Considerations When Selling a Company: Divestment

Deciding to sell a company is one of the most significant decisions a leader can make. To maximise the outcome and ensure a smooth transition, careful preparation and a deep understanding of the various considerations are paramount.

This post will highlight the critical financial, operational, and strategic factors that should be considered when preparing a company for sale.

I. Financial Considerations: Maximising Value and Minimising Risk

The financial health and presentation of the company are central to achieving a favourable sale. Buyers are looking for clear, accurate, and sustainable financial performance.

• Valuation:
  • Professional Appraisal: Engage experienced corporate finance advisors or business valuers to provide an objective and realistic valuation of the business. This helps set a realistic asking price and informs negotiation strategy.
  • Key Metrics: Understand the common valuation methodologies, often based on a multiple of earnings (e.g., EBITDA) or net assets. Be prepared to explain and justify projections for future profitability.
  • Adjustments to EBITDA: Identify and be prepared to explain any add-backs to EBITDA, such as owner compensation, one-time expenses, or non-recurring expenses that would not be present post-acquisition.
  • Growth Potential: Clearly articulate and substantiate future growth opportunities and revenue streams. Buyers will pay a premium for a business with a clear roadmap for scaling.
• Financial Records and Due Diligence:
  • Accuracy and Organisation: Ensure financial statements are organised, accurate, and up-to-date. Audited financial statements provide the highest level of assurance to buyers.
  • Clean Books: Address any discrepancies, missing details, or inconsistencies in financial records (e.g., stock movements, misplaced expenses). Messy books are a major red flag for buyers.
  • Tax Compliance: Ensure all tax returns are filed, and all taxes owed are paid. Understand the tax implications of various sale structures (share sale vs. asset sale) for both parties, and seek specialist tax advice to maximise any reliefs.
  • Working Capital: Be prepared to deliver a normalised level of working capital at closing. Negotiations around working capital can significantly impact the final sale price.
  • Debt and Liabilities: Clearly document all outstanding debt obligations, leases, and other financial commitments. Understand how these will be retired or transferred upon sale.
• Deal Structure and Payment:
  • Share Sale vs. Asset Sale: A share sale typically involves transferring the entire company, including assets and liabilities, offering simplicity for the seller and often more tax efficiency. An asset sale involves selling specific assets, allowing the seller to retain liabilities but often leading to greater tax complexity.
  • Consideration Types: The purchase price, or consideration, can be structured in several ways:
• Cash Consideration: This is the most straightforward and often preferred by sellers for its certainty and immediate liquidity. It means the buyer pays the entire agreed-upon price in cash at closing or over a short, defined period. While offering immediate payment, it might also have higher immediate tax implications.
• Stock Consideration (Equity): The seller receives shares in the acquiring company (the buyer) instead of, or in addition to, cash. This can be attractive if you believe in the buyer's future growth and want to participate in their upside. However, it introduces market risk (the value of the stock can fluctuate). Due diligence on the buyer's financial health and stock performance is crucial.
• Mixed Consideration: A common approach where the purchase price is a combination of cash and stock. This allows sellers to receive some immediate liquidity while also participating in the potential future growth of the combined entity. It can also help bridge valuation gaps between buyers and sellers.
• Payment Timing and Mechanisms:
  • Up-Front Payment: A portion or the entirety of the consideration paid at the time of closing the deal. This is the most secure for the seller.
  • Deferred Payments: A portion of the purchase price paid over an agreed-upon period after closing. This can help the buyer manage cash flow but introduces risk for the seller, requiring strong legal agreements and potentially security (e.g., a promissory note, personal guarantee from the buyer, or collateral).
  • Earn-outs: Payments contingent on the future performance of the acquired business, tied to specific financial metrics (e.g., revenue, EBITDA, customer retention) over a set period (e.g., 1-3 years post-acquisition).
  • Escrows: A portion of the purchase price held by a neutral third party (the escrow agent) for a specified period after closing. This is typically used to secure the buyer against potential breaches of warranties and indemnities made by the seller. Once the escrow period expires, the remaining funds are released to the seller, assuming no claims have been made.
• Warranties and Indemnities: Buyers will seek warranties (statements of fact about the business at the time of sale) and indemnities (promises to compensate the buyer for specific liabilities or losses arising from certain events) to protect against unforeseen liabilities. Negotiate these carefully with legal counsel to limit future exposure, including caps on liability and time limits for claims.
• Adjustments at Closing: The final purchase price is often subject to post-closing adjustments based on actual working capital, debt, and other agreed-upon items on the closing date. This ensures the buyer receives the business with the expected financial health.

II. Operational Considerations: Demonstrating Sustainability and Scalability

A buyer is acquiring a functioning entity, so operational efficiency, independence from the owner, and robust systems are crucial.

