When working with clients who are thinking of selling their business, some of the problem areas that frequently occur, and which can negatively impact on the asking price, include:
1. Poorly maintained corporate records
If you present the purchaser with incomplete or poorly maintained corporate records during the due diligence process, this can set the tone for the rest of the negotiations and immediately sets you off on the back foot. By corporate records I mean things like constitutions, register of members/unit holders, shareholder/unit holders’ certificates, minutes of key business decisions etc. Poor corporate records sow the seeds of doubt, and the purchaser can be left asking what else hasn’t been properly documented. I see this problem especially with trusts when there has been a change of trustee and the document referencing the change is missing or the trust has made a family trust election (FTE) and this hasn’t been brought to the purchaser’s attention (ouch!). The take home message is review your corporate records well in advance of a potential sale and talk to your legal advisor if you have any doubts.
2. Absence of or poorly drafted employment contracts
The important thing to remember when you are selling your business is that you are not just selling physical assets, but the purchaser may be just as keen to acquire your team, especially if you are in a service type industry. The problem with a lot of SMEs is that staff are employed either without any written contract in place or if they are in place, the contracts are outdated, inadequate or poorly drafted. This can set alarm bells off in the purchaser’s mind as they will be wondering if they are inheriting claims for unpaid leave entitlements or wage rates that do not match minimum standards. It is highly advisable to ensure that you have employment contracts for all of your staff, or at least the key members, before putting your business up for sale.
3. Lease documents (missing or expired)
The importance of having a current and valid lease agreement in place cannot be underestimated especially if the location of the business is paramount. If you have occupied the same premises for a long period of time and there is a close relationship between you and the landlord, don't be surprised if the lease agreement has expired. If however, you have a formal relationship with your landlord, make sure you renew the lease agreement before informing them of your plans to sell as this might be the opportunity they were waiting for to impose less favourable terms on the purchaser. You don’t want this scaring the purchaser off knowing that they may have to pay a higher price for the rent compared to what you are currently paying. If your lease has expired, make sure you renew it quietly in advance of sale and try and lock the landlord into a renewal anniversary date that spans at least 2-3 years after the sale.
4. Ownership of intellectual property
If you own rights to product or logo names and these are important elements of the business sale, you should give serious consideration to registering your name or logo as a trademark with IP Australia. Branding is very important to a business identity and the purchaser will want to ensure that they will have undisputed ownership to these after the sale is complete.
If you would like to know more about how we can assist you in meeting your business or financial goals, please do not hesitate to contact one of our friendly team members.
