While a company’s figures may look appealing on paper, a buyer will want to ensure that the figures can be justified and failure to successfully defend the figures, and the business in general, could lead a buyer to try and negotiate the price down as the deal progresses, or ultimately to walk away entirely.
Pre-sale preparations are invaluable to ensure that the deal moves forward as smoothly as possible. Carrying out a pre-market health check will take time but will almost always mean the buyer (and his advisers) will have fewer queries, saving time and money for both parties, and will have less opportunity to try and chip away at the asking price.
Below are some keys areas which should be subjected to a pre-market health check:-
A review of all key contracts will need to be undertaken and a seller should try to ensure all contracts are in writing wherever possible.
A buyer will want to know that a seller’s contracts with clients and suppliers can be taken on by the buyer without any problems. Assignment clauses and change of control provisions will need to be reviewed.
- Corporate Structure
Companies do not often revisit their constitutional documents but this is something that any prospective buyer will need to review so it is worth checking that you know where your statutory registers are, that they are uptodate and the record at Companies House is correct. Making updates and corrections is rarely difficult but can be time consuming so is far better discovered well in advance of any negotiations.
Employees are a vital asset for any business, but can also bring a host of issues around terms of employment and disciplinary or grievance issues. It is important to make sure that terms of employment and policies are clear and accurate and that data protection regulations have been complied with. This enables the seller to avoid having to give comprehensive indemnities to a buyer against any employment issues which may arise.
- Management team
The management team will almost certainly need to be involved in any sale. A seller should consider discussing the possibility of a sale with the management team early on to gauge their reaction. It may be that the team wishes to put together a management buy out proposal if this is an option the seller is willing to consider.
You should also consider what restrictive covenants you have in place in relation to these key individuals.
These employees may also have been granted share options which will need to be taken into consideration when preparing for a sale.
- Intellectual Property
Consideration will need to be given to the intellectual property portfolio, in particular who actually owns it and whether it is adequately protected.
If part of the business is being sold will any intellectual property be transferring or will a buyer require a licence from the seller to use the intellectual property.
If property is being transferred or leased as part of the sale it will be easiest to manage if the land in question is registered.
Thought will also need to be given to whether the buyer can provide evidence that planning requirements have been complied with over the years and that it formally has all necessary permissions to use the property. For example, are there any rights of way being used by agreement with a neighbour which need to be formalised before a sale.
- Debt free cash free
Many deals are held up by parties arguing over what is meant by the term ‘debt free cash free’. This concept, including what the seller considers to be ‘cash’, needs to be fully explained to the buyer from the outset so it is clear to the buyer what they are getting for their money and to avoid an argument on purchase price at a later date.
If you wish to discuss any of the issues discussed in this article, or if you would like to discuss how we can help you carry out a pre-market health check, please contact firstname.lastname@example.org or 01603 598000.