In order to ensure a smooth sale process, it is important to review certain matters before the legal process begins. This serves to highlight any potential issues that may cause costly delays in the process and anticipate the purchaser’s due diligence requirements. Careful preparation can also help to achieve a more favourable purchase price. Areas to consider are as follows:
Identify the value in the business. It is important to look at your business from a potential buyer's perspective, "why should I pay £x for your business? Where is the value?" For instance, the value may be in:
- the team - is there an efficient, well-managed and motivated sales team or is the company reliant on the owner managers?
- the customer base - is there a wide spread of good quality customers or is the company reliant upon one or two key customers?
- the product - is there an innovative bespoke product, well protected by registered intellectual property rights or is it a standard widget?
- the intellectual property - are the business names registered as trade marks or are any of the processes used in the business registered as a patent?
A purchaser will want to have access to the target company's accounts, including management accounts, in order to satisfy itself that the company is worth what the seller says it is. It is therefore important to work with the company's accountant to ensure that the company's finances are in order and that its accounting policies are reasonable.
It is also worth working with the company's accountant to ensure that the company is up to date with its taxation obligations, that creditors are being paid on time and that debtors are being efficiently chased for payment.
As part of the due diligence process, a purchaser is likely to want to see copies of contracts with key customers and suppliers to ensure that they are in order. It is therefore worth checking that all such contracts have been signed and identifying any potential issues, such as change of control clauses, so as to be prepared for any questions a purchaser may raise.
If the company has standard terms and conditions, it is a good time to ensure that these are not out of date and afford adequate protection for the business.
Is there any outstanding litigation or other potential liabilities, such as a failure to comply with any legal requirements applicable to the business, which would be of concern to a potential buyer? Is it possible to resolve any such issues before approaching a buyer?
If resolution is not possible, it is worthwhile getting a good understanding of the likely cost to the company of such potential liabilities, in order to be able to quantify this to the purchaser (and for the shareholders in the event that the purchaser requires an indemnity).
Management & Employees
You should consider the extent to which you will need to involve key personnel in the process in order to assist with the sale but this needs to be balanced with confidentiality requirements.
Thought should also be given to whether there are any employees that are vital to the running of the business and their likely reaction to a sale of the company.
In addition, where the owners of the business are heavily involved in its day to day running, consideration should be given to the likelihood of the purchaser requiring such owners to remain with the business post-sale (perhaps being incentivised by way of an earn-out).
The company's statutory books should be brought up to date, if not already, and the terms of the articles of association of the company, together with any shareholders' agreement considered.
It can take some time to find a suitable buyer for the company and then complete the sale process. In addition, the seller may have to wait to receive all of the proceeds of the sale, depending on how the consideration is structured, and owner-managers may be required to remain working with the company for a period after the sale.
Therefore, it is important to ensure that sufficient time is built into the sale timetable in order to meet any specific deadlines for completion, such as tax consequences, market conditions or personal reasons of the seller.