1. Will you lead the business for a further three years after the sale?
Buyers often want someone, who knows the business and the market, on board to mitigate risks and to help integrate the business beyond the deal.
It might work for you, but first ask yourself, could you work for somebody else and, if so, what will your motivation be? If you’re ok with that, then scrutinise the deal structure carefully and be crystal clear about what’s being offered to you before agreeing.
2. Would you help us to rationalise and integrate your business into our core and wind down your operation?
“It’s down to personal choice: your moral, ethical and professional values and what you can live with,” says Martin Brown, chief executive officer of SME growth advisor Elephant’s Child.
“Many entrepreneurs are emotionally attached to their business and take a moral and ethical interest in how colleagues and employees will benefit from a deal. So, think carefully about what a good and willing buyer looks like to you and whether your potential buyer fits that profile. If not, are you prepared to walk away from the deal?”
3. What are the biggest risks impacting your earnings/growth forecasts?
It’s a critical question and you have to know the answer. So, before you embark on a sale, identify key risks by carrying out a professionally comprehensive, well executed and accurate risk assessment. You need to demonstrate unequivocally that you have identified and understand your risks, have taken action to mitigate or remove them and put adequate monitoring and protection in place.
4. Is your valuation an equity or enterprise value?
“This is a typical example of confusing jargon in sales,” explains Martin. “Equity value is enterprise value minus net debt and a surprising number of people misunderstand this. Be sure you know what’s included in the deal.”
5. Will you indemnify us against claims or proceedings for infringement of patent, copyright, trademark, trade secret or other intellectual property?
“You cannot prevent third parties initiating legal proceedings against your company,” explains Dr Anthony Thomson, growth planning specialist with Elephant’s Child. “But you can verify you’ve got a comprehensive IP strategy in place encompassing IP protection, employee conduct and confidentiality, thereby ensuring your IP is well-managed and protected.
“You will likely need to confirm that you’ve never knowingly infringed any third-party IP, that trademarks are registered following appropriate registry searches and that any opposition raised to your chosen mark has been addressed.”
6. Do you mind if we only purchase the business assets?
“It’s common for larger organisations to acquire the assets of the company rather than the shares. Assets such as IP, brand, digital, customer contracts, stock, plant and machinery, are transferred; this should not be confused with asset stripping,” says Dr Thomson.
“It simply enables buyers to leave behind undesirable things such as unfavourable contracts, various liabilities, pension debt. For the seller, who is left to use sale proceeds to pay off company debt and windup, the key question is does this proposal fit with your strategic aim for exit, including, timing, effort and valuation?”
7. Can you guarantee future business growth projections?
Obviously, a guarantee isn’t possible. Instead, demonstrate rigour in understanding historic and future client demand, your mix and profitability by client, offering and sector. Provide evidence of strong account management to grow and retain existing clients and acquire new ones and of your ability to profitably launch new offerings.
8. Do any key customers, suppliers or other relationships depend on specific individuals?
Trading on the length and depth of personal relationships can be seen as a risk and lead to a discount to the business valuation or even kill a deal.
Dr Thomson says: “You cannot sell the founder or owner, so you need to have people in position to take over your important client relationships. Ensure comprehensive, demonstrable succession plans for all management and key staff are firmly in place so your customers don’t leave, potentially reducing the value of the business.”
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.