Selling your business: Top five most common M&A errors made by sellers & how to avoid them

If you are planning on selling your business, we have compiled a list of the top five most common errors that we find are made by sellers in relation to the sale process:

1. Not taking professional advice early enough

It is important that sellers obtain expert professional advice as early as possible in the transaction process (ideally before going to market). Whether this is working with legal professionals to help prepare for due diligence (see points 2 and 3 below) or working with a corporate finance adviser to ensure that the best possible price is obtained for the business, it is important to consult professionals as soon as possible in the process. We have found that the deals which progress smoothly are those where professional advice has been sought very early into the process by the sellers as it helps to avoid material issues cropping up later in the transaction.

It is also essential that, as a seller, you choose the correct legal and accountancy advisers for the transaction, ideally advisers with experience in M&A transactions.

2. Being unprepared for due diligence

One of the major oversights made by sellers is being unprepared for the amount of documentation which will need to be provided to the buyer and its advisers throughout the sale process. This due diligence exercise is fundamental to the buyer’s assessment on whether to proceed with the transaction and the due diligence exercise is a particularly time-consuming and challenging exercise for sellers, especially where they are still having to carry out their day-job and run the business on a day to day basis (with it being of vital importance that current trading of the business is maintained throughout the sale process).

With many deals currently taking longer to complete than in previous years, we are finding that the level of due diligence carried out by buyers has increased. This has been coupled by buyers’ demand for different due diligence work streams (beyond strictly legal & financial due diligence) including commercial and more recently ESG due diligence into the target business. This has again increased the pressure and workload on sellers during the transaction.

When considering a sale, it is essential that the sellers begin to collate copies of key documentation as early as possible and make sure that the records are up to date and accurate (see point 3 below). In particular, we find that the most well prepared sellers are those that have sought advice early and have already pre-populated a virtual data room with key documentation with their lawyer’s assistance. This then enables the virtual data room to be opened to the buyer and its advisers as soon as the offer letter is agreed and exclusivity is entered into – thereby ensuring a swift transaction timetable.

3. Target company having incomplete records

As mentioned above, having a pre-populated virtual data room in advance of the sale process is advisable in order to ensure a swift transaction. However, where this has not been possible we often find that it is only when a seller receives the buyer’s due diligence checklist/questionnaire that they realise that the target company’s records are inaccurate, not up-to-date or particular records cannot be located. In particular, we find that a number of businesses do not hold up-to-date statutory registers for the target company. Given the legal title to the shares is derived from the company’s statutory registers (i.e. the Register of Members) , an exercise to review these registers  is an essential element of a buyer’s corporate due diligence, which a seller should be prepared for in advance.

Coupled with the point above, it is extremely worthwhile for a seller to engage with a legal adviser well in advance of the sale process so that the legal adviser has time to do a sense-check on a number of the key records / documentation which a buyer will expect to see at the outset of a transaction.

4. Having an inadequate NDA

Good legal advice is also essential during the due diligence process. As a seller, your lawyer will ensure that you and the buyer have entered into a robust Non-Disclosure Agreement (NDA) at the beginning of the transaction (and prior to any information being shared). This is essential to ensure that the buyer can only the use the data being shared in order to consider the purchase (rather than for any other purpose). This is an area of particular concern where the proposed buyer is a competitor of the business and there are concerns in relation to poaching employees and / or customers of the target business.

5. Not negotiating the offer letter

Another common mistake made by sellers is signing the offer letter presented to them by the buyer without negotiating the key terms of the transaction.

In particular, we find that many sellers reach out to their legal professionals after having already signed the offer letter when it is effectively too late to commercially renegotiate some of the terms.  This, therefore, means that further negotiations happen later in the transaction process in relation to principles which should have been negotiated and agreed at the outset. In particular, tax advice should also be sought prior to the offer letter being signed to ensure that the deal terms work from the seller’s tax perspective (as raising any changes to the deal structure later into the process is likely to be resisted by the buyer).

From our experience, it is always best to negotiate and agree the key terms of the transaction at the offer letter stage as it reduces potential delays and contentious terms later into the transaction.

By approaching legal and financial advisers at the beginning of the sale process, sellers should hopefully avoid falling foul of the most common mistakes in the sale process outlined above. If you are planning on selling your business and have any questions about the process, please get in touch.