When you sell your business, it’s critical to get good deal terms.
Over the years, I’ve seen many potentially excellent business exits turn into very ordinary ones due to business owners not focusing on getting good terms for their exit.
In my last few posts we have looked at the four “pillars for getting the best exit deal. In this post we look at the last Pillar; Get good deal terms.
There is no such thing as a “standard” business sale agreement. Everything is negotiable within reasonable commercial parameters. Work closely with your advisers on your key deal terms – how and when you get paid, how the purchase price will be calculated, what warranties you will provide and what non-compete terms you’re prepared to accept.
This is an area where having a great advisory team will really pay off, as it’s likely you’ll be selling to a much larger organization with substantial resources, highly paid advisers and a lot more experience buying and selling businesses than you.
A caveat – “good” deal terms aren’t that great
I do need to point out that when I say “good” deal terms, I’m not suggesting getting deal terms that are substantially in your favor. You’re highly unlikely to get that if you are dealing with a larger buyer, they will negotiate hard during your exit and wear you down on a range of terms. I’m talking about getting reasonable overall deal terms and making sure you don’t get stuck with any terms that are highly detrimental to you.
Five key areas to focus on
Here are five key areas you and your advisers should focus on when negotiating the terms of your business exit deal:
- Structuring your business exit in the most effective way. For example, selling the company that owns your business and selling the business itself are fundamentally different transactions. Understanding the differences and making sure your deal is structured in the most effective way for you is critical.
- Structuring your business exit in the best way from a tax perspective. A lot of countries, including Australia, have tax regimes that, in certain circumstances, provide business owners with highly preferential tax treatment when selling their business. Depending on the size of your business exit, this can be worth millions of dollars, so you want to be sure these issues are properly considered. Make sure you obtain good advice from your professional advisers, particularly your tax adviser.
- Getting paid as much of the sale price as possible at settlement. You and your advisers should try to resist having monies put into retention accounts to cover warranty claims. You should also try to resist performance earn-outs – if they are required, try to limit them to as short a time as possible.
- Limiting warranties to what is fair and reasonable given the nature of the deal. While you will need to rely upon your lawyer to get this aspect right, it’s important you work closely with them so you fully understand the warranties you agree to provide about your business and their implications.
- Limiting non-compete obligations (that is, what you can do after you have sold your business) to what is fair. You don’t want to be shut out of pursuing a whole range of activities that are not closely related to your business.
This post completes my set of posts on the four pillars for getting the best exit deal: decide the best time to sell, put a great advisory team in place, create a competitive sale process, and get good deal terms. Now you’re all set to achieve a great exit.… Or are you?
There are four issues that often hit business owners out of left field during their business exit which can serious derail all their careful preparation. Over my next few posts I’ll look at these four “left field” issues and how to deal with them.