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.
A financial safety net for MSME workers: simplified
Govt has implemented few products that benefit the workers of MSMEs if implemented comprehensively.
Recently I had an opportunity to survey the financial safety net implementation by the rural population surrounding an Industrial area, near Bangalore. Many of the members of these households are working or associated with industrial units in that cluster or elsewhere.
In our study, we found that a large section of the households have not subscribed or not even aware of the products despite being widely published by the Govt.
The financial safety net for families- a need felt across more than ever
Every family aspires to secure themselves from the shocks and difficulties of through fair distribution of their earning between savings, risk cover and retirement corpus. The flexibility to do so is very limited if the earning barely covers the living expenses. This situation puts the families into a very vulnerable state and that may act as a deterrent to getting them into activities where the perceived risk to themselves is quite high or they remain alert to risk so much that will lead to lesser productivity from them.
Since their income barely covers the living expenses, Govt has taken many initiatives to supplement these needs by introducing an array of products.
These products are very pertinent for workers in MSMEs. The income level of workers, regular or otherwise, is not very high. These products are made very affordable, meeting their needs.
Financial safetynet –composition:
The financial safety net, we are talking about comprises a few assorted products mainly from Govt sources. In recent times, Govt has made access to avail the products and also to secure the benefits under the products much easier than ever.
These comprise savings, life insurance, health cover, accident cover, pension and skill development. Details as below:
Savings products: Having a bank account is commonplace for employees and it is a good sign. However many of them are just limiting their banking transactions to the savings account and it is no surprise to find some accumulating their hard earning savings in SB account when there are opportunities to maximize their earning even from a scarce amount of savings by opting for products like recurring deposit(RD) and fixed deposits. The spinoff from having an RD account is that it prompts them to adopt a planned approach to save and at the same time maximise the earning.
Term Insurance(PMJJY): Govt has been promoting term insurance of Rs 2 lakhs for an annual payment of Rs 330. It is made available for the people of age group 18-70 years. It is very simple and does not require one to go through any procedure to assess the eligibility.
Accident Insurance(PMSBY): An accident insurance amount of 2 lakhs is available for people for annual premium payment of Rs 12 only. This will help the poor labours to secure the family against accident-related deaths.
Health Cover: To empower poor families against health-related issues. Recently Govt enacted Ayushman Bharat scheme. The coverage is as much as Rs 5 lakhs. This scheme requires one to register and take health card from the nearest Govt hospital at no cost.
Pension products: It has been since a long time that all the citizens are given an opportunity for having their pension account under the National Pension Scheme( Eligible up to 54 years). Thereafter Govt has enacted four new products for the benefit of people in the age group of 18 to 40 years for unorganized and skilled labours. It is called PMSYM( Prime Minister Shram-Yogi Mandhan Yojna) Under this scheme the labours who are not eligible from PF and ESIC can have a pension account with a monthly payment of Rs 55 to 200 depending on their age and will be eligible for a pension of Rs 3000 after 60 years. Under this scheme, the Govt will also contribute an equal amount every month.
Also, those employees who have PF benefit may opt for a pension under Atal Pension Yojna non-subsidised.
Skill Development: Skill makes an individual more valuable for society. It helps one to earn more and to enhance his/her self esteem. It motivates the people to become more productive and he/she can become a source of strength to any organisation. Seeing the skill gap and the industry’s clamouring for support, Govt(state/central) have implemented many schemes to support skill development programmes.
Supporting Employees to become Financially secured- The best CSR initiative for MSMEs:
Corporate Social Responsibility (CSR) has emerged as a new yardstick to evaluate the contribution of an enterprise for the welfare of society. Govt has implemented a law compelling large companies to mandatorily spend on their own to the welfare of the society a portion of the income. However, this is not applicable for MSMEs as they do not have enough financial flexibility to engage in such activities.
It is well said that the best CSR activity for MSMEs is to support their employees. If these MSMEs take initiative to educate and encourage the workers working within their company to take the above social security products, it will improve the goodwill and make employees feel secure. Educating and encouraging these workers to secure themselves under these products does not require any investment. It is the word of encouragement, guidance and follows up will take them to avail these benefits. Some may incentivise in different forms to make them avail these products.
There are benefits for the MSMEs. A financially and socially secured employee makes the working environment secured. Standing as a socially responsible organisation will be further reinforced.
There are many new financial products from the Govt to help the weaker section of the society to become empowered. These products are also very important for employees of MSMEs. Many of the eligible beneficiaries are not aware of these products. MSMEs may encourage workers to cover themselves under these products and make their life more secured. This will augur well for the organisation and counted as a socially responsible organisation.