Forty nine percent of our business owners are aged over 50, and half of them are aged over 60. The National Research Bureau recently recorded that 130,000 businesses will be for sale in the next 10 years. Locally in the Wairarapa, that would equate to around one hundred and fifty businesses per annum.
You may have read of the farm succession issue. Well this is on the same level, and it means business owners need to give the matter due consideration. Some business owners will have a succession plan, which could be sale of the business, generational succession, management/employee buy-out or a structured liquidation of assets. We have heard a number of business owners say that millennials look at things quite differently from the way they did, or currently do.
One of the first questions is: “who will buy the business?”
- family succession is a plan that must recognise and accommodate needs, goals, objectives and reality of each family member
- a competitor or supplier
- a business in a similar market
- an employee – this can reduce costs and provide a greater level of privacy
- another person who wants to be a small business owner - we often hear of people buying a job.
Any business owner faced with the issue of succession needs to meet with their advisers and choose a succession option. They then need to:
- diagnose their own business internally (due diligence)
- complete a valuation
- agree on a timetable and marketing
- develop a succession plan (if relevant)
- take the business to market
- filter enquiries
- complete a sale agreement
- complete settlement, and deal with the post settlement matters.
A valuation is a key step in a successful outcome. It will assess the business’ growth aspects, profitability and margins size/stability of earnings, competitive environment, people, asset type and supply/demand dynamics. Relevant considerations include key customers – no dependency, good financials, brands (where relevant), maximum return, low-risk, a growing market and good governance.
Preparation of the business for sale will follow and will usually involve a Real Estate Agent. In preparation, you will need to ensure that your financials, asset register, contracts, IP, leases, and employment agreements are all current and appropriate. Generally, the following steps will follow:
- prepare of an information memorandum
- agree on the price, terms and what is being sold
- filter and manage enquiries
- due diligence, negotiations and contracts
- settlement and post settlement issues
How long is all this going to take?
You need to start with the end in mind. In our experience, depending on the size of the business involved, it can be 3- 5 years to the succession event with 2 to 4 years to prepare the business for sale. You need to remove all obstacles at the outset; have the information ready to go, and cast no doubt in a buyers mind. A smaller good business it could take approximately six months to market and sale the business.
The purpose of the information memorandum is to showcase the business, provide a high level of overview, act as an information library and provide a focus for the purchasing process. It needs to involve industry statistics, growth/decline, lease details, sales market and product analysis, organisational structure, and personnel and business strategy.
You obviously cannot have a business sale without a purchaser
Any purchaser will want to complete due diligence. A purchaser will want to know the reasons for selling. They will want to review the financial and trading information, have access to records, review sales data, customers, accounts receivable, expenses, suppliers, accounts payable, stock, banking and finance, assets/plant and equipment, goodwill, employees, business systems and software, competitors, and business agreements such as leases. The vendor needs to have all these ready and accessible.
Inevitably, some purchasers will be looking for finance. Finance providers will require a business plan, cash flow projections the marketing plan and budget. The banks will generally look at the people factor, equity, cash flow serviceability, and collateral security. In most cases, the purchaser will require a term loan and an overdraft. If the bank’s answer is ‘no’ then the options to consider are vendor finance, equity partnerships, or angel investment.
It is more usual for the vendor’s solicitor to prepare, or at least review, the initial agreement for sale and purchase. What is in that agreement will depend on what is being sold, and on what terms. Where the business comprises mainly of assets, the ADLS Business Sale Agreement is usually used. Common inclusions are:
- the premises – leased or otherwise
- employees – key ones and restraint of trade,
- level of vendor assistance and transition,
- valuation of trading stock,
- employees,
- GST,
- stock-take,
- conditions,
- asset values,
- delayed/deferred settlements and warranties and indemnities,
- turnover warranty, GST and confidentiality.
In an asset sale, none of the employees are transferred with the business. Instead the purchaser has a choice to re-hire any of the employees on the purchasers own terms with new employment agreements after they have been made redundant by the vendor. The employees have the choice between being transferred to the new employer, or being made redundant.
There are specific provisions for the more vulnerable employees e.g. cleaners and age-related sectors. As the business’ assets are often changing all the time - particularly with stock, debtors and creditors - they will often stay with the vendor.
On occasion, the sale will not be a sale of the business assets but of the shares in the vendor entity. In this event there is no issue with GST because the purchaser merely takes a transfer of the shares in the vendor company that runs the business. Such a purchaser needs to be aware that they are purchasing a company and its entire history, including its past wrongdoings and tax history. If you purchase the assets alone you leave those issues behind. The warranties representations and indemnities in a share sale agreement are far wider. Share sales are more common where a substantial portion of the asset value is attributable to goodwill and intellectual property.
One of the considerations for the purchaser will be the entity it chooses to complete the purchase. That often needs to be a considered decision. The most popular entity would be a company.
So, if you are selling your business you need a clear plan which needs to be communicated. You need to maintain formality in the process and have clear expectations as to when control passes. You need to communicate what is happening with your employees at an appropriate time, and work with your independent advisers. An important consideration will be the insurance that your new business will require.
The one certainty is that we are going to be seeing more business sales. If there aren’t enough buyers, or buyers aren’t prepared to pay what is expected, then some prospective vendors are going to have to carry on, or close up.
We have a team of commercial lawyers in our Masterton, Lower Hutt and Wellington offices who have extensive experience in the buying and selling of businesses. Contact any of our team to discuss your situation.
This article is compiled from a presentation made on behalf of Business Wairarapa to prospective business vendors at the Carterton Event Centre in early September 2019.