Tim Sadka, Corporate & Commercial Partner of Rix & Kay, outlines the hot topics that business owners should consider and the key questions to ask ahead of selling a business.
Be resilient and plan
A sale process can disrupt a business as it is the subject of an exit process. Anticipate this, plan your time and ensure the business can be driven forward and succeed despite the inevitable distraction a sale process brings with it.
Any reduction in performance in the months leading up to the sale could cause a reassessment of value by the buyer and risk a price reduction or, worse still, a lost transaction. It is imperative sellers keep focused on the business to avoid this. Allocate responsibilities for the sale process and allow the management team to run the business day to day. If resources are likely to be stretched, consider bringing in additional support in advance of the sale process.
Arrangements with other shareholders
Ensure you have the support of all shareholders. Are shareholders subject to suitable ‘drag-along’ rights, enabling compulsory purchase of minority shareholdings so that you can deliver 100% of the business to the buyer? Buyers will almost always want to acquire 100% of the equity, so address any issues in this regard sooner than later.
Are your employees subject to suitable restrictive covenants and notice periods? Does the business have suitable contracts with employees? Will a buyer have confidence resulting from the contracts in place and its due diligence that all key people will continue with the business post-exit? What would be the impact if one or more members of the management team decide not to remain after the sale? Keep ahead of the curve, anticipate this is a legitimate area for a buyer to be exercised about.
A buyer may wish to conduct anonymous customer referencing with important customers as part of due diligence to establish the then current quality of customer relations. Are there issues which might cause negative feedback? Anticipate problems and resolve any that you identify.
Regulatory and legal compliance issues
Buyers, and the investors and banks that support them, are increasingly concerned with compliance and regulation issues, including the potential impact of Brexit, National Minimum Wage, Data Protection Act, GDPR and Cyber Security. All too frequently, businesses carry out restructures and transactions which may not, when scrutinised, meet legal requirements. A buyer will review such transactions as part of their due diligence. Sellers should look at their history, ensure all is in order and, if any issues are identified, find solutions and regularise the business before the sale process.
For most businesses, these days, robustness of the IT systems is vital. Consider a health check with an IT consultant, focused on protection against cyber threats, back-up processes and capacity of servers and systems. Make sure you have copyright in bespoke software and your website – unless you have an express agreement, the consultants who wrote it will be the default copyright holder.
Be ready at any moment
Not all businesses are sold because the owner decides to start a sale process. Many transactions result from unsolicited approaches and, in such instances, the best outcomes for a seller are achieved by business owners who manage their business daily expecting a sale process may arise at any moment. They keep to a plan and run their business ready to react seamlessly to any opportunity that may arise.
There are other good reasons to plan. For example, if a business needs to raise finance at short notice, or to support fund raising for a transaction, a well-run business will cope better for being on top of the same points highlighted here.
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The information contained in this communication is for information purposes only and is not intended to constitute legal advice by the author and Rix & Kay Solicitors LLP. No reliance should be placed on the content and if contemplating acting in reliance on the content then, before doing so, legal advice should be sought.
Rix & Kay Solicitors LLP has offices across the South East, in Sussex and Kent.
© Rix & Kay Solicitors LLP September 2019