for the buyer after the sale. Depending on the structure of the deal, it may be necessary to negotiate and adjust employee incentives to ensure key employees stay with the business post-acquisition.

7. Valuation

Before starting purchase price negotiations, it is important to understand how to accurately value your business and how differences in the sale process may impact this valuation. An optional starting point is to obtain a valuation from a financial advisor or your accountant. They can help you understand the common methodologies used for valuing your company or business assets, along with market trends and comparable deals in your market segment, to ensure you do not underprice your business. 

The sale method can have a significant impact on the sale price achieved. Generally speaking, the use of an auction or a broadly-marketed deal will achieve better financial outcomes for the seller. These processes create competitive bidding environments which increase sale prices. However, the public nature of these processes poses a dilemma for certain businesses. Some businesses cannot afford to give an impression to their customers that they are “up for sale,” so managing the desire to widen the net for potential buyers against the desire to project stability will also be a key consideration. 

8. Demonstrating Strategic Value

Demonstrating strategic value can significantly increase the value of a business and make your business particularly attractive to a strategic buyer. In simple terms, strategic value is where the combination of two or more businesses with distinctive characteristics creates an overall value that is worth more than the sum of those businesses. To the specific buyer, the combined synergies of the distinctive characteristics of each business adds additional value.

The circumstances where strategic value will arise are varied and depend on the nature of the businesses involved in the transaction. Some common examples include:

• Where the businesses have similar core customer characteristics, but distinct customer bases, allowing cross-selling of products 
• Where a business can provide access to a new market for the purchaser 
• Where the businesses are similar in nature and can be streamlined to create operational efficiencies 
• Where a business produces a good or service in the supply chain of the buyer, enabling vertical integration and cost savings

Recognising the strategic value of your business will help you identify the best possible buyer for your business – one who recognises and is willing to pay a premium for the unique value-adding proposition of your business.

9. Founding Team

The founding team, more so than key employees, will often need to show ongoing commitment to the business, if they stay on post acquisition. This generally takes the form of deferred consideration or earn-out agreements, which are structured around key performance metrics such as revenue, EBITDA or other organisational milestones (i.e. integration of the two businesses post closing). The founding team needs to be as aligned and committed to the earnout goals as they were during the foundational period of building the initial business. 

To avoid potential founder conflicts, it is crucial to proactively identify upfront the ambitions and expectations of each respective founder in relation to the sale. This may result in some founders being subject to different earnout metrics or some founders not being subject to an earn-out and leaving the business on closing. These arrangements all need to be clearly communicated and precisely detailed in your deal documentation.

10. Equity Incentives

It is very important to ensure that employee option plans and employee share plans have been set up accurately and diligently to avoid any last-minute complications that can slow down the deal. This may include having terms in the ESOP or ESS that provide the board with the discretion to exercise, cancel or act on behalf of the plan recipients to expedite a sale. On the flipside, employees and other plan recipients should also be adequately protected to ensure that they receive equivalent compensation to ordinary shareholders. Countless companies have been caught up in  prolonged and costly legal disputes due to treating employee stock or option holders differently from ordinary shareholders without providing adequate compensation.

Elevate Your Exit Journey with Biztech 

Ready to take the plunge? Let’s talk business exits – the smart way. Partner with Biztech Lawyers. Our mission is to provide more than just legal advice; we’re here to understand your unique business journey, proactively address potential deal roadblocks, and offer strategic guidance. Your business exit is not just a legal transaction; it’s a strategic leap toward new horizons. Elevate your exit journey by partnering with us today and pave the way for a successful transition. Chat to us