A few years ago we worked on a business sale transaction in which one side had far less robust advice than the other – you can guess which side was which!
Our client – the vendor – was selling a reasonably large, engineering-style business.
The purchaser – while a successful business operator – was not experienced at acquiring businesses and did not appear to have thought deeply about the sort of expertise they would need to advise and guide them.
The transaction proceeded, however on reflection I feel the purchaser had deficient advice from a range of perspectives, including:
- financial
- accounting, taxation and business structuring
- legal.
I estimate they would have paid at least $30,000 in fees for this sub-optimal advice.
They also endured a lot of stress and had to focus a lot of time outside their existing business trying to corral their advisors to get the deal over the line in a timely and cost-effective fashion.
The business sale story – how it unfolded
After identifying our client’s business as a purchase opportunity, the potential buyer signed a heads of agreement, allowing them to conduct due diligence on the business.
They subsequently signed a business sale contract, paid a deposit and exchanged.
Interestingly, that deposit was paid on the basis of a binding sales contract – it was not conditional on finance.
Problem 1 – Finance
The purchaser subsequently found the finance arrangement put together by their finance broker was not appropriate for the style of business they were purchasing and was difficult to execute in the time agreed to in the contract.
In order to complete the deal, they had to substantially drain their existing business’ cash flow to deliver to the contract.
As a result, just when they needed some surplus funds in order to comfortably transition the new business, they were tight on cash.
Problem 2 – Accounting, taxation and business structuring
Similarly, there were business purchase price apportionment issues which could have been better advised upfront to give the purchaser a better outcome in taking over the business.
In fact, some of the terms of the sale agreement were very favourable to the vendor because we were able to negotiate these on the vendor’s behalf without much resistance upfront; the purchaser’s advisors were effectively asleep at the wheel.
As a result, some of the transaction and transfer impacts favoured the vendor more so than perhaps could have been the case.
Problem 3 – Legal
The purchaser’s solicitor was extremely busy, didn’t really understand his client’s requirements and appeared to have very little experience in commercial business transactions.
That led to a very dysfunctional relationship between the purchaser’s solicitor and the vendor’s solicitor, as well as with ourselves.
Response times were extended and, in many cases, responses were disconnected from what the purchasers were wanting and what was previously agreed to in the sales contract that had been exchanged.
There was a lot of spinning of wheels!
A good deal suits both parties
Our client – the vendor – enjoyed a successful sale, albeit there was a fair amount of stress as the impacts of communication dysfunction impacted the back-end of the sales process.
We, along with the vendor's accountant and solicitor, provided robust advice regarding protecting their risk, and ensuring an optimum amount of cover in terms of the tax and transitionary impacts.
But, ultimately, a sweet deal is one that suits both parties and, while we achieved our aims for our client, I can’t help reflecting on where the purchasers ended up.
How to ensure you get good advice when buying
The purchaser in this deal received a hefty bill for advisory fees, but, if the deal had been done well, that $30,000 may have provided value for money.
If you are paying good money for advisory services, you need to know you are getting strong, responsive advice from people with a depth of experience in handling business transactions.
How do you ensure that? You do your own due diligence on potential advisors before engaging them.
Whether you are considering using your existing advisors or engaging new ones, try these steps:
-
- Test them out
Ask about their experience with transactions i.e. how they run them, what they do, what might be the impacts if you were to do XYZ? - Ask for quotes
Step one in seeking a quote is understanding the scope of works, i.e. what an advisor will and will not do for you, whether that’s in terms of taxation advice, business structuring, legal or funding advice.
Step two is about dollars – don’t be afraid to ask for a firm quote, or at least a ballpark estimate as to what it should cost based on various circumstances. - Oversight the process
Make sure you or your lead advisor oversights and project manages the overall process.
Be clear about expectations, timeframes, the steps and decision points.
This will make for a much better outcome and a smooth transfer to business ownership usually means the value paid for your investment is supported and protected.
- Test them out