An ill-conceived strategy to sell the company: Prone to legal and other risks
While many entrepreneurs plan to leave the business for a variety of reasons, the strategic approach is essential to make it a successful sale.
Recently, I received an entrepreneur who had trouble coming out of her failed exit plan. The business had been running successfully for many years. However, the COVID-19 pandemic and the consequent lockdowns had a severe impact on the business of the company. The company experienced supply chain disruptions on the one hand and the delayed restarting of orders from some of the customers on the other hand.
In view of advancing age and lack of successor within the family, she decided to quit the business and started exploring someone who can take charge of the business and run it.
She identified a businessman looking for diversification to take over the company. The terms were negotiated. He did his due diligence and assessed the company’s potential. After mutual discussion, it was agreed to enter into a partnership in which he would own 95% and hers would be 5%. Upon signing of the deed of partnership, the manufacturing facility was immediately transferred to new premises (belonged to new owner).
Bonhomie did not last long. Cracks started to appear in the association as they went into business. There were gaps. For instance, execution of personal guarantee of the new partner to bank loan was deferred rather bank permission was not obtained for new partnership arrangement. Consent of the bank to shift the assets were not obtained. With respect to compensation for the current owner, there was no explicit agreement rather it was left to mutual unwritten understanding. There was no formal business transfer agreement. The partnership deed was more forward-looking as if for a new entity than addressing the transitional challenges and issues. Likewise, few other issues began to bother them and in turn lead to friction.
The entire transaction was organised in a very unprofessional way and without a solid legal basis. Above all, the new partner was new to the industry and did not show much interest in learning the intricacies of the business of the company. This lead to a situation of mistrust and one began to blame the other. The partnership came to an end. The seller lost a great deal to relocate the company to new premises and again bringing it back. On top of that, the company suffered a business loss for six months because of the bickering. In the end, she felt associated with the wrong person.
Selling to the Wrong Person:
Accepting the first offer may not be an appropriate choice. This may not necessarily be your best offer. Selling your company at a high price with little or no money upfront with an extended contract can lead you to lose it all. This is what opened in the case discussed above.
Business sales often go bad after the new owner takes over. The new owner may be inexperienced in business, have a closed mind or be a bad leader. The list goes on and on.
When this occurs, the new owner eventually closes its doors and lets the previous owner hold an empty bag.
The steps one needs to take while putting business for sale.
It is fact that many small businesses do not find successors in their families when the children pursue their own interests. There are other reasons such as poor health, premature death of a key individual, partner differences, etc.
In any event, an orderly sale requires certain essential measures, a methodical approach and respect for existing legal and procedural aspects. Following are few steps we suggest:
1. Timeframe for Sale and preparedness
Keep a time frame of one or two years to conclude the sale. This timeframe must be utilized to update financial records, ensure legal compliance, document the processes, etc., to make the business fit to BUY. This will make the transition friction-free and will not cause disruption.
2. Business Valuation
Next, determine your business’s value, to make sure you don’t set a price too high or too low. Identify key strengths & opportunities. Consult a professional for an assessment with a detailed explanation of the value of the company. The document will provide credibility at the requested price and may serve as a gauge for your offer price.
3. Avail service from an advisor
An experienced advisor can bring expertise to manage the sale and also free up your time. They can add value by leveraging their business network to speed up selling.
4. Preparing Documents
Prepare a detailed Information Memorandum including financial records, legal compliance, detailed list of assets, contact list of customers and suppliers, disclosure of potential disputes, etc.
5. Finding a Buyer
Use the trade networks, online platforms, professional advisors to identify the potential buyers. Sometimes your own associates may assist you in finding the buyer.
Once you have prospective buyers, qualify them before letting to start due diligence in terms of financial standing and more importantly suitability of the person to keep the business running.
The sale of the company must not lead to legal hurdles either to the seller or to the buyer. Because it can destroy the business you have nurtured for many years. It is highly recommended to take the assistance of professionals to create the documentation and deliberate every aspect before signing.
For many MSMEs, the sale is a compelling transition strategy. In addition, selling is the means of realizing the value of the business built assiduously over the years.
Assess your options and choose the best choice in the long term interest of the business you nurtured. Ask yourself, is he the best person to buy and run my company? Or, can they quickly connect with the customer base and learn how to market effectively? When the business sale goes as planned, it creates a tremendous opportunity for new business owners and the success continues.
It is saddening to see a business fail after years of success due to the lack of a professional approach to sell the business.
Poorly structured sale of a business may also incur unnecessary additional costs, including commercial, legal, financial and tax issues.