Kate Westbrook, Head of Commercial, and Simon Hore, Corporate Partner, write for The Entrepreneurs Centre on the importance of preparing your business for sale long before you consider moving on.
Selling your business can be a difficult concept to get your head around, especially when you’ve started from the ground up, but that’s no reason to put your head in the sand when it comes to making preparations to sell.
There are huge benefits to sorting the detail out well in advance of this eventuality, not just for you as the seller, but also will ensure that legal risks have been reduced as much as possible and your business is in good shape to continue to thrive after you’ve passed it on.
When it comes to sorting out the legal aspects, these include:
- Checking company administration and filings at Companies House are correct and all shareholders have rights to sell their shares;
- Having watertight contracts with customers and suppliers;
- Protecting the business with employee contracts featuring suitable restrictive covenants;
- Ensuring you own any intellectual property ;
- Avoiding personal guarantees in banking arrangements, supplier contracts or property leases;
- Formally extending property lease terms where appropriate.
Maximising and retaining value
The main reason why you should tie up legal loose ends prior to selling is because it will help you secure value.
When buyers get to know your business, they’ll form an opinion of value based on financial performance and future plans, but that value can reduce if they dig deeper and discover legal risks. This can happen during due diligence where the buyer asks for information about the legal, tax and accounting position of the company and will find out about any significant risks, disputes and non-compliance.
Once you’ve sold your business, you’ll want to keep the proceeds, but if you haven’t taken care of the legal matters beforehand, warranty claims made by the buyer could eat into those finances.
Sellers are usually required to give certain warranties about the legal affairs and compliance of the company and any valid claims during the warranty period could result in the return of proceeds.
Overcoming obstacles
When issues arise during due diligence, at best, this can cause delays in the transaction and, at worst, can completely derail it.
A common issue is ownership of intellectual property. For example, if a company’s core asset is software, and during due diligence it turns out the original developer was not an employee, but a contractor with no written contract. If there is nothing confirming the IP is owned by the company paying for it, ownership lies with the original developer.
This issue is fixable if the developer is willing to sign to confirm the IP ownership position, and should be done early to avoid delay.
It’s never too early (or too late) to start
Buyers like the process to be clean and simple, and they don’t want to discover a myriad of legal issues once the sale has concluded. By anticipating the legal issues and reducing them as much as possible, this provides a great first impression, gives your buyer confidence and maximises chances for success.
In an ideal world, you’d start your business with the end in mind and invest in quality legal advice and documentation early on, but realistically it’s not always possible when you’re focussed on growth. Whilst it’s never too late to make a start, with quick wins possible prior to sale – it’s always best to avoid last-minute work and take a more considered approach.
Thrings’ Corporate team regularly works with businesses of all sizes to help them identify key areas of risk across legal areas such as contracts, employment, property, intellectual property and data protection, enabling business owners to make decisions on where to prioritise investment.
