Preparing a company for sale
Selling a business is usually the biggest decision a business owner takes and managing a sale process is emotionally demanding and time-consuming - time away from running the business. Taking steps to prepare your business for a sale, well before a buyer is on the horizon, will make things very much easier when the sale process starts.
The best way to prepare for a sale is to conduct a dummy-run of the legal due diligence process that a well-advised buyer is likely to want to conduct. This dummy-run will flush out any issues you may need to resolve ahead of any sale process and should facilitate a smoother, less stressful, and less time-consuming transaction. Importantly, this should also help to maximise the value of the business as it will avoid buyers using issues to chip the price or require potentially costly indemnities.
So, here are some of the key areas that we would suggest are covered by a dummy-run, ideally with input from your transaction advisers.
1. Structuring & tax planning
When selling your business, you will need to consider the tax implications of doing so. Regardless of whether the sale is structured as a share sale or an asset sale, HMRC will normally be entitled to a portion of the sale proceeds that you ultimately receive. However, with some prior planning it may be possible to restructure the business to maximise any potential reliefs that are available. It is important that you take tax advice as early as possible to ensure that you qualify for any tax reliefs that are available.
2. Financial information
Ensuring that your financial information is organised and accurately reflects the financial position of your business is crucial to any sale process. Any buyer will be looking for you to provide financial information that can demonstrate consistent revenue streams, growth, and profit on a long-term basis. Depending on the business in question, you may want to look to have a specialist finance director review the business and look at it from a financial hygiene perspective to ensure everything is in order. As a starting point you should ensure that your financial information includes (a) historic accounts, preferably last three years as a minimum, detailing profit, and turnover for the business (b) asset valuations (c) up to date management accounts and (d) details of financial arrangements that are in place.
Many small and medium sized businesses are reliant on the expertise and knowledge of their owners. Prospective buyers will want to be sure that the business will not materially diminish in value without the owners at the helm. By reviewing and, if necessary, bolstering the management team it should be possible to help a buyer get comfortable that the asset it is acquiring will at least maintain its value post completion.
Another very key issue regarding ownership is ensuring minority shareholders and majority shareholders are aligned in their commitment to a sale and that the company’s shareholders’ agreement contains appropriate drag-and-tag provisions in case there are able last-minute wobbles.
Check also that all Companies House filings are up to date, that the company books are accurate and that the shareholders know the whereabouts of their share certificates.
In addition to the management team, a buyer will want to know who the company’s key employees are, what their employment contracts look like, and what arrangements are in place to incentivise them to stay with the business following the sale. If key employees are not already incentivised beyond their standard terms of employment, you may want to consider what arrangements can be put in place to lock employees in and ensure that their interests are aligned with yours. You should ensure that all employees have entered into appropriate employment contracts that contain the necessary provisions to protect the business if an employee leaves.
It is important that you have copies of all key commercial agreements. It is common for businesses to be unable to locate key commercial agreements, or in some circumstances, find themselves in a position where key commercial agreements are not documented. Undertaking a review of the arrangements that are currently in place will help you identify any potential areas of concern, whether it be incorrectly worded terms and conditions, or change of control provisions that may trigger a termination of the contract on a sale of the business. Identifying issues prior to entering into a sale process will give you the time to take any action necessary to correct them ahead of taking your business to market.
6. IT & systems
Depending on the nature of your business, computer systems and data may be high on the list of priorities of a buyer when conducting its due diligence exercise. You should be able to provide the buyer with details of all IT and other systems that are in place, together with the supporting documentation detailing elements of the system that are (a) shared with third parties, (b) subject to licence (c) developed for the business by a third party and/or (d) owned by third parties.
7. Website & digital platforms
It is important to ensure that all websites and digital platforms operated by your business are legally fit for purpose and contain all relevant privacy policies, notices, terms and conditions and applicable disclaimers. You should check that website content does not leave your business vulnerable and, if they are hosted by third parties, any hosting contracts are robust and free from inappropriate limits of indemnity. It is also important to ensure that all domain names are owned or controlled by the company as it surprisingly common to find them registered in the name of individuals who are no longer with the company.
8. Company assets
Any buyer will want comfort that the company’s key assets are sitting within the company, are owned by the company and not subject to any third party right of ownership. In circumstances where an asset is owned by a third party, the buyer will want to ensure that the company has a contractual right to use the asset in question. The best thing to do is prepare an inventory of all the company’s assets and check things like leasing agreements, title deeds, licenses and registration certificates are all in order.
9. Regulatory permissions & licences
Depending on the nature of the company’s business, there may be a requirement to hold particular regulatory licences or permissions. If this is the case, you should ensure that they have been properly obtained, are up to date and readily available for inspection by the buyer. Any failure to have the correct licences and permissions in place could result in a delayed or abandoned sale.
10. Compliance & procedures
It is important to check that all your compliance policies and procedures, such as anti-bribery and corruption and data privacy, are up to date with current legislation and fit for purpose.
You should ensure that your company’s insurance coverage is adequate for the risks associated with your business. A buyer will expect to be provided with copies of all insurance policies that are in place together with details of all claims that have been made by the company and whether they are covered by the company’s insurance. Depending on the nature of your business, it may be appropriate to instruct a specialist to undertake an insurance review of your business to determine whether the company has the benefit of an appropriate level of cover in place, given the nature of the business undertaken and the risks posed.
Even though a sale process may be some way off, it is worth getting a professional valuation of your business from a specialist as this will help you to manage expectation with stakeholders and give you a benchmark to enable individual shareholders to tax planning advice.
13. Transaction advisers
Corporate finance, tax and legal advisers can play a meaningful role in fine tuning your business ready for a sale process. This is a time for specialists, and it is worth investing effort in identifying, selecting, and appointing transaction advisers who are genuinely experienced and successful in managing the sale of similar businesses to yours.
Preparation of this sort should put you and keep you on the front foot in future negotiations. As Abraham Lincoln said: ‘Give me six hours to chop down a tree and I will spend the first four sharpening the axe.’