Smoothing the path for business sales

Selling a business can be difficult and it is becoming a longer process. Datasite, a mergers and acquisitions (M&A) research platform, found that due diligence processes were, on average, taking two to three weeks longer in 2023 versus 2022. More rigorous due diligence inevitably means a rougher ride for a vendor and an increased number of aborted deals.

However, life changing rewards are on offer for those willing to persevere through the maze, and preparing fully before going to market can make the whole experience much more tranquil.

Preparation is key

In some ways due diligence is a game; one where it is absolutely vital to keep the buyer’s confidence high. That is not always possible if there is an inherent issue lurking, but easy wins are available.

My biggest tip for anybody contemplating selling a business would be to ensure that they have at least 12 continuous months of good quality management accounts before embarking on the process.

Providing poor monthly management information will immediately cause a buyer and their advisors to question any financial information being presented. This potential unreliability is a loose thread that will at best lead to a more rigorous review exercise, and at worst a revised deal structure which seeks to balance the risk through a lower payment at completion.

Investing time in a preliminary business health check before going to market could also pay dividends. While this cannot be certain to uncover all potential issues, it does provide some breathing space to review individual areas and formulate a strategy for mitigating concerns without the time pressure of a live transaction.

Lower end deals

Increased scrutiny in due diligence is not the sole reason for longer deal processes. In recent years, even smaller deals have become more complex. It is now common to see mechanisms such as normalised working capital utilised. While the added complexity could be viewed as an annoyance by a seller, these are key tools in ensuring the settlement received is as expected. Ultimately, that is more important than the process being lengthened by a week.

The growing prevalence of warranty and indemnity insurance – to protect vendors from future claims – also contributes to a longer transaction. An insurer will seek to review due diligence reports in order to finalise the areas which it will cover. The addition of this external party adds a time delay, albeit one which could reduce the seller’s long-term risk.

Summary

Selling a business to an external party can be a difficult yet financially rewarding path to take, and experienced advisors can assist in reducing the stress. Other ‘softer’ options include a Management Buy Out (MBO), or Employee Ownership Trust (EOT), however these options often come with a lower payment on completion. Ensors CF team are on hand to help you select the right transaction for your circumstances.