Deciding to sell your business is often the most important decision any owner will decide to make. Time, effort, money and sacrifice (to name a few) go into creating a business and making sure that you get the most out of the sale process in order to maximise value and minimise potential headaches can be invaluable. We’ve pulled together a short list of key suggestions that might help you in preparing for the sale of your business.
Consider Transaction Structure & Tax Early
A lot of corporate transactions are structured specifically to be tax efficient, and the tax consequences of what two parties want to achieve can often be different. For example, a share sale may be more tax efficient for the seller, whereas an asset purchase might be more tax efficient for the buyer.
Further reading: Guide to Share Purchase or Asset Purchase
Much is going to depend on what the parties want from a transaction and their bargaining power. There may also be specific aspects of the proposed transaction’s terms which the parties have agreed, but that need to be structured slightly differently (or outright aren’t commercially possible) as not to give rise to significant tax consequences for one party (for example, if one party has agreed to pay off a debt, or if the seller is continuing to be employed by the buyer post-completion).
Considering tax and structure early saves the parties agreeing something they later need to row back on or change.
Operation Clean Up – Prepare for Due Diligence
The buyer’s due diligence is one of the most substantial parts of a transaction. A buyer may undertake a variety of different types of due diligence into the business they are acquiring. This often takes the form of legal and financial due diligence, but may also include commercial due diligence and for some industries more specific targeted areas of due diligence.
Sellers are often struck by the sheer volume of information that they need to supply as part of the due diligence process. It’s therefore important that in preparation for a sale, you organise and “tidy up” some of the key areas of the business as these will be scrutinised during the due diligence process. This will enable you to answer the buyer’s questions much more accurately and efficiently. If the business isn’t in order, the buyer may use these poorly managed areas as a negotiating tool to your detriment. If the issue is significant enough to need to be rectified prior to completion of the sale, this could delay the sale process and lead to higher costs. Some areas of due diligence to consider have been outlined below.
Employment Contracts & Associated Documents
If you haven’t got basic template contracts for all your employees already, we suggest you rectify this as soon as possible. Not only might you be in breach of employment legislation, but undefined terms are also open to interpretation, and you’ll want to make sure that the business is protected. Buyers are often keen to see that key employees are locked in on suitable employment contracts that protect the business, and ultimately the investment they are making purchasing your business.
Review the contractual position with both your suppliers and your customers. Do you have basic terms and conditions with your customers? Do you have any onerous or non-commercial contracts that a buyer might have an issue with? Do any of the agreements your business has entered into have change of control clauses leading to unfavourable consequences for your business post-completion? Remember, a contract doesn’t have to be written down, it can be created verbally and how your business contracts with others might not be clear cut. We suggest you review the contractual position before hand and begin to organise and document any unwritten arrangements the business might have prior to sale, particularly those which are of commercial value to the business.
Ownership of Assets
Where a business has been operated for a number of years, it isn’t unusual for assets to settle, legally, in the wrong hands (for whatever reason). It’s important that the business is sold to the buyer with everything it needs to continue operating. However, often a business might end up owning assets which it has no use for, and which really need to be transferred out to a separate party pre-completion. Conversely, there may be assets owned by a different entity which the business needs, and so which need to be transferred into the business prior to completion. Examples might be intellectual property rights, domain names, vehicles or real estate.
Statutory Registers and Record Keeping
Where a business is operated through a limited company, there should be a set of statutory records and it is a legal obligation of that company’s directors to maintain those records. Of particular importance is the register of members, which is in fact the definitive list of who is and isn’t a shareholder; it is effectively a shareholder’s legal root of title to the shares they own. If the sale of the business is being undertaken through a share sale, the buyer and their solicitor will almost certainly ask to see the register of members to prove title to the shareholders’ shares. However, we often see that such registers are not in place and need to be reconstituted prior to completion. Particularly complex issues can arise and lead to significant delays. In extreme examples, an application to court may need to be made to determine who is and is not to be included on the company’s register of members. We suggest you collate and review your corporate records and registers well in advance of the proposed sale, especially as there is an ongoing obligation to maintain them as part good corporate governance.
If you are considering selling your business, it is important that you build a robust team of advisors around you well in advance of the sale and get the best possible advice early on. Here at BHW we can provide you with tailored advice prior to any proposed business sale and make sure you feel comfortable and confident going into the sale process.