Here are some additional links to videos from the Planner Lounge:
http://www.youtube.com/watch?v=AQqQ8-9mYVg - Clawbacks and deferred payments
http://www.youtube.com/watch?v=KVeynywo_LI&feature=related - drag along and tag along rights
Through the Planner Lounge website, I have recently featured in a series of videos about buying and selling a financial planning business and associated issues.
Here is a link to the first video, which deals with the legal issues surrounding bringing in a new equity partner:
http://www.youtube.com/watch?v=pDitM_KWGJw
I will provide links to the other videos in the course of the next few days.
Once you have reached agreement in principle to sell your business, the first step is usually for you and the buyer to sign a “heads of agreement”.
This document may also be called a “memorandum of understanding” (or “MOU”), an “offer letter”, or a “term sheet”.
As you will appreciate, the heads of agreement is an important document. It needs to be drafted and negotiated with skill. I have seen many sellers ruin years of good business succession planning by signing the first thing that is waved under their nose by a buyer, without advice or thought as to the consequences of what they are signing.
The forthcoming series of posts are designed to assist you to prepare and negotiate your own heads of agreement.
As always, this information is of a general nature only. Professional advice should always be sought on your business succession planning process. You will get the best result only if you work closely with your lawyer, corporate adviser, tax adviser, and / or business broker when preparing or negotiating a heads of agreement.
The series will be posted over the next week or so. So, stay tuned for further instalments!
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5 May 2011 – what is a heads of agreement?
A heads of agreement is a summary of the key terms of your business sale transaction. It is used as the reference point for drafting the sale contract and subsequent negotiations.
The heads of agreement may also set out the process and timetable for the parties to follow in order to conduct due diligence, prepare the sale contract, obtain necessary third party consents and approvals, and complete the transaction.
One important thing for you to be aware of is that, later down the track during the detailed negotiation process, it will be difficult for you to change or “get out of” the commitments that you made upfront in the heads of agreement. If you try to do so, you will quickly use up any goodwill that you have generated with the buyer, and may allow them to take the upper hand in the negotiations. This might seem obvious, but it is a mistake that I see both novice and experienced sellers of businesses make regularly. Excited by the prospect of their sale process finally gaining traction, they sign the heads of agreement in haste and then regret it later.
Some of the issues and concepts that are typically addressed in the heads of agreement are as follows:
In the following posts, we will look at some of these key clauses and concepts in detail.
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6 May 2011 – Heads of agreement: binding or non-binding?
In my career as a corporate lawyer, I have seen many heads of agreement that are hopelessly unclear on the basic question of whether or not the parties intend to be legally bound by their terms.
Should the deal fall over, there is then a “feeding frenzy” for the lawyers on both sides. The lawyer for the party who has pulled out of the deal will no doubt argue that the heads of agreement is vague, imprecise, and totally non-binding document. And, no surprises, the lawyer for the other party will argue that the heads of agreement is clear evidence of a contract between the parties, which is fully binding and enforceable. The other party has breached that contract by pulling out of the transaction, so must pay compensation.
Whilst making this kind of argument is a great way for the litigation lawyers to meet their fee budgets, it is less great for the parties, who are left in a position of doubt and uncertainty.
The message here is to decide upfront (with advice from your lawyer) whether or not you will require the heads of agreement to be legally binding, and then draft a document which clearly states the position either way.
There are can be a number of important legal and commercial issues in making the decision of binding versus non-binding. Also, if you want to create a binding document, then you will need to ensure that the heads of agreement are sufficiently clear and detailed to “stand up” in a court of law.
In making the decision of binding versus non-binding, taxation considerations can also be an issue. In Australia, a “CGT event” is generally triggered when the parties sign a binding obligation to buy and sell (and not when they complete the transaction). So, by signing a binding heads of agreement you can sometimes create a tax liability for yourself.
As a final thought for you, please also be aware that some buyers and sellers take the approach of being deliberately vague about the binding or non-binding status of their heads of agreement. Depending on how the document is drafted, this can sometimes give them the leverage to “have their cake and eat it too”. In other words, if they are concerned about the other party pulling out of the deal, they will argue forcibly that the heads of agreement is binding and that they will sue if the deal does not proceed. Or, if they themselves decide to pull out, they will argue just as strongly the other way. This tactic is clearly not without risk, and some would say it is morally dubious. However, I have seen it used effectively in the past, so look out!
