How to prepare a business for sale: guide

Practical Guide for Owners and Investors

Mainstream

Preparing a business for sale is not about finding a buyer. It is the creation of an asset that the buyer wants and can buy.

The main question is not how much the business is worth according to the seller. The main question is whether the business will pass the buyer’s check and whether the transaction will close.

Effective pre-sales preparation begins with three checks:

1. Is your business ready for due diligence legally and financially?
2. Can it be sold without tax and regulatory risks?
3. What will the buyer see in the structure of assets and contracts?

If these three issues are not resolved before the market launch, the owner risks either a prolonged exclusive period without closing guarantees or a substantial discount to the price at the final stage.

When you need to prepare your business for M&A

Systemic pre-sales preparation is necessary if:

• The owner is considering a complete or partial exit from the business;
• It is planned to attract a strategic or financial investor;
• The business is structured across multiple jurisdictions.
• the main assets are distributed among different legal entities;
• Historically, there has been no strict separation of corporate and personal finances.
• intellectual property is not registered for business;
• there are unsecured corporate, tax or judicial risks;
• Key contracts do not contain provisions for the change of control;
• The business is prepared to be sold to an international group or private equity fund.

The mistake most sellers make

Many owners start with the question:

What multiplier score can I get?

That's the wrong first question.

The right question is:

What legal and financial defects will lower the price or destroy the transaction at the due diligence stage?

Sometimes the best solution is to delay the deal for 3-6 months and carry out a pre-sale restructuring. Sometimes, you can prepare a red folder with voluntary risk disclosure. Sometimes, it is necessary to conduct a due diligence audit (vendor) to control the process and prevent price manipulation.

Preparing a business for sale requires not the hope of high valuation, but control over the verification process.

Step 1. Legal Due Diligence (Vendor Legal Due Diligence)

The first thing to do is to look at the business through the eyes of the buyer.

Key areas of verification:

• corporate structure: history of creation, all issues of shares / shares, minutes of meetings, absence of corporate conflicts;
• title to assets: the right of ownership of real estate, land, equipment, transport, ships;
• intellectual property: registration of trademarks, patents, domains, copyrights to software and transfer of rights from employees and contractors;
• material contracts: contracts with key customers and suppliers, change of control provisions, exclusivity, expiration dates and terms of termination;
• regulatory status: licenses, permits, approvals, compliance with the sanctions and export legislation;
• employment relations: Employment contracts with key employees, option programs, confidentiality and non-competition agreements;
• litigation: Current and potential claims, arbitrations, administrative proceedings and outstanding awards.

If a legal audit identifies defects, they can be corrected or a clear disclosure letter can be prepared that reduces the risk of post-sales claims.

Step 2. Financial Due Diligence (Financial Due Diligence)

The buyer does not buy the past, but future cash flows. But he estimates them through historical financial data.

Preparation should be made for:

• audited financial statements (preferably in accordance with IFRS or other recognised standard);
• consolidated group statements (not just individual legal entities);
• qualitative management accounting and detailed breakdown of revenue and costs;
• Normalized EBITDA (cleaned of non-market, personal and irregular expenses)
• Cash flow statement, which is understandable to an external user;
• Segmental reporting when the business is diversified.

The closer the business is to the standards of a public company, the harder it is for the buyer to justify the discount for opacity.

Step 3. Packaging assets and clearing the perimeter of the transaction

One of the most common reasons for a transaction failure is that it is not what the buyer needs to be sold, or the business being sold is “smeared” on various unrelated structures.

At this stage, pre-sale carve-out is carried out:

• Separation of the business to be sold into a separate company or group;
• transfer of assets, contracts, employees and IP to the target company;
• Separation of non-core, problem or personal assets;
• closing of inactive legal entities and settlement of intragroup loans;
• Creating a clear and simple corporate ownership structure.

The buyer pays a premium for the purity and simplicity of the structure. A confusing scheme of ownership with offshore companies without economic sense is a direct way to reduce the price or demand compensation guarantees.

Step 4. Develop an effective tax structure for the transaction

The structure of the transaction (share deal or asset deal) dramatically affects the net revenue of the seller after taxes.

It is necessary to analyze in advance:

• tax residency of the selling party;
• Double Taxation Avoidance Agreements (DTTs) between jurisdictions
• Capital Gains Tax (CGT) for the seller;
• the possibility of applying tax benefits, holding regimes and exemptions;
• transfer pricing and possible accumulated tax risks within the group;
• indirect taxation (VAT, stamp duty) in the transfer of assets;
• protection against immediate taxation, including deferred consideration or earn-out arrangements.

