Despite the massive impact the lockdown has had on the UK economy, many businesses have continued trading, although not all are recognised as essential services.
Push bike sales have enjoyed a 200 percent uptick, but the new car market dropped by 97 percent in April (with just 4,321 registrations), highlighting the struggle faced by some sectors.
Many business owners will be considering selling up, but now is not the best time and snap decisions should be avoided.
Buyers know the current situation offers bargains. Sellers should be careful when dealing with issues like due diligence, warranties, indemnities and price adjustment mechanisms, to ensure they do not accept much poorer terms of sale than they normally would.
The coronavirus crisis remains fluid and may cause buyers, after the purchase price and other terms have been agreed, to try to revisit terms and alter matters in their favour – a situation to be avoided.
Remember, the buyer is purchasing the long-term viability and potential of the business, which must be reflected in the deal’s terms.
If the deal was already in the process of being negotiated before the current crisis, then the buyer might wish to revise the terms to modify the price adjustment mechanisms.
Sellers can take steps to protect themselves, like asking for more payments upfront to avoid the risk of deferred payments, as the current volatility could impact the buyer as much as it does the seller.
Any seller would need to go through the disclosure process again to mitigate the risk of any claims, and revisit any relevant warranties in light of the pandemic, in case they need amending or qualifying.
SIMPLE STEPS TO SUCCESS
Selling a business is a series of clearly defined steps, including securing the position of workers, minimising personal tax liabilities and deciding what expert advice is needed.
This could involve a corporate finance adviser, a tax accountant and a corporate lawyer, ideally experienced in the sector in which the business being sold operates. There’s no substitute for experience when identifying areas of risk.
When taking on an expert, a clear division of responsibilities and a fee structure should be agreed in writing so the seller can create the best possible picture of their business to maximise the sale price.
READ: HOW TO SELL A BUSINESS
This can involve tidying up loose ends, selling under-used property or equipment, positioning major purchases or implementing strict stock management and credit control measures to maximise working capital and create a stable, longer-term financial pattern.
Currently, sellers are more likely to be offered a valuation that maximises the buyer’s chances of securing the business as cheaply as possible. The seller must evaluate the status of the buyer as carefully as they would normally to understand if they can fund the purchase.
It may be tempting to rush due diligence checks in a ‘buyers’ market’, but this would be a mistake by the seller and the kind of panicked response the buyer, who may be highly geared themselves or only have vague financial promises, will hope for.
If part of the purchase payment is to be deferred, what guarantees are in place with regard to those payments? Do they reflect the reality of the current pandemic- related market conditions?
Additionally, if payments are linked to future business performance, will the seller have ongoing influence on the business? Do the figures reflect the impact of coronavirus?
During the lockdown and the economic uncertainty that will follow, buyers will place increased emphasis on due diligence, more particularly on aspects such as insurance, supply chain risks, business continuity and employee health and safety policies.
As a seller, it’s best to be transparent, which not only demonstrates good faith, but also helps protect against any future claims if any information was not fully disclosed.
Sellers should rely on their expert advisors to fully interrogate the details of any offer, which these advisors will view dispassionately – it’s what the seller needs and what the bargain-hunting buyer fears.
When it comes to deferred pricing mechanisms or earnouts, the seller must ensure they are fully covered with regard to the pandemic’s impact on their business.
The buyer may predict a business slowdown over the next six months and attempt to structure a deal based around continued pre-coronavirus earnings during that period, which may result in that earnout being unachievable.
The seller needs to be clear about what a realistic prospect for future trading is (allied to their own ability to influence that trading post-sale) with clauses in the sales agreement reflecting that reality.
Selling might be the only option for some business owners but they must exercise caution. The pandemic has created market conditions where speculators feel they can grab bargains, but sellers can still structure any agreement to ensure the business they have worked hard to build is not undervalued.