Preparing Your Business for Sale

By the time a draft sale agreement is circulating, the structure is settled in everyone’s mind, the buyer’s board has approved a shape and a number, and your ability to change either has largely gone. Sellers who discover in week eight that the shares sit in the wrong entity, or that an asset structure costs them R7 million more, are not asking for an amendment. They are asking for a renegotiation — and buyers treat a renegotiation as a reason to look again at everything else too.

The fix: have the tax conversation before heads of terms, when the structure is still an open question.

Loading four thousand documents into a data room and adding a line saying everything in it is disclosed feels thorough and protects you against very little. The test is whether a reasonable buyer would have understood the problem and its size from what you gave them — and an unindexed folder of scanned PDFs fails that test comfortably. Twenty minutes spent writing an issue up properly removes a claim that could otherwise run into millions.

The fix: write specific disclosures against the specific warranties they qualify, in enough detail that the reader knows what the issue is and roughly what it is worth.

Sellers negotiate the earn-out number hard and the measurement barely at all, then spend two years watching the buyer allocate head-office costs, change the sales commission structure, move a product line and revise the accounting policies. None of that has to be done in bad faith to cost you the money; a buyer integrating your business will make those decisions for their own perfectly sensible reasons. On a R8 million earn-out they are worth more than anything you argued about at signature.

The fix: define the measure, fix the accounting policies that produce it, and secure a right to the information and a proper way to resolve a dispute about the number. See earn-outs, escrow & deferred payment.

The date the deal dies gets set at three months because that sounds businesslike, while the licence transfer sitting in the conditions list takes a regulator eight months on a good run. When the date arrives with conditions outstanding, the deal is technically dead and you are asking a buyer whose circumstances have changed to revive it, on their terms. Meanwhile you have run the business under restrictions for a quarter and told nobody why.

The fix: build the long stop date off the slowest item on the conditions list, add a margin, and write down how it can be extended while everyone is still friendly.

Your biggest customer’s contract says the customer may terminate if the ownership of your company changes, and nobody read it until the buyer’s lawyers did in week five. Now it is the buyer’s discovery rather than your disclosure, it attaches to R11 million of your R30 million turnover, and it arrives with a price conversation attached. Found three months earlier, it is a manageable consent; found in diligence, it is leverage.

The fix: read your top ten contracts for change-of-control and transfer restrictions before you go to market, and decide how each one will be handled.

On a business sale the staff transfer whether or not anyone has prepared for it, and you and the buyer stay jointly liable for twelve months for what was owed before the transfer. Sellers who never do the written exercise on accrued leave, bonuses and severance find that liability unallocated, unpriced and entirely live when a claim arrives eleven months later. By then you have no records, no payroll system and no leverage.

The fix: build an accurate employee schedule early and agree the accrued liabilities in writing, with names and numbers, before the transfer date.

The warranty schedule is long, technical and arrives late, and it is tempting to leave it to your advisors and your financial manager. But your advisors do not know whether your second-largest customer ever signed the standard terms, and your financial manager does not know what you promised a supplier verbally in 2019. You are the only person in the building who can answer most of these questions.

The fix: read every warranty yourself, line by line, and treat anything you cannot personally confirm as something to disclose rather than something to hope about.

The restricted business is defined broadly, nobody carves anything out, and eighteen months later the consulting work you always intended to do, or the stake you hold in a supplier, or the venture your daughter is starting, turns out to be a breach. By then the buyer has paid, has no reason to accommodate you, and your choices are to abandon the plan or to litigate. The clause that causes this is almost never the number of years; it is the definition of what you may not do.

The fix: write down what you actually intend to do for the next three years, read the restraint against that list, and get the carve-outs into the agreement before you sign.

If the price is trued up after closing, whoever prepares the accounts holds the pen, and by then you no longer have the business, the systems or the staff. A seller with no access to the records and no proper dispute mechanism is negotiating about their own money with nothing to negotiate with. A single change in how doubtful debts or slow stock are provided for can move the number by a million rand.

The fix: agree the accounting policies and a worked example before signature, and secure real access to information, a proper review period, and an independent expert to decide a deadlock. See locked box vs completion accounts.

Tell them too early and you lose people during the months between heads of terms and closing, exactly when the buyer is assessing whether the business depends on individuals who are still there. Tell them on closing day and you spend twenty years of trust in an afternoon, and the buyer inherits a workforce that starts the new relationship suspicious. Neither failure shows up in the agreement, and both cost real money.

The fix: agree a communication plan with the buyer in advance — who is told, in what order, on what day, by whom, and what is said about job security. See the sale process & timeline.