The Final Negotiations When Selling A Business
Once everyone has signed off the DD, it’s down to the final hurdle, the actual contract for the sale of the business – the Share and Purchase Agreement. It’s the final fence in the race, but, like the Grand National, you can still fall here, and if it does, your race is over (for now).
The Sale and Purchase Agreement (SPA) details every aspect of the transfer of ownership in the body and appendices. The DD outcomes decide a considerable amount of the detail for the SPA. Anything that the buyer sees as a risk becomes part of the warranties or indemnities clauses.
It must be remembered that the SPA is a joint contract between the parties who are selling and buying. It’s comprehensive. It’s the final step of selling a business.
Selling a business – payment terms
While the Purchase price might be set, the actual payment terms are generally more complicated. There are many ways for the terms to be applied. This includes deferring part of the payment conditional on performance criteria. This is a way of sharing the risks associated with the initial transfer and post-acquisition activity. It’s a 2-way agreement so make sure you have all the protection in place, you need to know what needs to happen for you to get paid and you make sure you are in control of those activities.
This is especially important for an earn-out where you are required to work after the transfer of ownership under the new owners. It’s easy to underestimate how soul destroying it can be to work for new owners when you’ve been the owner and controller yourself. If you sell to the kind of buyer that’s going to make this difficult (or impossible) you are going to have to be prepared to walk away from the earn-out element. This is a reasonably common occurrence. With the right buyer who is culturally aligned, it can be a huge success. It’s usually binary.
It’s important to understand the tax implications of the payment terms to make sure you are not agreeing to something with a significant personal tax implication just because it’s beneficial to the buyers. The SPA is a mutually agreed arrangement for the transfer of ownership and is likely to involve some give and take on different clauses. It’s never completely one sided or straight forward.
If your buyer is a bigger company, part of the deal may be a swap of money for shares in the acquirer. It’s important to understand how much the shares are worth to you and what restrictions you have on selling them. If they are listed (i.e., publicly traded) this is easier to account for as you’ll have a free market on which to trade. There are usually strict timing restrictions on selling those shares.
However, if it’s a minority interest in a private company you’ll need to mitigate the risks with an effective shareholder agreement and clarity on how you can exit your value. It’s your job to figure out what you want and get that included in the legal paperwork BEFORE you sign anything.
Shareholder agreements are one of the critical documents every business owner should have – no matter what the circumstances.
What’s included when selling a business?
Most businesses have working capital and cash help within them that form part of the distributable reserves of the business. They are due to the shareholders immediately before the transfer of assets. This is often forgotten about by less experienced or sophisticated sellers.
Make sure your lawyer deals with how the cash and working capital is managed in the SPA. Get tax advice on the treatment of this too. You don’t want to end up with an unexpected tax bill because of the different treatments of the proceeds of the sale. Even sophisticated buyers get caught out by this. The more specific the SPA is on the treatment of cash and working capital the easier it is to close the numbers in the final deal.
It might seem obvious to get tax advice in advance of the sale process, but it helps you structure the deal and give the appropriate instructions for negotiations to your lawyer. Making part of the proceeds a contribution to your pension, for example, is a great way of making the most of some of your tax allowances.
Additionally, when you reinvest proceeds from a business sale there is currently an opportunity to defer tax liabilities and payments. And at the time of writing Entrepreneurs Relief is still available.
Earn-out clauses and employment restrictions are amongst other major elements of the SPA that affect you after the sale. It’s the job of your lawyer to take you through every aspect of the document, but it is up to you to make sure you are aware of every word in the document, and its impact on you. It’s a big document and can stretch to hundreds of pages.
It’s the details that cause the last 5% of the deal to become the most demanding and complicated. The process to this point is tiring and stressful so it’s hard to think straight when all you want to do is get it over. What appears to be a small issue missed here could cost you thousands, if not millions.
Popping the champagne corks
Nothing beats the feeling of signing that SPA and watching the funds arrive in your bank account.
But don’t expect to arrive at your lawyer’s office at 11am on the day of the signing and expect to be having a champagne afternoon tea. Even when all you have to do is sign a document, it’s rarely that simple. Most sellers and buyers experience last minute tweaks and adjustments.
It’s not unusual to still be in the lawyer’s office hours later than expected or, indeed, days or weeks later.
In one exit process a client was expected to complete the deal on 30th June. Over the next 3 months there were 4 completion dates set that simply failed to complete. With one thing and another it was late September by the time the ink was drying on the SPA. By this time the sellers were completely fed up and, had one of them not been staying in the company, there would have been significant commercial damage to the business.
Despite several extensions to the deadlines for signing the final SPA, the working capital and cash agreement that was written in the SPA did not match what had been verbally agreed. This caused the seller to get a 3rd party third-party auditor to independently review the final numbers (there was a deferred payment element of the deal that required specific future performance). The audit cost 5-figures but resulted in a 6-figure release of cash in favor of the seller, much to the annoyance of the buyer. It was the buyer who dropped the ball on the SPA.
In my very first exit experience, the final phase of the deal was a long and complex affair involving nearly 100 people and a 700-page SPA. The company being sold included entities in different time zones which needed to be legally concluded in chunks. Starting on day one1 in the early hours, it finally concluded the following morning.
As the summer sun rose on the horizon of the marathon process, the lawyers, buyers and sellers emerged from an office to drink a glass of champagne and wait for the funds to come into the seller’s bank accounts in multiple transfers of tens of millions in payment.
The rest of the morning was spent packing up paperwork and everyone getting ready to go home. As part of the seller team, I enjoyed an open-air post-deal lunch. It was a boisterous affair as each tranche of money arrived. When only one more transfer was left, I fell asleep, face first, in my lobster salad – only waking as the final beep of my email came through notifying me of the last payment. Having cleaned up the Rose Marie sauce from my face and hair (I still can’t smell it without thinking of that day) I slept, deeply, for more than 17 hours, thankfully in my own bed.
Are you ready to sell your business? A Professional Business Mentor is just the leverage you need to get out of the rut and fly. Discover how you can make your business worth more AND avoid leaving money on the table when you finally leave your business. Click here to contact Christine by email alternatively, you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses exit ready so they can enjoy a happier, richer future. She saves them THOUSANDS and increases the value of their businesses by MILLIONS.