It would be easy to lump start-ups in the same gloomy boat as established small businesses. Despite being allowed to trade while insolvent during the pandemic, and recent changes to insolvency laws, Deloitte is forecasting about 240,000 small businesses will collapse in coming months. It remains to be seen how the overhaul of insolvency legislation – the biggest in 30 years – will mitigate this scenario. Under the new legislation, businesses with liabilities under $1 million receive a 20 day grace period in which to restructure so as to remain viable. Creditors then vote to either accept or reject the restructure, in which case liquidation is to become faster and less costly than before.

While the move has been welcomed by the sector, the Small Business Ombudsman Kate Carnell has urged owners in difficulty to seek professional advice even if they feel they can’t afford it, as she reasons they simply cannot afford not to give themselves the best chance possible to avoid closure. At the same time, Ms Carnell is calling on government to provide owners with assistance in the way of $5000 financial advice grants.

In NSW this week, there was a similar boost courtesy of Tuesday’s State Budget. NSW Treasurer Dominic Perottet reiterated support for the sector and announced policies that would make running small businesses easier by cutting red tape, thereby simplifying processes around rebuilding after the downturn as well as attracting investment and creating jobs.

Onward and upward

None of the uncertainty however has deterred the start-up community. By mid-year the number of new businesses registered with the Australian Securities and Investments Commission (ASIC) was 34 per cent higher than the same time last year. In July 2020 ASIC processed 48,128 fresh business registrations, well above July 2019’s figure of 36,024, as well as 35,812 in 2018 and 33,399 in 2017. Analysts and economists point to the driver being simple survival: many businesses are started out of necessity, and ventures created during economic downturns are often highly successful – Uber and AirBnB among them.

Similar figures have been seen internationally. In the United States, new business applications rose almost 20 per cent in the 12 months to September according to the US Census Bureau. Applications from the type of businesses likely to hire employees were up about 12 per cent. Additionally, analysis by university researchers from the likes of Harvard and Stanford found 52 per cent of start-ups in the country had been positively affected by the pandemic.

Knowledge is power

The spike in new businesses raises the prospect of more mergers and trade sales down the track. For the uninitiated, especially newcomers to running a business, the process can be fraught with pitfalls. Gaining advice on the stages of such deals is paramount said Katie Johnston, a senior associate at Brisbane firm The Fold Legal and expert in business restructures, raising capital and managing mergers and acquisitions.

“The preliminary offer and negotiation stage are critical,” Ms Johnston said. “There are some tricks and traps at this stage but these can be avoided if you know what to expect.”

Traps include placing too much trust in non-disclosure agreements, particularly if two parties are competitors; neglecting to keep shareholders abreast of plans to issue new shares; and failing to ascertain whether a potential buyer of the business has sufficient funds. In the early stages of negotiation, Ms Johnston said it is particularly important to impart enough business intel for the acquirer to calculate a ballpark price to offer, yet not information so sensitive that it could be misused in a detrimental way should the deal fall apart. “It can be a difficult balance to strike but one you should have laser focus on,” Ms Johnston said.

Virtually any merger or sale can be broken down into 7 stages according to Ms Johnston:

1 Offer and negotiations:

Discussing and agreeing what the offer will look like + disclosure of basic business information. (More sensitive information is shared further along the process). It is important that a binding confidentiality or non-disclosure agreement (NDA) is signed at this early stage.

2 In-principle acceptance of offer:

Decide whether the offer is worth pursuing. If so, it is time for the third step…

3 Heads of Agreement or Term Sheet:

This document lists the key features of the Offer, details key conditions, and is negotiated and signed by both parties. Term Sheets tend to be non-binding, and subject to conditions such as finance, due diligence and board approvals. Binding provisions in a Term Sheet include exclusivity in which both parties agree to commit to pursuing the deal for a set period of time; ensuring confidentiality via a clearly written NDA which gives the target business the right to enforcements should it be breached by the acquirer; and costs.

4 Due Diligence:

Advisable for both parties to undertake, especially in cases of a partial sale/merger or where scrip or shares are involved.

5 Negotiation and draft transaction documents:

These are generally drawn up the acquirer’s lawyer and reviewed by the target’s legal team. Further agreements may be necessary, if, for instance, senior staffers are retained and/or shares are to be transferred.

6 Execution of transaction documents:

A flurry of documentation are now prepared to seal the deal, and once conditions are met it can take about a month for completion after all documents are signed.

7 Completion:

Celebrations are in order only after the merger or sale is settled, the purchase price paid and any other loose ends and necessary documents tied up neatly. Cheers!