When selling a business there is no better place to start than inside the mind of the purchaser.
Buying a business requires a certain amount of due diligence and as far as the purchaser is concerned – the more the better.
Here are seven areas the purchaser will want to look at in detail and a rough idea of what they will be looking for.
1 – What the Business Does
The first task for the prospective purchaser is to get to grips with everything the business does.
This is more than just a description in the prospectus, they will want to look at brochures, literature, briefings and web presences.
Beyond getting a handle on the internal capabilities of the business it is also looking at the claims the business makes in relation to its capabilities.
Excessive claims, or claims of capabilities that require the involvement of third parties will potentially change the view of the purchaser on the overall value of the business for sale.
2 – The Accounts and Tax
The accounts of the business is a more obvious area where the purchaser will look.
The accounts should be up-to-date with projections for the existing financial year available.
It is important that projections have some basis in reality. If, in this year, you are projecting a large rise in sales, you will need to show hard evidence that this is achievable.
Tax is a big risk and so you can expect records to be checked over the last 5 years. This will not be just looking at the accounts, but at the submissions made to HMRC.
The purchaser needs to make sure there are no tax related skeletons in the cupboard and so they will be looking for any special arrangements with HMRC. They will also look at other special issues that may incur future liabilities such as asset disposals or offshore operations.
3 – The Business Construction
If you are selling a business you own 100% then this can be quite simple, but as soon as additional shareholders and directors are involved, it can quickly become very complex.
The purchaser will be looking for both shareholding capital and associated rights. This will also involve looking at the articles and memorandum of association. There may also be a separate shareholder agreement to consider.
This documentation can hold some nasty surprises with agreements that made perfect sense when the business was formed now looking unreasonable or unfair.
4 – External Finance
The purchaser will need to know all details of any external finance including loan facilities, overdrafts or any other debt instruments that have been used to ease cashflow or for investment.
Also included in this search are mortgages or charges on the business and any director liabilities associated with loans or other finance arrangements.
The information required will include not just the finance being employed, but the total amount available. So you may have an overdraft facility, but not be using it all.
They will go through the documentation with a fine tooth comb so it is worth considering doing this yourself first. A bit like the shareholder agreement, the loan documentation can sometimes contain some nasty surprises. It is better if you know about them before you are questioned on them.
It may be the sale itself will be used to settle some debts, but how this is supposed to work should be fully defined before the business sales process starts.
5 – Property and Planning Permission
When selling a business, any property to be made as part of the sale will have to be fully defined of course. However any planning permission gained for future expansion should be included as an enhancement to the overall asset value.
Leases are especially important as they indicate the true extent of the ownership. These may incorporate exclusions which may restrict future use – even if planning permission is already in place for future developments.
The purchaser will also want to look at any property disposals in recent years to check for any legacy liabilities or even income.
6 Fixed Assets
Beyond the property the business is housed in, the fixed assets of the business are part of the obvious physical representation of the business for sale.
The purchaser will require a full list of everything that this entails, whether what is being sold is in fact owned and the true value of each asset.
So all equipment being leased will have to be defined and associated documentation produced.
Equally the true worth of the equipment needs to be established. For example a 5 year old desktop computer already written off a couple of years ago, may not be an asset, but a liability as it is more than likely it will require replacement in the very near future.
Is that It?
Er … no. In fact it is just the start and there is more to come on this subject in the not too distant future.
You can see from the above, the devil is in the detail. The last thing you want to be doing is compiling this stuff at the last minute.
Our advice is to start early and make sure you always have a handle on all of the detail you will need to sell a business as you are running it.