“You want to be prepared, deliberate and intentional – don’t give your accountant and your lawyer a back-of-a-napkin proposal”
The prospect of buying or selling a business is top of mind for many people now the general election is over.
Election pledges to lower tax cost and compliance, change employment law, improve cash flow, cut red tape and provide better access to capital for small business owners, have left people buoyed at the prospect of better economic times ahead.
Commercial law specialist Andy Martin says a good window is now available for people to prepare their business for sale – but warns many owners leave it far too late to connect with their advisers.
“You want to be prepared, deliberate and intentional – don’t give your lawyer a back-of-a-napkin proposal and tell them to settle it in two weeks. You may have negotiated a perfect exit but nine times out of 10, people who take a bit more time, have a deliberate focus and are willing to take advice will achieve far better outcomes.”
Andy worked for Buddle Findlay in Auckland for 15 years before moving to Tauranga earlier this year to join Cooney Lees Morgan’s Corporate and Commercial team as Special Counsel. He has a broad corporate and commercial advisory practice, with a focus on mid-market mergers and acquisitions.
He says Cooneys has already noticed an upturn in corporate commercial legal activity and he predicts that trend is likely to continue under the new government.
“There’s a lot of small to medium business owners who have been waiting for the uncertainty of an election to dissipate before making big decisions as they want a bit more confidence around the economy. And there will be buyers and investors who were sitting on their hands for the same reason.”
But Andy warns there’s still not a lot of government money to go around and the economic environment won’t change overnight. “The country is hugely in deficit and will be for another few years, so there won’t be a bottomless lolly jar for helping SMEs. But generally, business owners appear to have more comfort that their interests may be slightly higher on the agenda and have a more positive outlook.”
Andy says a number of factors suggest that merger and acquisition activity in the SME space is rebounding and could be poised to rise in 2024, with one of the key factors being an increasing focus on exits and sell downs by business owners as part of their generational succession planning. However, while interest rates are forecast to start easing next year, the current high cost of capital means buyers will continue to be selective with their investments and acquisitions. So now is the time to work closely with your accountant and lawyer to get everything in order.
“As always, business owners need to work on their business as well as in it. Businesses have been operating in a tough economic environment for the last two or three years and may have not had particularly good growth, or could even have suffered a bit of a decline. They’ll be wanting to restore their trading performance and increase their enterprise value.”
Andy says owners who wish to exit within the next year or two should start looking at ways to improve their business now so it’s more attractive to buyers – both from a financial perspective by improving trading results, and also from a legal perspective by examining their business structure.
“Speak to your lawyer and accountant early. The earlier, the better. It doesn’t have to be an in-depth discussion. Just start a conversation and get a realistic idea of what’s ahead of you.”
Accountants can help frame up financial reports to improve a potential valuation, while your lawyer will help assess what you ultimately want to achieve from a sale. Important issues to consider include whether your business is more suited for selling as a share sale or an asset sale, the extent to which a founding vendor needs to remain in the business to make sure the value is realised for the purchaser, and the risk profile that a vendor is prepared to accept because every sale and purchase agreement is different.
Owners should consider whether critical areas of the business need to be reviewed or restructured. “There’s usually low hanging fruit you can do straight away, like considering if you need to secure key customers and suppliers with contracts, making sure you own your IP, resolving outstanding disputes and examining your leases. Is there anything else you can do to make your business better over the longer term, and therefore more appealing to potential buyers? A strategic review with inputs from your professional advisors may prove invaluable.”
Helpfully, Andy has written a comprehensive article on what to consider before selling your business which is available now on Cooney’s website.
“I recommend allowing at least three to 12 months to properly prepare your business for sale.
At the end of the day, it only takes one buyer and one seller to make a transaction happen. Talking to your advisers early can help achieve the most productive deal.”
