Would you pay top dollar for a car that doesn’t have registration papers, a service history, keys, an ignition that works or a motor that runs smoothly? We doubt it.
On the flip side, you’d likely pay extra for a car if the owner went to the trouble of cleaning it out and polishing its paintwork on the day of sale, and delivered it with a full set of service records.
It’s no different for your business. Why would anyone pay top dollar for a business that has not been serviced or tidied-up before being put on the market?
Before putting your business on the market, you need to put your thinking cap on, and ask yourself this question: If you were a potential purchaser, what would you criticise about your business?
Now you need to do as much as you can to resolve those issues. If you don’t resolve them, don’t be surprised if they come up in negotiations as the basis for a purchaser offering a lower price.
Here’s where we can help! We have a ‘shopping list’ of common mistakes that business owners make when selling a business. This article shares our insights with you, so that you don’t fall into the usual traps.
1. Corporate records are incomplete
Having poorly maintained or incomplete corporate/entity records is a classic way to put off purchasers (or their advisors).
We’re talking about things like constitutions, registers of members, director/member resolutions and share transfers. Sometimes they are missing, maybe they were never signed. This can make purchasers uneasy, and it demonstrates bad business ‘housekeeping’. It leaves purchasers wondering what else hasn’t been properly documented.
If you operate your business through a trust structure, then pay attention. Incomplete records are a common problem for businesses that involve trusts (especially unit trusts). A trust may hold some of the business assets or be the main operating entity. There is no central register for trusts like the ASIC register for companies, so trusts are only as good as their internal records. If the records are out of date or incomplete, the details of the current trustee or the recorded unit holdings may be altogether wrong.
We suggest that you undertake an audit of your corporate/entity records for your business early and certainly before putting your business up for sale. This will give you time to locate and collate documents that already exist and to reconstruct missing documents as appropriate.
2. Missing (or badly drafted) employment contracts
For most businesses, your team represents a great deal of the value. In many cases, a purchaser is looking to ‘acquire the team’ rather than any particular physical asset. While a purchaser can go to one of many vendors to acquire an item of plant, or lease a premises, you are the only one who has assembled and trained your unique team. Yet we see so many vendors – probably more than half – try to sell their business without having comprehensive employment contracts in place.
Even when there are contracts in place, they are often outdated, inadequate or just plain unlawful. There is no faster way to scare off a purchaser than having them think they are inheriting claims for unpaid employment entitlements or underpayments.
We recommend having your employment contracts (or at least those for your key staff) reviewed before putting the business up for sale. Any issues can be fixed up before potential purchasers are on the scene. Post-employment restraint and non-compete provisions should be included where appropriate to give the purchaser more comfort – and get you more money.
3. Lease expired (or worse, no lease)
If you value the location of your business, it is likely purchasers will, too. If your lease isn’t in good shape with plenty of time left on the clock, you likely won’t get top-dollar for your business.
The first thing to do is to make sure you actually have a lease in place. If you have a good relationship with your landlord or have been in the same premises for a long time, you may find that your last lease expired years ago. It’s a common oversight. Generally, the time to negotiate a new lease is before the landlord catches wind that you are thinking about selling, as they may not offer such favourable terms to someone else (i.e. your purchaser).
If you don’t have a lease, now is the time to insist on one. You might have been willing to rely on a handshake, but your purchaser won’t be. Ideally, the lease should be for a relatively short initial term (i.e. 2-3 years), with a few rights to renew for a similar period. This will give your purchaser the most flexibility. And more flexibility for your purchaser means more money for you!
4. Intellectual property ownership
You can’t expect a purchaser to pay big bucks for your business/product name or logo if you don’t own the registered rights to it. You need to make sure all your intellectual property ducks are in a row. This is where registered trade marks come in. For information about how to protect your business name, read this.
Registering your name or logo as a trade mark with IP Australia ensures that you have undisputed ownership rights to that branding. Certainty of ownership equals value to a potential purchaser. And really, all you are doing is making the most of what you have already have – you’ve already put the hard work in by developing and promoting your branding.
We’ve seen some awkward situations where the purchaser uncovers that the seller hasn’t actually owned the intellectual property rights it was trying to sell! Either the IP is owned by the individual personally (very common) or by a related entity that was not intended to form part of the sale. This can cause all sorts of headaches – and it is worse the closer to settlement that the ownership issue is identified. We recommend that the entity structure (including relevant asset ownership) be mapped from the outset, preferably via an easy-to-read diagram. Bonus: you can provide the diagram to your purchaser and their advisors during the due diligence period as an easy way to explain your structure.
Think of this process like a ‘tune up’ for your business. Yes, it will take some planning and effort, but it will pay off by attracting more purchasers that can see immediate value. And that feeds directly into your ultimate goals: Getting the highest purchase price possible and taking a well-earned break!
Feel free to use the above ‘hit list’ to get started, then give us a call on 1300 654 590 or email us. We can help you to map out your current structure or fix up the issues you’ve already identified. We’ll also walk you through some of the particular issues that may apply to your business, in your industry. Our aim is to set you on the path to selling your business sooner and for the highest price.
Click here to read more about developing an exit strategy from your business.
Get yourself prepared
The best way to kick-off the process is to get some knowledge about what’s involved in selling your business – what’s the process going to be like, what do you need to look out for – the pitfalls.
We have prepared the following materials to get you started on the right track:
- 9 questions to ask yourself before you sell your business. This is a great article to get you started and put you in the best mindset for a successful sale.
- VideoPost: How to Buy or Sell a Business – ‘a tour de force’. This is an hour-long recorded seminar presented by Andrew on the nuts and blots of the process of selling your business. This is a must-see resource for anyone thinking seriously about selling their business.
- How should you deal with employees as part of a business sale? This article deals with the important, and technically difficult issue of how to deal with your employees as part of a business sale.
- Will I ever realise the true value in my business? This is a note written by Andrew Andreyev, the founder of ADLV Law, about his own experience in growing a business.
- 5 things you need to know about vendor finance. Sometimes you need to help the buyer of your business fund the purchase by providing them with a loan.
When you’re ready to get serious about realising the value within your business, call us on 1300 654 590 or email us and speak directly with one of our Great Lawyers.
The information contained in this post is current at the date of editing – 6 July 2023.
