Moore Blatch’s top rules for transactions
Thomas Clark | 17.10.2018
07.01.2019 Thomas Clark
If the festive break has hardened your resolve to sell your business, these handy tips on what to do in advance of a sale may make the whole process easier – and secure you a better price.
Whether you're using an agent or selling via an introduction, the better prepared you are the easier it will be. Most likely because once you have found a buyer and the heads of terms are signed, the following few months may be the busiest of your working life considering the need to continue to run the business whilst engaging in a time consuming sale process.
My useful tips are as follows:
Check your company books
On a share sale, the company books and records are the point of a reference for a buyer to confirm who actually owns the shares in a company. Once a company is incorporated, company books and records are often put on a shelf and forgotten about until a potential buyer asks to see them.
Over time the shareholders may have changed, and whilst stock transfer forms may have been signed, the register of members in the company books and records may not have been updated.
Taking the company books and records off the shelf in advance of entering a sale process will give you the opportunity to identify gaps or inconsistencies before they are handed over to a buyer.
Prepare for due diligence
Due diligence is one of the first exercises that a buyer will undertake after signing the heads of terms.
The buyer’s questions will cover a wide range of topics, from financial issues to ownership of intellectual property rights. The good news is that there are some questions that feature heavily in most due diligence exercises, and your professional advisers templates will guide you to information that the buyer is likely to ask for.
The most efficient way of collating information is to collect electronic copies of all key documents and upload them to a data room.
Set up dedicated email addresses for the sale
Sellers should consider using a private email address from the outset, as otherwise following completion the buyer will end up having access to all the work done leading up to the sale, including correspondence between sellers, lawyers and other advisers. A private email address will also ensure privacy at work.
Check the most efficient tax treatments for the sale
Sellers should consult their tax advisers as part of the planning process in advance of the sale. The tax treatment will be the subject of negotiation, but taking advice from atax adviser will help sellers understand and recommend the optimum treatment which can influence and maximise the tax treatment received.
Increase your sale price by enhancing the value of your business
You can enhance the value of the business by asking and answering the following questions:
Are all intellectual property rights material to the company’s business actually owned by the company, or licensed from a third party? And is there a written licence in place which is signed by both parties?
Have all sub-contractors entered into written agreements with the company so that any intellectual property rights they create belong to the company?
Are all intellectual property rights that can be registered actually done so in the name of the company?
Employment law has changed significantly over recent years, so the company needs to be clear contractually, who its employees and contractors are.
Are all employees subject to restrictive covenants? Are they effective?
Who are the key employees? Do they have a non-poaching clause and are the clauses robust enough?
What holiday pay are employees and contractors entitled to?
What pension arrangements and contributions does the company offer? What are the company’s pension liabilities?
Are there any share options in place?
How do employee sellers take their remuneration?
If the company owns leasehold property, does it have a copy of the lease and relating documents to hand?
If the property is rented, are there issues that need to be addressed, like dilapidations, for example?
Does the company have its own terms and conditions under which it contracts?
If the company has contracted on any terms (other than its own) does it have copies of these to hand? Are they signed?
Are there any repeat or long-term contracts that, for example, will not be fulfilled in the next six months?
Do any of the contracts have change of control clauses – i.e., providing that if more than 50% of the share capital is sold you need the consent of the other contracting party?
Does the company have all the regulatory permissions and licences it needs in order to operate its business?
Will any regulatory permissions or licences terminate if the company is sold, and, if so, what can you do to overcome that issue – e.g., by contacting the regulators or licensing authority?
What outstanding loans does the company have?
Are any loans secured?
Have any directors or shareholders given any personal guarantees to secure such loans?
Are there any contracts (other than your employment contracts) between the sellers and the company?
Would warranty and indemnity insurance be appropriate?
The benefits of addressing issues before your buyer raises them
Gathering information and potentially addressing issues in advance will provide the sellers with the opportunity to identify what is material to the company, and how any obstacles can be overcome before completion – and ideally before the information is shared with the buyer. For example, buyers will understandably be concerned if they think a major customer could terminate their business on completion of the sale. However, if this point is identified in advance, the sellers will be able to agree an amendment prior to the sale, or to draw this to the attention of the buyer and between them agree a strategy to deal with the issue. The key benefit of this is that identifying problems in advance of your buyer’s due diligence will put you in control.
In advance is an explanation; in arrears is an excuse.