Owners want to sell for the right price. Buyers, licensees and collaborators want to buy, fully-informed. Here are four tasks to achieve a meeting of minds.
Noric Dilanchian, Managing Partner, Dilanchian Lawyers & Consultants, Sydney. Noric can be contacted at noricd@dilanchian.com.au or visit www.dilanchian.com.au.
In our work with clients we look for ways to improve results. We know from experience that clients who succeed in selling or collaborating, prepare for that eventuality.
Our research shows that four preparatory tasks help achieve great results.
The four tasks reduce the fear, uncertainty and doubt ("FUD") arising from the fact that a business is not a physical thing. Rather, it is a bundle of abstract concepts.
Of course, most businesses have tangible elements like a business name, brand, products, as well as people, systems and a leased location .
But the intangibles of a business require definition:
- its operating legal structure which has clear financial and tax consequences
- its accounts with line items which may be under-documented
- customs and traditions honoured but not recorded
- services, contracts, and terms and conditions for customers and suppliers, which are rarely fully written
- its undocumented innovation methods that help save it from extinction
It's vital that the managers and owner of a business define this bundle of concepts before beginning transactions towards selling or collaborating.
This article is about how to make these transactions successful and smoother.
Task One: Effective Communication
First, astute clients communicate the nature and depth of proposed business opportunities to prospective buyers, collaborators and their advisers.
To this end, prepare an information memorandum or similar profile document which acts as a hook to draw a response from a prospective buyer or collaborator.
Without it, a business spends time and money giving prospective buyers and collaborators ad hoc information on demand. Supplying information only on demand may sometimes save costs. But this approach exposes transactions to FUD, adds stress to negotiations, erodes trust and increases the likelihood of oversights. A buyer who wants basic data will be surprised by a delay in its supply and may perceive the delay as a weakness. FUD thrives when positive information is absent.
Remember that presenting information graphically can be very effective. Prospective buyers and collaborators will appreciate a chart or diagram illustrating your business or proposal.
Consider creating an organisation chart, a business process map, a value chain diagram on your business model, and a diagram of your IT network typology.
Spreadsheet information is also useful. Consider preparing a break-even analysis, product development budget, and a historical statement of revenue and cost of sales.
Contact Dilanchian for templates for any of these. They aim to communicate how smoothly and efficiently others can merge or align their operations with yours.
Task Two: Build the Quality of Your Assets
Second, clever clients build the quality of assets.
This often involves improving the business's legal and intellectual property law protection. An intellectual property audit will analyse and document positions under copyright, trade mark, confidential information, designs and patent law.
If intellectual property protection or intellectual capital documentation is weak, a buyer or collaborator will lose confidence in your proposal. Once they or their advisers find gaps in your protection, FUD will grow and the deal may slip away.
Leases are a common problem area. When selling a business, a lease may be easily transferable to the buyer. However, you may have lease weaknesses to fix. These could include unresolved maintenance problems, an approaching lease expiry date, high rent or restrictions on using the premises for new purposes.
To compensate for these and other perceived weaknesses, the buyer may want a fee discount or legal fall-backs such as tougher warranties and indemnities, and even pre-defined liquidated damages obligations, guarantees and company charges. Build the quality of your assets by paying attention to these matters and you avoid or minimise the financial and legal consequences.
Task Three: Work on Deal and Transaction Structuring
Third, our clients do better if they work on deal and transaction structuring before starting negotiations.
This puts them in control of negotiations. They get to shape negotiation game play and define and draft effective terms and conditions.
It's an advantage to be the negotiator who controls the deal-making and its document preparation process. Contact your adviser to structure your transaction before negotiations begin.
How do you manoeuvre to secure a better price? One way is to present financial circumstances positively. For example, if your projected recurring revenue is from recently-signed customer contracts, prepare a forecast cash flow projection. If a disclaimer or rider is needed, supply the forecast as a best endeavours estimate, not a warranty as to definite future revenues.
Think creatively, ask questions and use your contacts.ﾠIf you want to sell your business, think about buyers you might have overlooked. Email your brains trust, pose questions, hire a business broker or commission a report from a specialist consultant to identify prices and likely buyers. Sometimes buyers come from outside your pool of competitors. There may be recent entrants in the market unaware of your proposal.
Another way to create value is to remember that it's your team of people that create your intellectual property, not machines. Astute clients build the morale of their people and ensure their contracts and arrangements are attractive to prospective buyers and collaborators.
eview and properly document commission schemes, update contracts, if necessary, and remove irrelevant key performance indicators for your people.
In setting the sale price of a business, industry conventions or ratios play a part. These norms can limit your price, break away by:
- highlighting cost-reduction possibilities - list any volume discounts, no-fee deal arrangements or fee waivers in place for long-term loyalty
- illustrating how your order processing system is scalable, profitable or above industry norms
- using surveys to prove higher-than-normal customer satisfaction rates
- using customer retention statistics to prove lower-than-normal customer churn rates.
Think of negotiations and transactions as theatre, improvise by all means, but work with a script.
Task Four: Design your Strategy
Fourth, during proposal design, deal-making and negotiations, wise clients perfect outcomes with transaction-specific strategies.
For example, if you're selling, attract more than one bidder before entering serious negotiations with any one bidder and you benefit from competition between them. If you feel uncomfortable doing this, use a representative. To act as your representative a solicitor, accountant or business broker can really make a difference here.
Some structures require special care. A transaction-specific strategy for a non-incorporated joint venture proposal should always involve clearly defined and measurable outcomes for the collaborators. Commission a business planner to work with you in building a business plan for the joint venture. Test the financial plan with your accountant. Build IT to manage the enterprise.
Check contracts for the due date for all payments. The purchase price usually requires a part-payment on exchange of contracts and the balance on completion. Sometimes buyers seek payment by instalment. If this is unavoidable, protect yourself by withholding revenue or delaying the transfer of title to key assets until payment is complete.
Conclusion
To achieve the "meeting of minds" that facilitates legally-binding contracts, you need to communicate well with buyers and collaborators. The four tasks reduce FUD for them by:
- lowering the real and perceived risks of doing business with you and your enterprise
- improving the intellectual property of the business, helping build the monopoly they seek
- creating an easier, turn-key transition with fewer loose ends.
Our research shows that by completing the four preparatory tasks and using an information memorandum, you greatly improve your chances of a successful business sale or collaboration.
Note on Copyright
This article is copyright Dilanchian, but can be copied or quoted with due acknowledgement
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