As a business owner the challenge when thinking of selling your business is being able to see the wood from the trees.  You need to Be Prepared (the motto of Boy Scouts and Girl Guides) but knowing what may derail your business sale and making sure you have covered that aspect, is fundamental.

The point was evident on a recent transaction on which we acted.  The entrepreneur who I will call Peter, had built a successful and growing business with a very good management team.  A competitor made an approach to buy his company but one aspect has not been properly thought through.

The management team had only 10% of the share capital between them.  The potential buyer of the company wanted the business but he also wanted that great management team to ensure he could drive the growth of the enlarged business.

So the buyer wanted and needed to incentivise the management team to stay on and grow the business.  The buyer was also cautious as most buyers are.  He wanted to pay only half the agreed consideration upfront and the balance was to be subject to a complex earn out basis (cleverly) on the performance of the combined businesses.  For the deal to work and motivate the management team they were going to need to have much more than 10% of the earn out.

After protracted negotiations it proved impossible to structure a tax effective deal that would work for the entrepreneur, his management team and the buyer.

Some months later the buyer came knocking on Peter’s door again.  By this time a generous new share incentive scheme had been devised for the target company’s management team.  The scheme had re-based the value of the company giving the team 35% rather than 10% only of the value above an agreed “day one value”.  Peter’s full back position had been protected: if a team member left before a sale of the business he only got 40% of the value of the extra equity awarded to him.  The buyer had also decided he must be bold and offer an all cash deal with no earn out.

So the story had a happy ending.  A deal was struck that motivated everyone.

The second time around the motto Be Prepared had been addressed.

For many business owners there may only be one chance to get things right.  So plan ahead and Be Prepared to avoid losing your opportunity to sell at the right time for the right price!

For further information, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com