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Home / Business / Small Business

<i>Rod Drury:</i> How to start a business (part six)

Herald online
27 Jul, 2008 05:00 PM3 mins to read

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Selling a business you have built from the ground up can be emotionally, physically and financially demanding. Photo / Getty Images

Selling a business you have built from the ground up can be emotionally, physically and financially demanding. Photo / Getty Images

In the final of a six-part series, Rod Drury explains what to do when it's time to sell a company.

KEY POINTS:

There are lots of good reasons to sell your business. Hopefully you'll use a portion of the money to fund the next one and build something even bigger.

But selling is a huge distraction because it places your business at risk. There is uncertainty with staff and even
family can put the wrong sort of pressure on you, as they mentally start to spend the money.

A normal sale process might include an offer being made in principal, followed by the development of a detailed contract and a period of due diligence. Then the purchaser tends to cool off a bit and look to discount the original offer based on what they found during due diligence. Because of the distraction, the monthly numbers have headed south, deal costs put costs up, and if a deal is transacted, it can end up well south of the original number. Often no deal is done and the vendor is left picking up the pieces.

Often you are selling out to a competitor - and now they have been right through your business, learned how it works, and left you struggling at the end of the process.

Deals get tougher and less likely to close the more they drag on. An alternative to the process above is to flip it around and bake certainty into the deal right at the beginning.

Under this model you provide key metrics about your business up front to give the intending purchaser enough information to submit an unconditional offer containing all deal terms. You warrant that there is nothing they will discover during due diligence that will have a material impact on the transaction. The materiality threshold is set as part of the deal - of course you set that materiality threshold as high as you can.

This offer needs to be binding as soon as you sign it. Then the due diligence process can commence and, as soon as the period is complete, the deal can close. This might be time limited to one month.

This means they have all board approvals, financing in place, and are 100 per cent committed at the time the offer is finally presented.

This restricts a competitor to only headline information before they are committed so is a good way to protect your intellectual property.

A key aspect of the deal will be if the founder stays in the business or not. It can be very frustrating staying in a business that you no longer control. For this reason it is important that as part of getting a business ready to sell, you put good management in place and spend more time working on the business rather than in it.

The purchaser should want to put their stamp on the business, and should see that you are no longer critical on a daily basis. You should set the expectation you will stay around only long enough for a graceful handover. This may be as short as 1-3 months.

Finally, it's important to have good advisers. Find a lawyer with a good track record of business sale transactions - they will create and preserve value in the deal. When your life's work is being sold, you need someone who is objective on your side.

The deal is never done until the cheque is in the bank. When it is, make sure you take a holiday - something I keep forgetting to do.

* Rod Drury is CEO and founder of leading NZX-listed accounting software provider Xero (www.xero.com).

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