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The 30 minute test: Is your business ready for a private sale?

Alistair Gordon
Monday, October 27, 2014

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Alistair Gordon, Master Coach in the Australian Institute of Directors Directing Growth program designed for directors of mid-sized businesses, offer a completely free, 30 minute test for you to ascertain whether or not your business is ready for sale.

Imagine the scene (this shouldn’t be too difficult!). A much larger business has approached you and offered to buy your business – finally, a dream come true. The golf course and that well deserved international trip beckons. At the newsagent last weekend you quietly bought a copy of Trade-a-Boat and spent a very happy hour trawling through its pages.

Negotiations have been going well. The price was settled after a bit of too and fro, the sales agreement seems to be mostly agreed after two hectic weeks, the purchasers seem relaxed and happy, and their auditors are due in to review the books early next week. Life is about to be very sweet indeed.

Except for one thing that is about to happen to you that - if this is your first trade sale – you did not forsee.

At the back of the sale agreement prepared by the purchasers lawyers is a Schedule headed “Warranties”. There is nothing on this page in the first, or even the twentieth draft.  But it will shortly become a page you will never forget.

Warranties are commitments and statements that the purchaser asks you to make as the seller of the business. They include items like:
•    You have no knowledge of any customers being dissatisfied with your products or services
•    You have no knowledge of any customers taking current or future legal action against the company;
•    You have no knowledge of any fault, currently existing or in the past, in any product and service delivered by the company that might lead to future legal claim;
•    You have no knowledge of any suppliers considering in the past, or in the future, withdrawing their supply arrangements;
•    You have no knowledge of any disputes that could harm the reputation of the company going forward;
•    You have no knowledge of any claims – existing or likely to occur in the future – against the company;

This is just a short selection of what the purchasers’ lawyers will throw at you in the last few days f the contract negotiation. Usually, the warranties (a computer generated catch-all document) runs to several pages.

The essence of what a professional set of lawyers will ask you to commit to is this: you have completely complied with everything that you should have complied with, and indeed lots of things you didn’t did not need to comply with but in the spirit of handing over a spotlessly clean business you have, and that absolutely nothing can go wrong with the business in the foreseeable future, because if it does we’ll be back to you for our money back (and we’ll keep the business of course).

At around about this time the auditors will come back with various accounting complaints that – in essence – suggest to them that the profits statements you made were elevated, and that by applying the purchasers’ accounting standards (which are set by Chicago or some such distant and never to be argued with place) the profit re-stated is 27% less than currently stated in the sales agreement.

This pincer movement is designed to drive down the price that you thought had been agreed, and also to reduce any risk the purchasers might have associated with buying the business. They want to make sure the risk resides with you, not them.

Generally speaking, this is the moment you go home, stressed, and throw that copy of Trade-a-Boat out of the window.

An alternative journey
As the AICD Directing Growth Program suggests, there is an alternative path that may be taken here, and it is to imagine you are already in a transaction, and ask yourself how ready are you for these questions.

My advice to business directors who are seeking a trade sale at some stage in the future in threefold.

Step One. Do the 30 Minute test. Ask your lawyers for a copy of the most draconian Warranties list s/he can find, and read tjhem. 30 minuites later, after everyone else on your management board has read them,, consider these questions:
•    Where might the business be open to risk?
•    How you we mitigate these risks (prior to transaction)?
•    Which warranties can we predict will be required but we can say – on day one of the discussion with a prospective buyer – we will not accept?

Step Two. Invest in an audit, and while you don’t have to get one of the big four to undertake it, you want the audit conducted as if tghe aduiotors are presenting a purchaser. You want them to week out every possible accounting infraction that might end up being a gun to your head late in negiotioations. And obviously, with this in hand, fix them.
Set Three. The first two are easy, this third is hard work, and probably a team sport. You have to put yourselves in the seats of a potential purchaser. They will look at value and risk and potential through quite differently lenses than your Board might. Clearly understanding why someone would want to acquire you, how they are going to pay for it, what promises they are making to their Board, is a critical success factor in preparing your business to be easy to buy.

My little story at the top of this article is not a made up story – it’s a real life experience. And, just in case you think perhaps I am over-egging the prose a little to get your attention, its happened to me in negotiations more than once. I even (shame on me) deployed these tactics when reacquiring a business that I had sold to a buyer previously (I am smiling broadly while writing this sentence!).

I would highly recommend getting involved in the AICD Directing Growth Program, which covers these topics, and also enables you to focus on sustainable growth for your business, and network with peers who have, no doubt, many more interesting stories to tell. See details below.

Key message: prepare for battle, because battle it will be. Good luck.

About Alistair Gordon
Alistair Gordon is owner of HFL Leadership, a leadership development company that operates across the Asia Pacific head-quartered in Sydney. He has grown and sold several businesses, and is a business and leadership coach, senior facilitator, and tragic football fan. Alistair.gordon@hflleadership.com

Directing Growth Program
Break through the mid-size growth barrier with our new program for owners and directors of mid-sized businesses.

The Directing Growth Program is a one-year program, designed for business owners and directors of mid-sized businesses and examines how to build strong governance structure that leads to growth and improved business performance.

Program members will connect and share experiences with other like-minded owner directors through face-to-face and online learning opportunities. Find out more >>

Published: Monday, October 27, 2014


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