How can I protect my interests ?
Cashing out will require you to make some pretty big calls about what your business will look like in the future, how it will operate and your role within in. For the purposes of this article, I’ll be working on the assumption that we are looking at a sale of the business in some form.
One of my clients commented at this point in the process that it was like deciding which one of his children he was selling and for how much.
We shouldn’t underestimate the emotional connection we have to our businesses and the people in them which is why there are some simple steps we can work through to achieve the best possible outcome whilst protecting your interests.
- Engage a good commercial solicitor – while there are many technically sound and legally proficient solicitors not all are commercial animals (as opposed to doing commercial work). Find one that can understand your wishes and drivers then can explain them back in clear commercial terms. A technically sound contract does not necessarily make for a good deal. The legals will consist of a number of documents that can include a sales/purchase agree (SPA), service contracts, leases, licences and a raft of minutes and resolutions to execute the sale. It’s important that you understand how all these documents interact and what they do, but a good commercial solicitor will be able to explain the commercial and legal requirements of these.
- Understand the deal yourself – what is it that you are offering, what is for sale, what is included or excluded, how will you be paid, in what form and when? These questions should be answered by you first and form the basis of your negotiation stance and ultimately the heads of terms the solicitor will build the ‘legals’ around. As you can see, lack of clarity or understanding at this early stage can become compounded and embedded in the deal if you are not clear.
- Know your red lines – the cashing out process will involve negotiating and part of those negotiations will involve compromise (unless you’re very lucky or have under valued your business). But it is critical to know where your redlines sit which may not necessarily be financial. It may involve retaining long serving loyal staff, not renaming the business or keeping at its historic base. Again these are emotional triggers and should not be overlooked.
- Deferred consideration is no consideration – this is the legal equivalent of the proverbial ‘a bird in the hand is worth two in the bush’, but the proverb holds true. Many deals are constructed with a large proportion of the consideration deferred, which in itself is not an issue but be very careful that you fully understand the circumstances and the risks involved in those circumstances to get fully paid out. After all, you will be relying on a business you no longer own or control to deliver.
- Getting paid with your own money – this links to the above point but is often lost in terminology such as leveraged funding, but strip the deal back to its basics and ensure you understand who is paying who, where the money is coming from, who is bearing the risk and what happens if it goes wrong. If it feels like you are getting paid with your own money, then you probably are and the deal might not be as good as you first thought.
- Can you work together – as we know, much of business is a people game and the ability to work together to achieve common goals (in this case having a strong business for the new owners and getting you paid in full). It may be that there is a relatively short transition period from you to the new owners (anything less than six months is short) but the deferred consideration can leave you connected and reliant on the new owners for two years or more. So it’s vital that you can work together in a trust based environment towards your common goal.
- Be prepared to walk away – for many reasons not all deals come off and can fail at any time from initial negotiations to the final signing off. You should be prepared to do this as no deal is always better than a ‘bad’ deal, however that is framed. If at anytime you feel pressured, coerced or have simply lost track of where you are up to ask your solicitor to pause the process ( or create a delay or firebreak) to allow you to examine things in more detail and hopefully get comfortable with things again.
Having a trusted person throughout this process can be invaluable so you can ‘talk it out’ and ensure the glasses are rose tinted. An expert will help but a long term business confidant who knows you and what makes you tick is just as helpful.
So now we are clear about what can be done to protect ourselves throughout the cashing out process, we can look to the good bit (thought I’d leave this to last) of how do I maximise the value of my business?