16 June, 2011

Private business exit: Q14, Q15, Q16. The final questions

It’s time to wrap up the series “Private business exit: 16 questions to develop a plan“. To recap, our 16 questions are:
  • Why are you selling?
  • What exactly does your business offer the world?
  • What are your goals and dreams - inside the business, outside the business and after the business?
  • How attractive is your business, and what’s wrong with it?
  • Who are your key people, customers, suppliers and partners, and are you vulnerable to their departure?
  • How do you make yourself unnecessary to the business?
  • Which buyer types should you target?
  • Who would want to buy it and why; who should, but doesn’t, and why not?
  • Should you sell gradually or all at once?
  • Should you sell to family and/or staff?
  • What should you do to improve your business attractiveness?
  • What should you do to be ready for sale?
  • How do you manage the sale process? Part I, Part II
  • What’s in a good sale agreement for you, and for your buyer?
  • How do you ensure a successful transfer?
  • How much should you be involved after the deal is done?
Let’s quickly answer those last 3 questions.

Sale agreements are usually very standard, with variations typically around the pricing formulas and the warranties. Make sure that the agreement is very clear on what is being sold and what is not; what is being guaranteed and what is not, what is in the price formula and what is not, what your role is after the deal and what it isn’t, etc. (Regular readers know that I’m an advocate of NOT thinking). Make sure that any earn-out formula is based on simple-to-measure and easy-to-verify numbers; more disputes happen here than in any other area. Try to keep any warranties (e.g. that you own all your intellectual property or that you have no tax liabilities) and any related price claw-back provisions simple, definable, measurable, and time-limited. Have a disputes procedure which can resolve any issues such as earn-out calculations without going to court. All of this will help to make the agreement better for you and your buyer. In short, keep the sale agreement simple, friendly and fair.

Ensuring a successful transfer is largely the buyer’s responsibility. As a responsible seller, you’ll naturally do a good job of announcing the transfer and assisting as defined in the sale agreement, and not just because there’s an earn-out clause.  But let the new owners take control - it’s in their interest to quickly reassure staff, suppliers and customers. You may find that the new owners aren’t doing a good job on handover, and be tempted to step in, but be very careful; it’s not your business any more, and you may make matters worse, disrupting the new chain of command and possibly inviting a lawsuit from the new owners.

Your ongoing involvement after the deal depends on whether you’ve been contracted into the bargain - eg. a fixed period of time to ensure a successful handover, personal control to achieve the earn-out potential, or simply because you’ve agreed to carry on in the business. Some selling executives stay on, and end up eventually running the enlarged operation. There are no hard rules. Just do a great job if you do stay on. If you’re not staying on, then enjoy the friendships you’ve made but, as in the previous paragraph, be careful about any involvement beyond that. In particular, there’s an unwritten rule to avoid making negative public comments on your former enterprise. That unwritten code is usually followed by former senior executives in any enterprise, much to the annoyance of journalists. Move on to your next adventure.

I hope you’ve found this series useful. When I started it, I wrote that the best way to have a great business to sell is to have a great business. Actions you’d do to prepare your business for sale are often actions you should do anyway. These 16 questions and the ensuing discussion will help you formulate a business plan with successful exit in mind.

By the way, I’m always interested in good mid-size businesses to buy, and even if not, I do occasionally help out (as an adviser or director) when someone needs a hand to plan and execute a sale or acquisition. Contact me via SAMBARD. Meanwhile, here’s a bonus question for you. What will you spend your money on; a new business or some little luxury?

First posted November 12th, 2008

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