• Owner Dependence and Management Team:
  • Reduce Reliance: A business that can run without the owner or a single person is significantly more attractive and valuable. This means building a strong management team with segregation of duties.
  • Succession Planning: Develop a clear succession plan for critical positions, especially if key individuals are nearing retirement or plan to leave post-sale.
  • Employee Impact: Understand the implications for employees, particularly under regulations like TUPE (Transfer of Undertakings (Protection of Employment) in the UK). Communicate transparently with staff where appropriate and offer incentives to secure their support during the transition.
• Systems and Processes:
  • Documentation: Document all key operational processes, job responsibilities, and internal systems. Well-documented procedures provide confidence to buyers about continuity and ease of transition.
  • Technology and IT: Ensure IT systems are organised, secure, and fit for purpose. Centralised systems (e.g., CRM, finance tools) are highly valued.
  • Intellectual Property (IP): Consolidate and clearly document all intellectual property (patents, trademarks, copyrights). Assess its value and ensure proper registrations are in place.
• Customer and Supplier Relationships:
  • Diversification: If a significant portion of revenue comes from a few key customers, work to diversify the customer base. Over-reliance on a small number of clients can make the organization appear vulnerable.
  • Contracts: Ensure all customer and supplier contracts, leases, and agreements are up-to-date, legally sound, and transferable. Identify any change-of-control clauses that may require consent from third parties.
  • Maintain Relationships: During the sale process, actively maintain strong relationships with customers and suppliers to demonstrate stability and continuity.
• Legal and Regulatory Compliance:
  • Compliance Audit: Conduct a thorough review to ensure the business complies with all relevant industry regulations, licences, and permits. Resolve any outstanding legal issues, disputes, or potential claims.
  • Corporate Governance: Ensure corporate books, records, and agreements (e.g., shareholder agreements) are well-maintained and up-to-date.

III. Strategic Considerations: Timing, Fit, and Future Potential

Beyond the financials and daily operations, the strategic context of the sale significantly impacts its success.

• Timing the Sale:
  • Market Conditions: Consider the broader economic climate and industry trends. Selling when the organization is thriving and the general economy and markets are in an upswing can yield a significantly higher price.
  • Business Performance: The best time to sell is often when the business has demonstrated consistent profitability and growth, ideally before it reaches a plateau.
  • Reason for Sale: Be clear about the reasons for selling (e.g., retirement, new ventures, financial goals).
• Identifying the Right Buyer:
  • Strategic Buyers: These are competitors or companies in related industries who can achieve synergies (cost savings, market expansion) by acquiring the organization. They often pay a premium.
  • Financial Buyers: Private equity firms or investment funds typically look for profitable businesses with strong growth potential that they can scale and sell later for a return.
  • Management Buyout (MBO): Consider whether existing management team has the desire and capability to acquire the business. This can often lead to a smoother transition and preserve company culture.
  • Cultural Fit: This element can significantly impact the long-term success of the acquired business and its legacy. When considering potential buyers, look beyond just the financial offer and consider their approach to business, employees, and customers.
    • Values Alignment: Does the potential buyer share similar core values? If the organization thrives on innovation and a collaborative spirit, a buyer known for rigid hierarchies and cost-cutting might lead to significant friction and a loss of key talent. Conversely, if the organization prioritises customer intimacy, a buyer focused purely on volume might alienate its loyal client base.
    • Employee Treatment and Retention: How does the prospective buyer typically integrate new acquisitions? Do they have a track record of retaining key personnel, or are they known for widespread layoffs post-acquisition? Inquire about their HR policies, employee benefits, and their approach to fostering a positive workplace culture.
    • Customer Relationships and Brand Legacy: Will the buyer continue to serve the existing customer base with the same level of quality and care? Will they respect and leverage the established brand, or will they absorb it into their own, potentially diluting its brand identity? If the brand carries significant local or industry goodwill, assess how the buyer intends to manage and potentially enhance that. Discuss their marketing strategies and customer service philosophies.
    • Management Style and Autonomy: Does the buyer typically centralise control, or do they allow acquired businesses a degree of autonomy? If management are accustomed to making independent decisions, a highly centralised buyer could stifle innovation and lead to frustration. Understand their operational integration strategy and how decisions are made within their existing portfolio companies.
    • Community and Social Responsibility: If the company has a strong commitment to local community involvement or specific social initiatives, explore whether the buyer shares similar values. A buyer who discontinues such efforts could negatively impact the company's reputation and employee morale, especially if these initiatives are deeply ingrained in the company's ethos.
    • Long-Term Vision vs. Short-Term Gains: Does the buyer have a long-term vision for the business that aligns with its potential, or are they looking for a quick return on investment? Financial buyers may operate on shorter time horizons than strategic buyers. Understanding their investment thesis will give you insight into their future plans for the company.
• Confidentiality:
  • Non-Disclosure Agreements (NDAs): Insist on NDAs with all potential buyers from the outset to protect sensitive commercial information and prevent the news of a sale from disrupting operations, employee morale, or customer relationships.
  • Controlled Information Release: Manage the flow of information carefully, releasing more detailed data as buyers demonstrate serious interest.
• Post-Sale Involvement:
  • Transition Period: Be prepared to stay involved for a transition period to ensure a smooth handover, especially if expertise is critical to the business. The length and terms of this involvement should be clearly defined in the sale agreement.
  • Restrictive Covenants: Expect to negotiate non-compete clauses and other restrictive covenants that limit ability to engage in similar business activities post-sale.

Selling a company is a lengthy process - by addressing these financial, operational, and strategic considerations well in advance, an organization can significantly enhance its attractiveness, achieve a better valuation, and navigate the complexities of the sale process with confidence.

Proactive planning and a robust advisory team are a company's strongest allies in securing a successful and rewarding exit.