Business sale structures that extend beyond the ‘as is where is’ sale approach include alternatives that are becoming more common for high-value mining and resources business owners who aim to maximise return whilst balancing or minimising risk to achieve a successful business succession.
The most successfully executed business sale transactions are those that consider the purchase price in close alignment with the associated risks and rewards for differing sale transaction approaches. An exit-ready business owner who is confident in the post-sale performance of their business, may consider offering transaction features that may add some risk, but which can result in a higher final sale price.
An “as is where is” sale transaction is often preferred by a Seller who is less confident about the performance of their business once it’s out of their hands and who seeks to minimise their risk by “locking in” a purchase price.
However, as mining and resources business values increase, this type of sale transaction is more often the exception than the rule. This is because banks are often reluctant to lend to a Buyer using this type of sale transaction and further, Buyers are generally less willing to offer top-dollars without some form of warranty or “earn-out” mechanisms.
For exit-ready business owners who are aware of the risks, alternative structures that generally change when and what sale proceeds they receive in hand, the benefits include a larger pool of Buyers to choose from and opportunity to achieve a (much) higher overall sale price.
1. Joint venture, partnership or partial sale
This structure provides allows exiting business owners to sell part of the business now, and continue on with the Buyer as a new participant. In this circumstance, the parties must carefully document how they will control the business, share profits, and exit if one wishes to leave or if something unforeseen happens.
A key benefit of this approach is that the Seller gets to “take some money off the table” and remain involved in the operation of the business to influence the continued success of the business and lock in a partial future return.
2. Staged buyout
While similar to the above partial sale approach there is an expectation that the Seller will eventually be bought out. In this structure, the parties must consider the ongoing control mechanisms as detailed in the above structure, while contemplating the “final” sale result where only the Buyer remains.
This approach is advantageous because it allows the exiting business owner to remain in the business to influence its performance to yield a higher sale price if continuing growth occurs. The advantage for the Buyer is they will become more able to fund the purchase.
An earn-out accommodates the sale of the business entirely, however a portion of the sale price is held back from or an additional premium is paid to the exiting business owner if the business achieves certain performance targets post-sale. Conversely, this approach allows for some of the purchase price to be refunded to the Buyer should particular minimum thresholds fail to be met.
The main benefit of this transaction structure is that the exiting business owner offers some certainty of future returns which enables them to be bullish on the sale price.
4. Warranties & Indemnities
This sale transaction approach has provision for comprehensive warranties and indemnities where the Seller will warrant (promise) that a number of statements about the business or assets are true. If some or all of those promises are incorrect and the Buyer suffers loss as a result, the Buyer will be entitled to money back.
Again, because the exiting business owner is offering the Buyer increased certainty, they can generally raise their price expectations.
5. Vendor Finance
This sale transaction structure effectively enables the Seller (Vendor) to “loan” a portion of the final sale price to the Buyer and receive loan repayments over a period of time. In this instance, the Seller will need to consider the sort of security required to ensure payments are made, and the value of that security should the Buyer default.
A key benefit of this approach is that the exiting business owner is effectively funding some or all of the purchase price in return for a higher sale price and possibly, interest on the loan as well. Should the Buyer default in their payments, generally, there is some security that would include the Seller being able to “take back” some of the benefit of the business.
6. Ongoing engagement
Using this transaction structure the Seller remains employed or engaged by the business as a consultant, independent contractor or an employee. In this situation, the Seller will need to consider the terms of their ongoing engagement, including circumstances for leaving.
The key benefits of this approach is Buyer confidence. Retaining the expertise of the Seller who can contribute to the ongoing success of the business is appealing to a prospective Buyer, while the Seller in addition to the sale price, continues to receive substantial ongoing compensation by way of wages of consulting fees.
Naturally, both Seller and Buyer need to undertake due diligence. Then once that process is undertaken, the parties then must consider, negotiate and draft the transaction documents very carefully to ensure that they accurately reflect the desired transaction and do not give rise to any unnecessary or unforeseen exposures.
It’s during this process that other issues that can impact the commercial realities of the deal are also given close consideration. These include restraint of trade clauses, excluded assets, intellectual property rights and inclusion/exclusion of real property assets and ongoing lease terms if a property is not sold.
With all that in mind, it is also important for exiting (and incoming) business owners to keep their financial adviser and accountant involved at the same time as they are instructing their lawyers.
Taking a collaborative approach between professionals ensures the “big picture” of succession that affects aligned matters of financial planning, tax effective management of sale proceeds, investment, superannuation and retirement strategies are adhered to and deliver desired and properly-integrated outcomes.
For information about legal matters relating to business succession for mining and resources, please contact Craig Hong on +61 (0) 7 3007 2000 or email firstname.lastname@example.org.
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