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9 May 2011: Heads of agreement –negotiating exclusivity, confidentiality, and break fees
When a heads of agreement is expressed to be non-binding, in the sense that neither party is legally obliged to complete the transaction, the parties may still sometimes agree to include a few clauses that are of a binding nature to assist them to bring the transaction to completion. These clauses typically relate to:
1. negotiating exclusivity;
2. confidentiality; and
3. break fees.
We will look at these clauses and concepts in detail over the next few instalments of this series.
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12 May 2011 – Negotiating exclusivity
When a buyer signs a heads of agreement, they may seek a period of negotiating exclusivity from the seller. This is period of time (for example, 6 weeks) during which the seller agrees not to negotiate with, and not to offer the business for sale to, anyone else.
The exclusive negotiating period can be very useful for the buyer, as it gives them a “window” in which they can progress the transaction and confidently incur due diligence costs without the risk of being “gazumped”.
As the seller, you will need to think carefully about whether the benefit of granting an exclusivity period will outweigh the risks (for example, the risk that other potential buyers will go cold).
Some sellers are happy to grant a period of negotiating exclusivity so long as there is a tight and prescriptive timetable that the buyer must follow in order to complete their due diligence and finalise the transaction. If the buyer fails to comply with that timetable at any stage along the way, they will lose their right to exclusivity.
Or, a seller may seek a small, non-refundable deposit in exchange for granting a period of exclusivity.
As the seller, you should also be wary of granting an exclusivity period that is excessively long. The longer the exclusivity period, the more scope the buyer will have to take their time and perhaps “string you along” before they go cold on the transaction. Generally speaking, an exclusivity period of up to 3 months (at the absolute outer limit) may be acceptable, but it is hard for a buyer to justify a longer exclusivity period in the absence of any special circumstances.
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13 May 2011 – Confidentiality
A well drafted, binding confidentiality clause can be very useful in a heads of agreement.
These clauses generally impose a duty of confidentiality on the parties in relation to three categories of information:
1. the fact that the parties are negotiating in respect of the proposed transaction;
2.the terms of the proposed transaction, as set out in the heads of agreement; and
3.any information disclosed by the seller to the buyer in the course of its due diligence investigations.
However, as always with confidentiality obligations, please understand that in the real world they can be difficult and impractical to enforce.
In particular, how do you prove that information was “leaked” by the intending buyer and not by someone else? And, are you able to prove loss and damage as a result of that “leak”? The practical answer is that, if confidentiality is important to you, then a degree of trust with the buyer is important. You should also consider taking other steps to protect your confidential information, such as:
(a) limiting the number of people from the buyer’s team who have access to confidential information about your business;
(b) prohibiting the photocopying or downloading of your confidential information; and
(c) only disclosing highly confidential information (for example, pricing information or the list of your key customers) at a late stage in the process, when you have a high degree of comfort that the transaction will proceed.
Occupational health and safety risk – a huge issue when selling your business
I recently worked with a listed company that was looking to buy a specialist manufacturing business. The business is owned by 4 principals, who set it up from scratch 15 years ago. The business has grown rapidly over the last few years, turns over about $50 million, and has great products, profitability, and a compelling growth story.
It all looked good on paper….until we turned up at the factory. Then we saw the unguarded machines, the untidy floor space, and other obvious safety risks. We then dug a little deeper, and uncovered poor systems, inadequate OH&S training, and a culture which placed little importance on these aspects. My client ran a mile from this business.
Unfortunately, this is not an uncommon story. In my professional life I have seen many good entrepreneurial businesses that have grown quickly but the systems, procedures and processes have simply not caught up. Sadly, one thing that often gets left behind is rigorous attention to workplace saftey. As part of your business succession planning process, you should think about these things and put in place steps to reduce the risk today and also ensure that you do not scare buyers off when the time comes to sell.
If you do not protect your staff from harm in their workplace, the legal and reputational risks can be massive. The business, and you personally, can be exposed to legal claims, fines, and even imprisonment in certain circumstances.
