The term 'exit' is used a lot by business consultants, corporate finance managers, brokers, accountants and lawyers too. The term can have various meanings depending on the context but generally refers to a business owner's plan to sell their business.
A seller's motives for selling or planning an exit are likely to be financial or commercial reasons or, more usually in owner-managed businesses, entirely non-commercial ones such as retirement, ill health or even simply a desire to do something different. The financial or commercial reasons can be voluntary or involuntary. Whatever the reason, for those who have never sold a business before, the exit process can be daunting.
'How to sell a business' will be a ten-part series of articles released each week guiding you through the key phases of selling a business and highlighting key legal matters that can arise so you know what to expect when instructing solicitors and what we do to help protect you and the value of your business.
In this first blog we consider what a prospective seller should be doing a year or two prior to an exit to get their business in the best shape possible before going to market.
Benefits of being well-prepared
For many of our clients, particularly owner-managers or family businesses, an exit is a one-off event. This is their opportunity to realise the value of investing years of hard work and money growing their business. Some owners may have an exit strategy planned years in advance, but for many, an exit opportunity may come out of nowhere. Therefore, preparation is important.
Business owners have numerous advisors and each will cite benefits relevant to their areas of expertise of being prepared prior to an exit. Ultimately, the better shape you're in across the board, the better chance you have of realising the true value of your business when you sell.
Who should you be speaking to?
Your tax advisor will point to personal and corporate tax issues that can enable a prospective seller to maximise their cash on an exit and importantly, retain that cash rather than lose it due to poor tax planning. Prudent business owners should be having early discussions about tax with their advisors prior to a sale.
Accountants speak of the importance of healthy finances and ensuring your accounts can withstand a thorough review from a prospective buyer's accountants. A healthy set of books will make your business more marketable and seemingly more valuable when prospective buyers start picking through the numbers.
Business consultants or coaches will cite the importance of ensuring you have a clear business strategy as you work towards an exit to ensure your business is performing well all the way up to a sale.
Your solicitors will ultimately be responsible for the sale process itself which is primarily, a legal process. Therefore, we see first hand the legal issues that can arise during due diligence and how these can cause loss in value. If the legal issues aren't addressed this can lead to:
- a buyer withholding some of the purchase price from the seller after completion;
- a seller being asked to personally indemnify a buyer for significant liabilities at huge personal financial risk; or
- in a worst case scenario, the buyer walking away from the deal all together.
We will discuss surviving legal due diligence in more detail later on in the series.
How can solicitors help you prepare?
The following are our 'top five' issues that we think you should resolve before an exit:
(1) Sort out your contracts
If your key customers aren't signed up to formal written agreements, a buyer will be concerned that they might take their business elsewhere after a sale. If you have employees, do they have up to date written contracts? Employment law moves at a fast pace and it is easy to fall behind and be at risk of disputes arising. If you have valuable intellectual property, a buyer will want evidence that it is sufficiently protected.
(2) Know the terms on which you're doing business
If you have key customers or suppliers, do you know the terms on which you are contracting with them? Often, terms and conditions are buried somewhere on their website or on the back of invoices and are rarely reviewed. Ask your solicitor to review the terms and conditions to see if they contain 'change of control' clauses which would enable a party to terminate the contract if you sell a controlling interest in your business. Unsurprisingly, this can put a buyer off if the customer / supplier is key to your business.
(3) Resolve your disputes
If your business is involved in ongoing litigation or if legal action has been threatened against you, now is the time to settle those disputes. Businesses involved in disputes are not attractive to buyers.
(4) Get compliant
Do you require consents or licences to carry on your business - e.g. ICO registration, landlord consent or environmental permits? These matters should be reviewed to ensure compliance and resolve any breaches.
(5) Tidy up your corporate structure
Buyers want to know what they're buying and who they're buying from. If you have a complicated corporate structure, your financial advisors might suggest a re-structure prior to a sale. You should ensure the restructure is carried out in a legally compliant manner.
The next step in the process is the formulation of a sales strategy. The key elements of the sales strategy are the method of sale (e.g. by auction or private negotiation), the structure of the sale (i.e. sale of shares or sale of assets) and the timing of the sale. In next week's blog, we will discuss the various methods of sale and how an exit can be structured to achieve your goals.