WHEN YOU ARE SELLING YOUR BUSINESS...THERE’S NO SUCH THING AS A GOOD SURPRISE

The Final Stage – due-diligence & the legal process

Picture the scenario: the potential sale of your business seems to be

going so well. Six different competitive bids have been received, but

you have a clear sense of the preferred ‘front runner.’

It is likely at this stage that you may look to give a degree of

exclusivity to the preferred bidder. Then, once an offer is accepted,

and the deal terms are in place, the challenging due diligence and

legal processes begin.

You’ll know the expression ‘caveat emptor’ – let the buyer beware.

It’s very true in M&A. Your buyers’ lawyers will want to undertake

their own detailed analysis of your company, the intensity of which

can even surprise the buyer! Problematic issues that surface during

due diligence can wreck a deal completely, or result in a heavily

compromised sale price.

And you, as the seller, don’t want either.

Due diligence is primarily about being transparent. The buyer will

want to confirm that what they think they are buying and what they

are actually are buying, are the same thing. And their lawyers will

want to prove it.

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Deal-making is a sensitive process. Unexpected surprises or liabilities

can be potentially fatal to a deal’s momentum. For that reason BCMS

advocates total transparency.

Emphasising your company’s strengths is obviously a key factor in

bringing acquirers to the deal table. But once advanced discussions

start, we must be clear with the buyer over weaknesses or

vulnerabilities that could develop into potential “deal-breakers”.

These could range from commercial weakness such as reliance on

one customer, or limited routes to market, to disputes with customers

or suppliers, or significant financial liabilities. Even potentially serious

issues can be overcome if they are disclosed in good time.

At first glance this seems counter-productive. Why show

your weaknesses?

Don’t make your buyer hunt for

clues about your business...

The spirit of openness

It is better that any perceived weakness is voiced by you. In many

cases, what you sense as a weakness may well be an opportunity for a

prospective buyer. If your expertise is in design engineering, and you

are less competent at marketing – make it clear. It simply says to a

new owner that greater resources or expertise in sales and marketing

will reap rewards.

Equally, as a seller you need to be clear and consistent about

your expectations or aspirations: don’t promise what you don’t

intend to deliver.

Our deal analysis tells us that if a selling business owner is

genuinely transparent, complications at due diligence stage are

reduced significantly.

Conversely, experience suggests that if our clients are not transparent,

problems and delays will be inevitable, even if the sticking point is a

relatively minor issue that is easily fixed – poor credit control,

for example.

If your buyer discovers for himself that you’ve got poor credit control,

he might begin to wonder why that fact hadn’t been disclosed

previously. “If they haven’t told us about some of these minor issues,

what major things might they be holding back?”

When you come to sell your business, be honest with your buyer.

There really is no such thing as a good surprise.

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CASE STUDY – AN EXCEPTION THAT PROVES THE RULE!Our client was a supplier of a comprehensive range of quality

stockbreeder products to farmers across the UK, through an

extensive network of agricultural merchants.

Turnover: £7m

Lowest offer: £3.5m

Sold for: £5.7m

The surprise issue:

In the final 36 hours before completion, it came to light that our

client was a shareholder in another company. This would not

normally be an issue – but this company was 50% owned by the

chosen acquirer’s key international competitor.

The acquirer had previously made it absolutely clear that any

agreement or relationship with this competitor would cause the

transaction to cease immediately. That close to completion, the

deal seemed irretrievably lost.

In most circumstances an unwelcome surprise at this stage in the

deal would have been fatal, and irreversible.

On this occasion, thanks to some expert negotiation from the

deal leader, the transaction was rescued.

BCMS seminars explain how to find strategically motivated acquirers

in large numbers and then gives step by step guidance on how to

negotiate the best terms.

To attend a free morning seminar, contact us on

seminars@bcms.co.uk

To request a FREE Business Evaluation Consultation call us

on 01635 296193.