If you’re considering selling your business / company, ensuring it is ready for the legal sale process before a buyer is found will facilitate a smooth and straightforward transaction.
The majority of buyers will undertake a due diligence process looking into all aspects of the business with great detail. Getting your own house in order ahead of this by undertaking some due diligence yourself in advance will save time, costs and effort at a later date and ultimately reduce the level of negotiation involved in the sale process.
Brigitta Naunton, a Director in the Corporate and Commercial team, outlines some important considerations and tips.
1. Are your company books accurate and up to date?
Ensure you have complied with Companies House reporting requirements and go through your statutory registers to ensure that they contain all the relevant information. The register of members must show a clean history of all of the members of the company since it was incorporated. Find out if all of the shareholders still possess their share certificates. Ensure you have copies of all members resolutions passed and that company law was complied with. Clean up the register of charges and ensure that Companies House does not show up old charges as still being outstanding. Obtain releases from former charge holders. Are there any problems or irregularities that need fixing such as incorrect confirmation statements or undocumented dealings with shareholders? If there are, fix them as soon as possible.
2. Are your other records in good order?
The due diligence process will usually involve reviewing the company’s key contractual commitments with suppliers, customers, financial backers and employees as well as title deeds and leases to the properties that the company occupies. Have you got all the regulatory licenses and consents in place that are needed to run the business? Do you have readily available electronic copies of these contracts and documents so that a data room can be set up quickly?
3. Are the company’s assets owned by the correct entity?
This is particularly important in group situations where a holding company is selling a subsidiary but, for example, the holding company (or another company in the group) has ownership of the intellectual property or real property that the subsidiary uses for its business. If this is the case, these assets will need to be legally transferred to the subsidiary before its sale.
4. Identify the skeletons in the closet
Look for any obvious issues in the business and try to find solutions for resolution or risk reduction before the sale. Put yourself in the shoes of the potential buyer and consider what issues would be important to identify and how you might minimise the risks. Examples might be a pending legal claim from a disgruntled customer, a product liability issue, overlooked licensing or regulatory requirements, irregularities in the company’s records. If these can’t be resolved pre-sale ensure you have good written records, be open about the issues with potential buyers and consider factoring them into the sale price from the outset to avoid later negotiations relating to price.
5. Identify other risks that may put off potential buyers
Consider the key strengths of the business and what will be attractive to potential buyers. For example, are there any key employees who are critical to the success of the company? Are they suitably incentivised and tied into the business? Are all critical intellectual property rights properly registered? Are contracts with key customers likely to terminate as a result of the sale or be about to expire? Is there a critical asset that is needed to function better?
6. Have you sought financial and tax advice?
Speak to your financial and tax advisers early on for advice on valuation of the business, how to maximise the potential sale value, ensuring a tax efficient sale structure and advise on marketing the sale.
7. Time constraints
It is essential not to under-estimate the amount of time involved in preparing and concluding a sale process. This is on top of your usual job of running the business. Dealing with problems identified early on will save time later. Create an internal trusted project team and seek as much help as possible from your external advisers.
Due diligence is also commonly undertaken by potential private equity investors and many of the above considerations will also apply to such transactions.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.