Part 3: The Sale Process
In previous articles we have highlighted the importance of effective planning and preparation ahead of the sale of your business, however the management of the sale process is also a critical factor in achieving the best outcome. The time commitment involved should not be underestimated, and many vendors choose to appoint an experienced advisor to manage the process and handle negotiations, ensuring that management remains focused on the performance of the business – ultimately a critical factor underpinning value for any purchaser of the business.
Maintaining control of the process
In a minority of cases, it may be advantageous to negotiate a sale directly with one party. However, this approach carries significant risks and downsides, particularly if the buyer knows or suspects they are the only horse in the race. If you are serious about selling your business, a better outcome will usually be achieved through identifying and negotiating with a range of interested parties, which may include both strategic trade buyers and financial buyers. This approach will enable you to retain control over the sale process, maintaining competitive tension and optimising your negotiating position. From a practical perspective, this will enable you to impose a timetable and process on buyers, and to control the flow of information at each stage of the process.
Potential trade buyers will often be identified from amongst your existing customers, suppliers and/or competitors, as well as overseas companies which may be seeking to enter your market. Financial buyers may include private equity funds and other types of investor. Identification of potential buyers is a key step in a successful sale process and you should ensure your advisor has access to a range of buyers relevant to the size and nature of your business – both in Australia and overseas.
Dealing with potential purchasers
Qualifying potential purchasers is critical – you want to avoid wasting time and providing commercially sensitive and valuable information to “tyre-kickers”, and instead focus on those parties with a genuine intent and capacity to proceed with the acquisition of your business – on terms that would meet your objectives. Advisors will initially approach potential buyers without identifying your business by name, in order to determine their level of interest. Following receipt of a signed non-disclosure agreement, a confidential information memorandum providing further information should then only be provided to short-listed parties, who will be asked to submit a non-binding indicative offer by a fixed date.
Shortlisted parties will then undertake due diligence before confirming terms of their final offer. Using an online dataroom as a repository for due diligence materials, with a Q&A facility, is a key element in ensuring an efficient process, enabling multiple parties to conduct their due diligence in parallel, and therefore extending the period for which competitive tension is maintained, prior to finalising negotiations with the preferred buyer.
When offers are received, in addition to evaluating the indicative price and deal terms, it is important to consider deal completion risk, for reasons such as failure to secure the required funding, internal or regulatory approvals, or where an offer is otherwise highly conditional. You will also want to understand the buyer’s intentions regarding the business going forward, including future investment and growth plans, how it will be managed, and the impact on current management and employees – particularly if the deal involves an earnout and/or you are required to remain with the business for a period following the sale.
Maintaining confidentiality
Ensuring confidentiality is always a key concern in relation to both your sale intention and the sensitive financial and commercial information on your business, which you will be sharing with a range of buyers, who may include competitors, customers and/or suppliers.
It is important to identify and manage carefully the flow of particularly sensitive information, such as project margins and the terms of key commercial agreements, especially in the early stages of the process. Whilst certain key employees necessarily involved in the process will need to “brought inside the tent” at an earlier stage, communication with key customers, suppliers and other employees regarding the sale also needs to be managed carefully, with a clear and consistent message, generally at a late stage in the process, once final terms have been agreed and deal completion risk is considered minimal.