Here are some practical steps that you should consider (which are not, of course, a substitute for specific professional advice):
1. Establish a formal OH&S committee. This committee should report to you or your Board of Directors on a regular basis. Ensure that minutes are kept of OH&S committee meetings. These minutes can then be provided to potential buyers during their due diligence investigations, and will be powerful evidence that OH&S risks are taken seriously in your business.
2. Ensure that OH&S is a standing agenda item at your Board meetings. The Board can review the OH&S committee meeting minutes and take action where appropriate. Again, all of this should be clearly documented for posterity.
3. Engage an OH&S consultant to review your business and report to you on the risks. You can then put in place a plan to address any issues identified (and should certainly do so before taking the business to the market for sale). There are a lot of OH&S consultants out there. Ensure that you do your research and select someone who has the necessary skills and experience to guide you properly. Perhaps approach your industry body for a recommendation.
An effective business exit strategy involves reducing the buyer’s perception of risk.
Business risk can come in many forms:
Remember, if you wish to increase the multiple on sale, look at ways to reduce the buyer’s perception of risk.
Can you see ways to reduce the buyer’s perception of risk in your own business?
Key principle # 1 – A successful exit strategy is not achieved overnight. You need to start planning an effective exit strategy today.
Key principle # 2 - Operate your business as a steward for the next owner. Successful exits flow from an attitude of running your business not for immediate reward, but rather with a view to passing on something that is better, stronger and more secure to the next owner.
Key principle # 3 – Reduce dependence on yourself. Many business owners are surprised to hear that one of the greatest impediments to a successful exit strategy is themselves! Buyers will pay a premium for businesses that are not dependent upon the personal goodwill of the owner but have their own business goodwill which will survive and flourish after the current owner has departed.
Key principle # 4 – Timing is everything. If you want to sell your business for a premium, do it when your business is humming, and the industry sector and economy are favourable.
Key principle # 5 – Ensure that your business and life goals are clear and aligned. You may hang on too long and risk damaging the business because your interests and passions lie elsewhere or because you are no longer the right person to take the business to the next level. Or you may leave too without planning for the next stage of life or giving thought to whether the sales proceeds will fund your lifestyle and future plans.
Effective business succession planning is critical if you are planning to eventually sell your business for a profit and have that business continue smoothly once you are gone. Yet, so many business owners put it off because they are too busy dealing with the day to day issues of the business. Many shy away from confronting emotional issues like getting older, death or retirement. They also fear the potential costs of speaking to an advisor about these matters.
I have seen so many business owners lose significant amounts of money from jumping quickly into a sales process without appropriate business succession planning – either through lack of foresight or because an unexpected crisis, such as illness, death or divorce forced a quick sale.
Selling without the appropriate business succession planning is like walking into a lion’s den. The buyer, often with advice from people like me, will smell you coming from a mile away, tear your business apart piece by piece, then watch as you make reluctant concessions to get the deal done or run for the hills without a sale.
Effective business succession planning will not only translate into real value in your pocket upon exit, it will also give you the satisfaction of leaving the legacy of a business that is strong enough to grow and thrive across generations.
If you sell a quality business, the buyer will not only pay you a good price for that business, but is likely to remain satisfied long after the sale.
On the other hand, buyers who feel that they have been sold a ‘dud’ are highly motivated to hire a bulldog lawyer to scour back through the sales agreement and look for reasons to sue. And believe me, they often find them!
Without appropriate business succession planning, what happens if something unexpected were to happen to you as the business owner?
Are there well documented systems and procedures in place to ensure that the business could run smoothly in your absence? Or would the whole business collapse because the whole business is so dependent on you?
If you do have successors, are they adequately trained to deal with the increased responsibilities? If it is a family member, have you been fair and transparent about the process with other members within the family?
Have you taken steps to protect the key assets in your business? Have you got a clear separation between your business and personal assets and liabilities? If you have business partners, do you have a shareholders agreement containing a clear exit strategy?
Inadequate business succession planning can destroy value in your business. It can also lead to bitter disputes over ownership, strained relations between remaining family members, a lack of adequately trained successors, bad quality financial records and reporting, and competitors stealing your brand, logos, and other intellectual property assets because of your failure to protect them. The list goes on…
With so much to lose, business succession planning should without doubt be a must for any private or family owned business.