An error in the tax structure may cost the seller 20%, 30% or more of the transaction price. This phase requires the collaboration of corporate and tax lawyers.

Step 5. Evaluate the business from the buyer’s point of view and prepare a business plan

Valuation in M&A is a function of how the buyer sees future synergies and risks.

The seller must prepare:

• detailed financial model with a forecast for 3-5 years;
• justification of assumptions on market growth and business share;
• analysis of the competitive environment and barriers to entry;
• Calculation of synergies that a particular type of buyer may receive;
• development scenarios when maintaining or leaving current management;
• Describe the dependency on key customers, suppliers and founder.

Unfounded forecasts undermine the credibility of the entire business presentation. It is better to present a realistic forecast with protected assumptions.

Step 6. Protect key relationships and team

Losing a key customer, partner or employee between signing and closing a trade can give the buyer the right to exit the trade or lower the price.

It is necessary in advance:

• Extend key customer and distribution contracts for a sufficient period of time;
• Enter or renew employment contracts with key managers, including gold handcuffs and retention bonuses.
• fix the transfer of rights to key developments and IP;
• obtain the consent of key counterparties to change control, if they are required by the contract.

The uncontrolled loss of a key employee on the eve of a deal closing can destroy value faster than any legal risk.

Step 7. Develop a strong negotiating position

To enter the market without a prepared negotiation strategy means to give the initiative to the buyer.

The negotiating position of the seller is based on:

• vendor due diligence report that the seller provides to all potential buyers before signing the NDA;
• Red folder – a closed part of the report with critical risks, which is disclosed only at the final stage;
• draft of the main contract of sale (SPA) on its terms;
• Process letter with clear terms and rules of the auction;
• Evaluating alternative scenarios, including abandonment, partial sale or debt financing.

If the seller has no alternative and is obliged to sell the business by a certain date, the buyer will always feel it.

Step 8. Prepare management and documents for Due Diligence

Physical readiness for inspection is a separate operational task.

It shall be established:

• Physical or virtual data room (VDR) with clear folder structure and document indexing
• A package of answers to typical customer questions (Q&A log);
• Disclosure schedule, which will become part of the SPA
• The team on the seller’s side, which manages the verification process and is responsible for communicating with the buyer.

Chaos in the data room and slow responses to customer requests are a signal of disorder within the business and a direct path to discount for the risk of uncertainty.

Asset Deal or Share Deal: pick

The choice between a share deal and an asset deal is not just a matter of price, but a function of tax efficiency, risk allocation and the structure of the seller’s business.

How to strengthen the position of the business before entering the market

The best deal doesn’t start with finding a buyer, but with preparing a business.

6-18 months before the proposed sale, it is desirable to:

• Complete Vendor Due Diligence;
• Removing identified legal defects;
• audit financial statements and switch to IFRS;
• Clear the perimeter of the business;
• strengthen the team and board of directors;
• to conclude long-term contracts;
• protect intellectual property;
• Optimize the tax structure of ownership;
• to create an effective management accounting and reporting system;
• Prepare a business plan and financial model;
• Determine the ideal buyer criteria and evaluate the synergies for each type.
• form a team of advisers (lawyers, financiers, investment bankers).

Business should be prepared not for the fact of selling "someday", but for a specific type of buyer and his expectations for profitability and transparency.

Common Mistakes in Preparing a Business for Sale

1. Delay the legal audit until the buyer enters. The surprises revealed lead to price concessions or the buyer's departure.
2. Sell the whole business when parts are more expensive. The lack of carve-out analysis reduces the overall cost.
3. Do not separate personal and corporate expenses. Normalizing EBITDA at the last minute causes mistrust of reporting.
4. Ignore the "change of control." Termination of a key contract due to a change of control can bring down the value of the business.
5. Overestimate. The buyer will conduct their assessment and see the manipulation.
6. Don't hold the key team. The departure of business leaders before closing often allows the buyer to exit the transaction or lower the price.
7. Do not prepare SPA on your own terms. If the buyer first offers the contract, he writes it for himself.
8. Sell without alternative. Exclusivity without a backup option deprives the seller of bargaining power.

