Selling your business: what to consider?
Often selling your business will be the culmination of many years of hard work and dedication. The sale process is one which many sellers will not have been through before and may not go through again.
The sale process can be a stressful period in which you, as a seller, have to carefully balance your day-to-day business management alongside the additional workload arising from the sale process. Ensuring that the business is prepared for sale may help to make the sale process smoother, less stressful and make the company more attractive for a potential buyer as well as maximise the value that you receive.
When should preparation commence?
There are various internal factors (such as personal circumstances) and external factors (such as the economy) which may make finding the right time to sell your business difficult. Sometimes an opportunity to realise your investment and exit the business may arise when you are not expecting it. Whether you are looking to sell in the coming months or as a long-term succession strategy, conducting regular business reviews will enable you to maximise your return and help to make the sale process, whenever that be, smoother. Therefore, the sooner that issues are identified, the sooner they can be resolved.
In our experience, it is rare, if ever at all, that a business is completely clean when it is scrutinised during a buyer’s legal, commercial, accounting and tax due diligence. The issues that arise may be insignificant or easily solvable. Other issues may not be so easily solved and may add significant delays and/or costs to the sale process; making the process more stressful and, potentially, risk the buyer walking away from the deal or changing its terms.
What should be included in a business review?
Typically, every buyer will conduct a due diligence exercise in relation to the target company’s legal, property, commercial, financial and tax affairs. Legal due diligence will usually cover items like the legal structure of target, its ownership and use of assets, information technology and real property, employment arrangements, and litigation. Therefore, we would recommend that any review would cover these areas.
Company administration: A Company is required to submit various filings to Companies House and maintain various statutory registers. Each of these will be scrutinised by a buyer with discrepancies requiring rectification. In our experience, many discrepancies (such as missing or incorrect filings) can be dealt with relatively quickly, but some may require a court order which can come with a large expense and a significant time delay to any sale proceedings.
Employment arrangements: A common risk area, and one which typically receives greater scrutiny and questioning, for many businesses is their employment arrangements. You should ensure that any contracts of employment with staff or contractors are up to date and reflect the present terms for each individual, and that handbooks and policies are implemented, reviewed and maintained. We commonly see the terms of employment vary over time, but the contract of employment is not updated to reflect such variation. A buyer will want to know what the current terms are and have evidence of such terms. Recent case law has led to holiday pay arrangements receiving extensive scrutiny and this would be another area to review to ensure the business is legally compliant.
Commercial arrangements: A buyer will typically want to ensure that the target business’s commercial arrangements are sound in order to protect the value it is paying for the business. Even if a sale is not imminent it will be good practice to review the business’s commercial contracts with customers or suppliers regularly to ensure that they are valid and reflect the present terms. We often find that a seller may be relying on expired or verbal contracts and a buyer may be hesitant to accept this approach, particularly if such arrangements would account for a significant proportion of the revenue the business makes. Another common issue we find is that the terms of business that should apply to customers and/or suppliers may have been updated over time but that such terms may not have been reflected in newer contracts, or that such terms may not have been reviewed for several years and are now outdated. Change of control clauses are often included in various contractual arrangements and consideration should be given as to how consent will be obtained in order to continue with the sale.
Assets: Every business will own various different types of assets, whether this be machinery and stock, vehicles or intellectual property and websites/domain names. It is important to ensure that every asset that should be owned by the business, is owned by the business. In particular, we often find that intellectual property, websites and domain names are held personally, rather than by the business. A buyer will usually want to ensure that it is indeed purchasing all of the assets that are necessary for the business to continue in its current guise. If the intellectual property value is a significant part of the business value, then additional scrutiny will focus on the ownership of the intellectual property to ensure that any contracts with developers contain the requisite terms to ensure the business retains ownership of the intellectual property.
Real property: Whether it is freehold or leasehold, each business will operate from some form of premises. In most instances, the buyer will want to acquire the premises from where the business operates. It is important to ensure that the legal title to the premises is correctly documented and that the business does indeed have a right to occupy the premises. Even in instances where the premises in which the business operates out of is immaterial to the transaction, the buyer may still conduct detailed due diligence, particularly in the case of leasehold property, to understand the extent of any potential liability that may arise such as through dilapidations claims. It is not uncommon for a business to sub-let part of its premises and any such arrangements should also be properly documented.
Regulatory and Compliance: Many businesses will require some form of licence or consent in order to carry on their business legally. A buyer will want to ensure that a business has the requisite licences or consents required and that such consents and licences will not be revoked as a result of the change of control. Conducting regular checks of such licences and consents can ensure that any which need renewing are done so at the appropriate time and can avoid a delay to the sale process as the buyer may not proceed without such consents or licences in place.
Selling your business is one of the biggest decisions that you will make. Every sale process will require considerable time and effort from the seller as they will usually have the most knowledge of the business. However, if you take time to consider the areas which have been discussed and take any necessary action then the sale process may be a lot smoother and ensure that the decision to sell is as rewarding, both financially and emotionally, as it can be.
Please get in touch with Rollits’ corporate team to discuss how we can help you prepare your business for sale.