So what are you waiting for?
Martin Checketts is a corporate lawyer and business succession expert, who assists business owners to prepare their businesses so as to achieve maximum profits upon exit. For any questions you may have about business succession planning, email Martin at mchecketts (at) millsoakley.com.au - Please replace the (at) with the @ symbol.
Having a business exit strategy is as important as a business plan. Yet so many business owners, when they retire, simply shut the door and walk away. Of those who are able to sell their business or pass it on to the next owner, ignorance or bad advice often leads to mistakes which cost them dearly.
Imagine if you could achieve financial freedom through growing and capturing value in the business, and then selling the business for a substantial profit?
If you want to maximise value when you sell the business or transition it to someone else, then a well planned, well documented business exit strategy is the way to get there.
However, this is not something you should think about just before you sell your business. A successful business exit strategy needs to be carefully considered months and even years before you sell.
I have lost count of the number of business owners I have seen jump into a sale process without appropriate planning – either through lack of foresight or because an unexpected event (such as death or illness) forces a quick sale.
There are key strategies that should be built into your business from day one which will help you maintain a professional, profitable business and translate this into significant capital appreciation when you sell.
Your business exit strategy should address the emotional, personal and non-financial issues that arise during your business succession process.
It should document the business exit strategy that is right for you and your business, laying out the responsibilities of key stakeholders. It should document systems and procedures to ensure that the business could run smoothly in your absence. It should contain robust financial reporting systems, with a clear separation between your business and personal assets and liabilities.
A successful business exit strategy flows from an attitude of running your business not for immediate reward, but rather with a view to passing on something that is better, stronger and more secure to the next owner. Get used to operating your business as a steward for the next owner, which means reinvesting appropriately in the business and not stripping out every last dollar along the way!
Many business owners are surprised to hear that one of the biggest impediments to a successful business exit strategy is themselves. Buyers will pay a premium for businesses that are not dependent on their owners. So learn to reduce dependence on yourself and train others so that the business will flourish regardless of whether you are there or not.
Timing is everything when it comes to a successful business exit strategy. Operating your business in a way that is always attractive to prospective buyers will make it easy to capitalise on sales opportunities that arise unexpectedly.
Ensure that your business and life goals are clear and aligned so that you are more likely to make a better decision around the timing and strategy for your exit. You will also be better prepared to move on and enjoy the next stage of your life, whatever that may entail, rather than hanging on too long and risk damaging the business.
Finally, seriously consider getting help from professional advisers. They can help find the business exit strategy that is right for you, make a clear separation between your business and personal assets and liabilities, and protect your brand, logos and other intellectual property assets.
They can protect the revenue streams of your business through long term contracts, put the appropriate shareholders agreements in place if you have business partners and defend you against the sometimes nasty tactics of potential buyers.
Above all, they can negotiate on your behalf, help you avoid common mistakes that can cost you the best deal and ensure that you get the very best outcome on sale.
Implementing the right business exit strategy for your business will be the biggest and most financially rewarding achievement of your working life.
Isn’t it worth thinking about right now?
Martin Checketts is a corporate lawyer and business succession expert, assisting business owners achieve maximum profits on the sale or transition of their business. For any questions you may have about business exit strategy, email Martin at mchecketts (at) millsoakley.com.au (please replace the (at) with the @ symbol)
Family business succession can be a complex process. The combination of personal and business interests is the leading cause of conflict in family businesses and as a result, many business owners avoid looking at a family business succession plan altogether. What happens then is that future owners of the business are left with the mess and confusion caused by having no proper plan in place after you exit.
Here are some issues to consider when considering your own family business succession:
If are you the owner of a family business and to wish to maximise your profits on exit, then a good family business succession plan is vital to prevent a poor outcome, not only for you as the owner, but also the future owners of the business.
Martin Checketts is a corporate lawyer and business succession expert, assisting business owners achieve maximum profits on the sale or transition of their business. For any questions you may have about family business succession, email Martin at mchecketts (at) millsoakley.com.au (please replace (at) with the @ symbol).
