The M&A market has remained incredibly buoyant over the past year, despite the challenges presented by the ongoing pandemic. With rumours over potential changes to Capital Gains Tax (CGT) persisting, we expect the M&A activity boom to continue for the foreseeable future.
Investors (from angel investors to private equity) are keen to invest in businesses that demonstrate clear growth potential. To attract these investors it is crucial that companies are clear on their business model and growth strategy; and from a legal perspective, that their “corporate” house is in order.
Confused corporate record keeping, missing contracts and unclear shareholder structures discovered during the legal due diligence phase of an M&A transaction or investment round will raise red flags to would-be investors. This may lead to a lack of confidence in management; or, in the worst-case scenarios, price reductions, indemnities within the sale/investment agreement or the deal itself falling over.
Here are a few tips to help your business receive the all clear from an investor’s deal advisers:
- Statutory books – ensure your company has a full set of up to date statutory books (e.g. register of members, register of directors, register of charges, etc.) that reflect the current status of the company. This is especially important with regards to the register of members which is the primary record of who owns the company and what shares each shareholder holds. A confused or lost register of members may keep investors away given the risk of third parties emerging from the woodwork claiming they own a share of the business.
- Management employment/service contracts – key individuals driving the business should have detailed and clear employment or service contracts with the company. These contracts should include standard “protections” such as non-competes and non-solicits, provisions relating to the assignment of intellectual property, and clear termination provisions. Although investors generally want to back these key managers to push forward the business growth plan, they will also want to ensure that the company is protected from a rogue manager.
- Intellectual property – in the start-up stage of any company the founders are quite rightly focused on building a viable business, rather than making sure the company legally owns the assets it purports to own. This is especially the case with intellectual property where quite often an individual founder (rather than the company itself) may hold the originally know-how, trademark, patent, algorithm, etc. If this intellectual property is material to the company, investors will want to see that it has been legally transferred to the company.
- Corporate record keeping – a company that keeps accurate records (from contracts with third parties to board minutes) will provide a would-be investor with confidence that management have the business under control and they know what they are doing. If you are looking for investment or perhaps looking to sell the business in the medium term, now is the time to clear up the company’s records and also ensure that you have appropriate agreements in place with the company’s suppliers, customers and other third parties.
These are simple fixes that you will likely reap the benefits of once your business is in the legal due diligence phase of any investment or disposal.
We at Thomson Snell & Passmore have extensive experience advising shareholders and management, as well as advising the investors themselves, on investment rounds and business sales – and we are well versed in the pitfalls that can arise throughout such a transaction.
For example, our corporate team recently advised longstanding client Motorline, on its multi-million pound sale to Marshall Motor Holdings plc. The sale strategy and readiness for market preparation for such a large group took many months of planning.
Please do get in touch if you would like to discuss your company and what you could be doing to better prepare yourself for that investment or business sale.