Preparing documents for buyers
After you (or your business broker) have qualified a buyer to ensure they are serious about buying your business and are in a position to do so, you should prepare the documents they will need to conduct due diligence.
Due diligence
The buyer will conduct a thorough investigation of your business, known as due diligence, often within a time period specified in a letter of intent – a document that indicates 2 parties are willing to do business.
Conducting due diligence is the best way for a buyer to assess the value of your business and the risks associated with buying it. Buyers will want to look at your business’s operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details.
The buyer may want to:
- observe the operation of your business
- examine processes and procedures
- analyse your business’s finances
- evaluate risks associated with buying your business.
Because of the sensitive and often confidential nature of the information, you will be provided to buyers, you should ask your solicitor to draw up a non-disclosure agreement for all buyers to sign. It’s also a good idea to review the records you will be provided with your solicitor and accountant before giving the buyer access to this information.
While you may have valued your business, your buyer may also want an independent valuation. The documents you provide will help this process.
Be prepared to answer any questions potential buyers might have about perceived weaknesses in your business. For instance, they may require explanations for times of poor growth. Explain how you managed these down times and how you improved the business following them.
Documents for the buyer
As part of the due diligence process, buyers will want to review as much of the following documentation as you’re prepared to show them:
Financial records
- Profit and loss statements for the past 24-36 months
These records show the net profit that is left after business expenses have been deducted from revenue. - Current balance sheet
An itemised statement that lists the total assets and total liabilities of your business. It demonstrates your business’s net worth at any given time. - Cash deposit records
Evidence of all your payments and receipts, by cash, cheque or credit card. - Bank loans and lines or letters of credit
Appropriate documentation provides evidence that financial institutions have extended these lines to your business. - Forecasted financial information and business plans
These give an estimate of future business results. - Details of your business’s automated financial systems
Training manuals or supplier details of systems your business uses. - Outgoing costs breakdown
The money spent on your business to keep it operating. Rent and utility bills are examples of outgoing costs.
Business operations
- Utility accounts
Show the cost of relevant utility connections such as telephone, electricity and gas. - Supplier accounts
Evidence of your contracts with external suppliers. - Insurance details
Evidence of your business’s insurance premiums and amounts of insurance accepted. - Stock inventory list
A detailed breakdown of the stock presently on hand. - Business history
Outlines your business’s background with details of the products and services you provide. - Asset list
Details the business’s assets including intangible assets such as goodwill, patents and trademarks. - Audit work paper files (if available)
Provide copies of any previous financial, safety and standards audit results, as well as the auditors’ contact details.
Legal documents
- Client contracts and trading agreements
Evidence of your business agreements with clients and other parties. - Employee contracts and agreements
Evidence of contracts between you and your staff. - Franchise agreement (where applicable)
Evidence of your franchise agreement. - Leases (where applicable)
Documents showing the details of your premises, car and equipment leases. - Work health and safety guidelines
Copies of work health and safety processes and requirements relating to your business and industry (e.g. evacuation procedures and manual handling processes).
Due diligence for a seller
You should also conduct your own due diligence. Your checks as the seller might include:
- ensuring your prospective buyer can secure the finance to purchase your business
- assessing the experience they have in running a business
- learning more about their future plans for the business.
Following the period of due diligence checks, you and the buyer should be ready to finalise negotiations.
Negotiating the contract
Once the buyer has conducted their due diligence, it’s time to negotiate the sale. Negotiating the sale of your business can be stressful, so using a business broker can help. There are many negotiating skills that you can use in this process.
Key points for negotiation
Remember, selling your business is not just about the sale price. There are other important areas that you and the buyers should agree on, including settlement. If the buyer is having trouble securing finance, they might request a longer settlement. If you’re in a hurry to leave the business, you might try to negotiate a shorter settlement.
You have a stronger negotiating position if you can promote the handover strategies and after-sale training that will ensure the business continues to operate successfully after the sale.
Potential buyers might also look for a guarantee that you won’t open another business that will compete with them after they take over. This is known as a restraint of trade covenant. Your solicitor can help with this clause.
You should also negotiate how much deposit the buyer wants to pay. Typically, a deposit of 10% or more of the purchase price is expected.
Drafting a purchase agreement
Once you and the buyer have agreed on the sale, the buyer’s solicitor should draw up a legal contract specifying the sale details. This ensures that both parties understand exactly what each is agreeing to provide and do. Ask your solicitor to explain the terms and conditions of the contract so you know what will change hands, when, how and for how much.
In addition to the basics of price and purchase, contracts for the sale of a business should include provisions to address potential problems that may arise, such as:
- the buyer defaulting on installment payments
- you providing inaccurate or false financial information
- you having more liabilities than were known at purchase
- you not actually owning some of the claimed assets
- material changes in the business occurring before the transaction of sale is finalised.
Legal obligations and business handover
Legal obligations
As a seller, you have certain obligations, including those to employees and potential buyers. Failure to fulfil these obligations can have legal consequences. It is a good idea to seek professional help from your lawyer or business broker during this time.
Consider the following questions about your legal obligations:
- Can your business licences be transferred or should they be cancelled?
- Are you going to sell or retain your registered trademarks?
- Have you notified the Kenya Revenue Authority?
- If you’re trading as a company, have you notified the company registrar?
- Do you need to contact your county government to cancel any local licences or permits?
- Will you need to transfer title on any lease agreements – such as for property, cars and equipment – to your buyer? The new owner and your landlord will need to agree on a transfer and you will need to pay the costs.
- If you are no longer employing anyone, cancel your policy with National Social Security Fund (NSSF) and National Hospital Insurance Fund (NHIF).
- Have you informed your creditors well in advance of the actual sale?
Hand over the business
After a settlement, there’s usually a handover process. You’ll probably need to plan this process well in advance of the actual handover and maybe even in consultation with your buyer.
The terms of the handover will be stated in the contract. Business handovers often take place over a period of time.
Some of the steps involved in the handover may include:
- introducing the buyer to important clients and suppliers
- introducing the buyer to employees
- providing a period of training to the buyer
- handing over all keys, alarm codes and security devices to the buyer
- notifying utility suppliers (telephone, electricity and gas companies)
- notifying bank, insurer, Post Office, industry association etc. of the change of owner.