Business owners considering a future sale should prepare well in advance to ensure a smooth transaction process and increase their chances of completion.
Potential sellers should be aware that buyers will conduct extensive due diligence and will use any red flags arising from the process in order to lower the purchase price or, in a worst case scenario, walk away from the deal. Approximately 90% of businesses taken to market fail to sell. However, advance planning by the seller reduces the risk of due diligence giving rise to any red flags and provides the best chance of ensuring that the transaction process is as smooth as possible.
To prepare for an anticipated sale, a business owners should therefore consider the following:
Statutory Books, Companies House Filings and Corporate Governance Documents
The first thing a buyer will consider is the ownership of the target and its corporate governance structure. It is critical that the register of members is properly maintained to evidence the true ownership of shares in the company. Other statutory registers should also be accurate and up to date and all outstanding Companies House filings dealt with.
A buyer will also review your Articles of Association and any shareholder agreements. It is therefore important to ensure that the Articles reflect the actual governance of your company. If you have a shareholders’ agreement in place, you should be aware of its key terms prior to a sale process in order to understand whether any minority shareholders can be dragged along, or can prevent the transaction. The key issues to consider are the existence of any pre-emption rights, tag-along rights or drag-along provisions, as well as any existing or anticipated shareholder disputes.
The Cap Table
Your cap table must be accurate and up to date to ensure the buyer has full visibility of the company’s stakeholders ahead of completion. Prior to coming to market, it is important to be aware of any share options, Enterprise Management Incentive opton schemes or convertible securities held and to have a complete understanding of the company’s equity structure.
Buyers will want to see an accurate cap table before they are able to effectively value their acquisition. A cap table which is up to date will therefore smooth the sale process and allow you to enter negotiations in a stronger position.
Commercial Contracts
It is also important to carefully review your contracts with customers and suppliers. Many contracts contain provisions which allow the customer or supplier to terminate or renegotiate the contract if there is a change of control of the company. It is important to be aware of these as the buyer may be concerned that a key customer base may no longer exist on completion, which may reduce the value of the business.
Employment
The buyer’s advisors will carefully review your employment contracts to ensure they are sufficiently robust. They will want to understand how the business works at an employee level. In line with this, the key issues to consider prior to a sale include:
- the terms of existing employment contracts. Appropriate notice periods, restrictive covenants such as non-compete clauses, and garden leave provisions should be in place;
- any outstanding or anticipated grievances or claims; and
- any ongoing or anticipated redundancy processes.
Ownership of Intellectual Property
For many businesses, intellectual property provides the primary value. However, the ownership of intellectual property is often undocumented and, as often is the case, may not actuallly be owned by the company at all. Prior to going to market, the business should ensure that:
- all intellectual property is in the company’s name, rather than individuals;
- all intellectual property created by employees and contractors are properly assigned to the company; and
- licences to use third party intellectual property are properly documented.
Transaction and Tax Structuring
It is important to consider whether you want to structure your sale as a share sale or an asset sale. This will have an impact on your tax obligations, as a share sale will generally be more tax efficient for sellers.
Deciding the transaction structure early on will also help to ensure that the negotiations are as efficient as possible. For example, if there are significant liabilities in the company which the buyer will not want to acquire, it may be better that the transaction is structured as an asset sale from the outset. Clarity as to the structure will streamline the due diligence scope.
Sellers should also begin to consider liability limitation in advance, which will enable them to cap their exposure to warranty and indemnity claims by the buyer following completion. These include financial caps and warranty and indemnity insurance.
Due Diligence Process
A well advised buyer will be rigorous in their due diligence of the company. If the seller is able to reduce the risks of anything flagging during this process, they will be in a much better position to negotiate a fair purchase price and to prevent negotiations falling through. The process will also be much more efficient and seamless.
Legal preparation should therefore be undertaken well in advance of the sale process and should not be left as a last minute thought to be dealt with during negotiations.
Get in touch
If you have any questions about any of the information in this article, please do not hesitate to reach out to our Corporate, Commercial & Finance team.
