How to respond to a potential buyer for your business

  • 31 Aug 2021

By James Lyons, Corporate Partner at national law firm Devonshires

The easing of lockdown is expected to spark increased acquisition activity for businesses in the UK. But what should you do if you are approached by a potential buyer for your business and what do you need to do to get the best possible price?

Know your own business

Receiving an offer for your business can be an enticing prospect, but there are a number of things you should consider and do before accepting. The first is to obtain your own valuation of your business. Don’t just accept the valuation your prospective buyer has given you. If you are selling a house you would get an expert – an estate agent – to value it and it should be the same when you sell your business.

Work out if selling is right for you

Just because you have received an offer it does not mean you have to accept it. Is now the right time to hand over the reins and realise the value you have created, or do you still want an active role and influence in the future of the business?

 

Also, what will the buyer bring to the business? Will they have the resources to scale up? Do they have a particular synergy which will enhance the growth opportunity? Are they in it for the long term or to make a quick profit by selling on in a few years? Make sure you take a step back and consider if it’s right for you at this time and if you should hold out for a better offer or a different buyer more aligned with your ambitions for the business.

Engage professional advice early

It is advisable to engage a legal professional early on in the process so that they can provide you with a due diligence checklist of items they would expect a prospective buyer to request. This will ensure that your lawyer can pre-empt any potential gaps or problems. I would always urge businesses to do this before they open up their books to a buyer or investor.

Look forward as well as backwards

Traditionally the value of a business is often based on a multiple of profit made over the past few years, but the impact of the pandemic is likely to change this approach. For any prospective buyer it is difficult to assess the true value of a business based on the past two years, as many have been so badly impacted by Covid.

As a result, I believe we will see more deals structured on an earn-out basis, with deal values referenced to future earnings or performance. Spend time documenting your future business plans and financial forecasts since much of the value you derive from your business may well flow from these rather than necessarily from recent performance.

Have your paperwork ready

Any prospective buyer will want to see your paperwork and contracts, so it is important that you have this in order. When opening up your books to prospective buyers or investors you can impress them with the professional nature of your business and increase your chance of maximising the value of your sale. It has always been important to have your paperwork and contracts up to date before selling a business, but the pandemic has made this even more so.

 

Any cautious prospective buyer will be interested to review your contracts to see if they are robust enough to withstand another wave or economic disaster like coronavirus. They will consider the extent to which your business might be exposed to supply chain disruption and the extent to which your contracts may be capable of being terminated or varied if another drastic situation arises.

Legal housekeeping

You should also ensure that all necessary registers and registrations are in place; these may include the company share registers (often overlooked), and registrations to help enhance or protect the value of the business such as intellectual property rights, like a brand name or design.

Other registrations may be required by law, for example data protection, depending on the nature of the business. As with contracts, it is also important to ensure that all relevant registrations are in the name of the company, rather than, as is often the case, one of the directors.

Make sure you are ready

It has always been important to have your house in order when selling your business, but even more so because of the pandemic. Consider if this is the right time at the right terms and don’t rush into it. Be prepared to do your own due diligence on your business to be ready to open your books. And remember that only by demonstrating your business’ future growth, as well as its past performance, will you get maximum value should you choose to sell.

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