Selling your business? Don’t forget to check out the buyer
October 20, 2022
The rallying call in many business transactions is ‘caveat emptor’, let the buyer beware, and most especially with M&A transactions where assets can be less than they seem, the liabilities greater than expected and the future prospects dimmer than represented. But, how often is the buyer a cause for deep due diligence, always provided they can demonstrate that they have the financial wherewithal to complete the transaction and actually do so? Why should this be a concern to the vendor?
There is an obvious driver for taking a closer look at the buyer where the deal involves deferred consideration, as the vendor remains on risk even after completion and often for an extended period.
There can be wrangling about the state of the business and its finances after the deal has been signed, or about undertakings given by vendors to buyers and vice versa. Promises of future cooperation and conduct can also be troublesome, especially where the vendor remains involved with the business in some capacity. Business ethics play a large part in resolving these matters.
Reputational and community issues
All too often, vendors have developed deep relationships with stakeholders in the business they are selling, particularly staff and suppliers but also with customers. Businesses can play a significant role in their wider community, particularly when they are long-established. The vendor may have sold, but could the subsequent behaviour of the buyer damage the vendor’s reputation and even lead to serious emotional issues for them? In the worse case scenario, it might even cause safety and security issues for the vendor.
Related article: Why a company’s credit rating can be its most vital asset
A cautionary tale of a disaster averted
The owners of a successful business they had founded decades earlier decided to sell in a part cash and part deferred consideration deal, under which they stayed on as employees. The company was substantially profitable and cash rich. The initial consideration was duly paid and the transfer of ownership and management control effected. Financial management was put under the control of an individual, who had not been involved in the negotiations for the sale and did not appear to have any financial stake in the purchasing company. Another individual claimed to be the true buyer and ‘fronted’ the acquisition.
Within a few weeks, the business was on its knees. The initial purchase consideration had been raised on the security of its assets, depriving the business of its working capital from the outset, and there were ongoing and repeated breaches of the lending facility. Suppliers were complaining that their invoices were now overdue, indeed the major supplier had put the company on stop. There were no funds to meet the month end payroll. The purchaser was asking the vendors to delay the payment of the first tranche of the deferred consideration.
The vendors were devastated at what had happened so quickly to the business they had created and aghast that staff, suppliers and customers might blame them. Fortunately, the lender took prompt action to call in Administrators, who were able to take control and to sell the business and assets back to the original owners before it collapsed. All the jobs were saved and continuity of supply maintained for customers, some of whom provided vital services to highly vulnerable people. A disaster was averted, but only just.
Subsequent investigation uncovered a deeply worrying profile for the new financial manager, who had clearly been the true buyer, showing amongst other issues their involvement with well over a hundred companies during the previous decade, in almost all cases only for a brief period of time after which the companies were eventually dissolved.
Buyer due diligence
There was clearly a failure in this instance to look beyond the sale transaction or behind the buyer. The sale and purchase agreement was a model of pragmatic protection for both parties, but inevitably relied to an extent on the good faith of the buyer in their future dealings with the business.
It is not difficult to explore the background of an individual or a company, to which you are selling and those involved as Shareholders, Directors or Company Secretary if it is a company. The basic information is available to the public at Companies House and can easily be analysed for warning signs if you know what you are looking for. This data may also lead to details of previous acquisitions by the buyer and their associates and the outcomes for the businesses and vendors involved. There are many other sources of information about any buyer and their transaction history.
Having an M&A expert on your side
Carrying out buyer due diligence is routine for experienced M&A advisers, who will always go beyond the more obvious tasks, such as finding potential buyers and assisting with negotiations over key issues such as price and the structure of any eventual transaction. Their role is to protect the vendor they represent in every way possible. Attempting to sell a business without such experts on your side may save money, but at what potential cost to you and the stakeholders in your business?
If you are looking to sell your business, Opus is here to help. You can speak to one of our specialist M&A Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.