It’s a statement of the obvious that you can only sell your business once! And having spent years (or more often, decades) creating what is typically your most significant asset, the natural focus is on securing the highest possible price when it comes time to sell.
However, many business owners inadvertently leave material value on the table due to a lack of optimisation of deal structuring, tax implications, and deal terms.
The bottom line, maximising the value you walk away with, is not simply a matter of securing the best number at the top of the term sheet, because at the end of the day, all that matters is how much of that value you actually keep.
This paper explores key missteps and strategies to ensure business owners walk away with the best possible deal.
Focusing on the headline price instead of the deal structure
A common mistake sellers make is fixating on the purchase price while neglecting deal structure. The way a deal is structured can significantly impact the actual proceeds the seller receives.
Key factors to consider:
- Earn-outs: Deferred payments tied to performance targets can shift risk back to the seller.
- Working capital adjustments: Misunderstandings around net working capital can lead to post-sale disputes and price reductions.
- Escrow and holdbacks: Buyers may withhold part of the purchase price to cover potential liabilities, reducing immediate liquidity.
Ignoring Capital Gains Tax and deal tax efficiency
A deal may look great on paper, but after-tax proceeds are what truly matter. Many business owners fail to consult tax specialists early enough, resulting in avoidable tax inefficiencies.
Key tax considerations:
- Capital Gains Tax (CGT): Understanding exemptions and structuring options can significantly reduce tax liability.
- Asset sale vs. share sale: Buyers often prefer asset sales for liability reasons, but share sales can be more tax-efficient for sellers.
- Rollovers and deferred payments: Structuring part of the deal as equity in the acquiring company can defer tax payments and allow for future upside.
Underestimating the role of competitive tension
The highest valuations come from a well-run sale process where multiple buyers compete. However, many sellers engage with a single buyer too early, giving away negotiating power.
How to create competitive tension:
- Run a structured sale process with multiple bidders to increase leverage.
- Prepare a confidential information memorandum (CIM) that positions the business optimally.
- Work with advisors to time the market and ensure buyers perceive the business as a scarce, valuable asset.
Neglecting due diligence preparation
Buyers will conduct extensive due diligence, and if they uncover risks or inconsistencies, they will use them to negotiate price reductions. Sellers who proactively identify and address potential red flags before going to market can avoid costly renegotiations.
How to prepare for due diligence:
- Conduct an internal audit of financials, legal matters, and operational risks.
- Ensure contracts, leases, and compliance documentation are up to date.
- Address any key-person dependency issues by strengthening the management team.
Overlooking non-financial deal terms that impact value
Beyond price, deal terms such as non-compete clauses, indemnities, and transition agreements can have significant long-term implications.
Key non-financial terms to negotiate:
- Non-compete agreements: Restrictive terms can limit future opportunities for the seller.
- Transition periods: Buyers may require the seller to stay on post-sale, which should be compensated fairly.
- Reps and Warranties Insurance (RWI): This can protect sellers from post-sale liability claims and reduce escrow requirements.
Conclusion: How to ensure you capture full value
To maximise value and minimise risk, business owners should:
- Work with experienced M&A advisors to structure the best possible deal.
- Engage tax and legal specialists early to optimise after-tax proceeds.
- Create a competitive sales process to attract multiple buyers and drive prices.
- Prepare for due diligence well in advance to avoid price chipping and deal delays.
- Negotiate beyond price, ensuring favourable deal terms that impact post-sale outcomes.
By focusing on these areas, business owners can ensure they walk away from their exit with not just a high sale price, but the maximum amount of that value retained.
The information on this website is general in nature and is not intended to constitute financial, legal, or tax advice. It does not take into account your objectives, financial situation, or needs. You should seek appropriate professional advice before acting on any content. While we draw on our experience as business owners and corporate advisors, our insights are not a substitute for tailored advice.