Checklist of the owner before selling the business

Before you start the sales process, you need to answer 15 questions:

1. Is the company ready for inspection?
2. Who is the legal owner of each key asset?
3. Are all shares/shares issued correctly?
4. Is intellectual property in the company?
5. Is there an audited report in accordance with international standards?
6. In which legal entity is the revenue consolidated?
7. What structure of the transaction will give the seller the maximum net profit after taxes?
8. What contracts contain a condition for change of control?
9. What happens to the business if the founder leaves a month after the sale?
10. Are there any current or potential legal disputes?
11. Can non-core assets be separated without losing value?
12. Is there a dependency on a single buyer, supplier or license?
13. What hidden risks will the buyer see and how will they be disclosed?
14. Which type of buyer will give the most synergy and therefore the most price?
15. Does the seller have a realistic alternative to this?

What a strong sales preparation strategy looks like

A strong strategy usually includes five levels:

1. Legal & Tax Structuring: Cleaning up the legal and tax architecture of a business.
2. Business Packaging Consolidation of assets and contracts in the target perimeter, “cleaning” the perimeter.
3. Financial Transparency Audit, EBITDA normalization, construction of an investment financial model.
4. Process Control Vendor due diligence, preparation of data room, development of SPA on their own terms, creation of auction regulations.
5. Negotiation Readiness Preparation of negotiation strategy, price maintenance scenarios, alternative offers and tactics to break the deadlock.

Without a fifth tier, the first four are the perfect asset, but they do not guarantee that the seller will not give up the price in the final round of negotiations.

FAQ

Do I need to audit before selling if the buyer still holds his own?

Yeah. Vendor Due Diligence allows the seller to find and fix problems before the buyer finds them. This keeps control of the process and the price.

How long does it take to start a business with M&A?

Optimal - for 12-18 months for medium and large businesses. The minimum is 3-6 months to close critical legal and tax gaps.

Can you sell a business with a bad corporate history?

It is possible, but the price will be significantly lower, extensive assurances and guarantees will be required, part of the amount can be frozen in a special account or paid out through a earn-out.

What's more important to the buyer: Legal purity or profit?

For the buyer, the projected net profit in a protected legal shell is more important. Profits in an opaque structure are valued at a large discount.

Do I have to transfer key employees?

In most M&A transactions, retaining key management is a critical condition for closing the transaction and maintaining the stated value.

What is Vendor Due Diligence and Who Needs It?

This is a legal and financial audit of the business, conducted by a reputable consultant on the seller’s order. The report is provided to buyers. This builds trust, speeds up the deal and allows the auction to run.

Can I sell my business if some of my assets are abroad?

Yeah. This requires coordination of the transaction across multiple jurisdictions, consideration of local tax and regulatory regulations, and proper structuring of the underlying Sales Agreement (SPA).

What if a critical risk is found during the preparation?

Close it before the deal, if possible. If not, prepare a legally correct disclosure to minimize the risk of post-sales claims and tailor the negotiating strategy for the price.

Related services

• International Mergers & Acquisitions (M&A)
• Joint Ventures, Shareholder Agreements & Strategic Alliances
• International Tax Structuring & Strategic Tax Planning
• Corporate Governance, Compliance & Business Integrity
• International Commercial Contracts
• Asset Structuring, Wealth Protection & Succession Planning
• International Arbitration, Commercial Litigation & Cross-Border Disputes

Related material

• How to structure an international M&A deal: step-by-step
• Vendor Due Diligence: How to Control the Business Auditor
• Assurances and guarantees in M&A transactions: How to Protect the Seller
• Asset Deal or Share Deal: Selection of the structure of the transaction in the international context
• How to Choose a Jurisdiction for a Holding Company Before Selling
• Tax Planning for a Business Outcome for an International Entrepreneur
• How to Protect Your Business From Losing Key Employees When Selling
• Pre-sales restructuring of the business: asset allocation and perimeter clearance
• How to Value a Business for a Strategic Investor
• Support of international M&A transactions: legal adviser

Conclusion

Preparing a business for sale requires not finding a record multiplier valuation, but creating a transparent, secure and transferable asset.

A strong seller’s position is based on a clean legal structure, verified financial statements, properly packaged perimeter of the transaction, a pre-designed tax architecture and full control over the due diligence process.

In international M&A, it is not the one who speaks louder about the value of the business that wins. The winner is the one who understands what the buyer will see, what risks he will find and how to preserve the value of the asset all the way from signing the term sheet to closing the transaction and receiving money.