Thinking of selling your business? Fine – but take time to breathe. Here Neil Jones, head of the corporate and commercial team at Ansons Solicitors shares the best time to bring your hotel to market and negotiating the right deal in a post Covid-19 world.
The coronavirus crisis has been very damaging for the UK economy, as businesses struggle to keep their doors open and continue trading due to the current restrictions.
Some sectors, like hospitality, have been hit extremely hard by the Government lockdown, with many owners now considering selling their business to make up for the loss of earnings.
However, it’s important for owners not to make any snap decisions in the current climate, as there are opportunist investors looking to secure struggling businesses cheaply, to the detriment of the seller.
Therefore, issues like due diligence, warranties, indemnities and price adjustment mechanisms should be handled carefully, ensuring the seller does not accept much poorer terms than they normally would.
With the current fluidity of the COVID-19 crisis, some buyers may want to renegotiate terms of a deal that’s already been agreed, but sellers should try and avoid such a situation, as it will usually not be in their favour.
Although the ongoing crisis will have some impact on the deal, it should be remembered that the buyer is investing in the long-term viability and potential in the business, and this should be reflected in the terms.
If the deal was already in the process of being negotiated before the outbreak of COVID-19, then the buyer might wish to revise the deal to include or modify the price adjustment mechanisms.
Sellers can take steps to protect themselves, like asking for more payments up-front 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 in order to mitigate the risk of any claims and revisit any relevant warranties in the agreement in light of COVID, in case they should be amended or qualified.
Simple steps to success
Selling a business is a series of clearly defined steps, including securing the positions of any employees, minimising personal tax liabilities and deciding what expert advice is needed.
This could involve a corporate finance adviser, a tax accountant as well as a corporate lawyer, ideally experienced in the sector in which the business being sold operates – there’s no substitute for experience when identifying pitfalls or areas of risk.
When taking on expert help a clear division of responsibilities and an agreed fee structure should be agreed, with both written down. Now the seller can create the best possible picture of their business, to maximise the sale price.
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 approached directly by buyers keen to offer a valuation that maximises their 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 in a ‘buyers’ market’, but this would be a mistake by the seller and the kind of panicked response the buyers, who may be highly geared themselves or only have vague finance promises, will hope for.
If part of the payment of the purchase price is to be deferred, what guarantees are in place with regard to those payments? Do they reflect the reality of the current COVID-19 related market conditions?
Additionally, if payments are linked to future business performance, will the seller still be able to influence future performance? Do the figures reflect the impact of COVID-19?
During the COVID-19 lockdown and the likely economic uncertainty to follow, it’s only natural buyers may place increased emphasis when performing due diligence, on aspects such as insurance, supply chain risks, business continuity and employee health and safety policies.
As a seller, it’s best to be front and transparent, which not only demonstrates good faith, but also helps protect against any future claims if such information was not fully disclosed.
Sellers should rely on their expert advisors to fully interrogate the details of any offer, which these advisers will view dispassionately – it’s what the seller needs and what the bargain-hunting buyer fears.
With any deferred pricing mechanisms or earn-outs, the seller needs to ensure they are fully covered with reference to COVID-19’s impact on their business.
The buyer may predict a business slowdown over the next 6 months and attempt to structure a deal based around continued pre-COVID earnings during that period, which may result in that earn-out 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 must exercise caution. COVID-19 has created market conditions where speculators feel they can grab bargains, but wise sellers can still structure any agreement to ensure the business they have worked hard to build, is not undervalued.