Preparing your company for a sale?

Joe Rogers, Associate Solicitor in the firm’s Corporate team, looks at the key areas to consider when preparing your company for a sale.

Selling your company can be a stressful process at the best of times, often made worse by a long and drawn-out due diligence process. However, with some forethought, and guidance from the right advisers, the process can be streamlined by pre-empting the sorts of information a prospective buyer may require – not only saving you time and effort, but likely some professional advisory fees as well.

It is never too early to start preparing for an eventual sale process, particularly as some of the information that can be requested by a buyer is not always immediately accessible/obtainable.

Of course, unforeseen delays can occur, but you do not want to find yourself in a position whereby an item is required by the buyer (e.g. an assignment of intellectual property rights or a change of control consent) and completion of the sale is delayed as a result – especially, if such things could have been dealt with in advance.

As the saying goes, “by failing to prepare you’re preparing to fail… spend additional time, and advisory fees, on replying to due diligence enquiries…”

It is worth noting that when offers do start coming in for your company, they will be subject to the buyer’s due diligence. This means that if anything is uncovered during the course of the transaction, the prospective buyer could seek to negotiate a reduction in the price they’ll ultimately pay for the company – clearly, this can be disappointing for a seller and so it is important to “kick the tyres” of the business internally before opening the books to a buyer. The sooner any issues are discovered, the sooner you will be able to address them.

The following are some of the key areas that a seller should think about in preparation for a sale:

Statutory registers

When the shares in a company are being sold, the buyer will need to satisfy themselves that they are buying all the shares that they intend to and that the sellers are in a position to sell those shares. Accordingly, the buyer will request to see the company’s statutory registers. Maintenance of these registers is a legal requirement and so if your books are not up-to-date, updating and rectifying the registers is a good place to start.

Material contracts

Typically, prospective buyers will be primarily interested in a company’s existing customer and/or supplier relationships. Therefore, it is worth collating and reviewing key contracts to ensure that you hold signed and dated versions, that the contract cannot be terminated because of a change of control and that the contract term has sufficient time remaining before its expiry date.

A buyer will want to see fully signed versions of key contracts and have certainty of contractual coverage. If a contract term is due to expire shortly before or after completion of the sale, you may want to consider negotiating an extension. Likewise, if a contract contains a change of control provision which allows the other party to terminate the contract as a result of a sale, you will either need to negotiate the removal of such a clause or seek consent to the proposed transaction.

Depending on the nature of your business, you may need to redact your material contracts which can be a time-consuming exercise, so keep this in mind when preparing to sell.

Intellectual property (IPR)

Are there any IPR that are material to your business? If so, you should ensure that, where possible, all such rights sit within the company. To the extent any IPR sits with an individual or third party, within the business or otherwise, it would be preferable to seek to assign those rights to the company pre-valuation as IPR can often be valuable assets.

Employees

Buyers will want to know how many employees are in the business and the terms on which they are engaged. Therefore, it is helpful to have prepared a redacted schedule of employees, setting out their key terms such as remuneration, notice periods, length of service, pension arrangements, restrictive covenants, etc.

A buyer will also want to know if the company has any employee incentive schemes in place i.e. share options or bonus schemes. Ensuring documentation around the implementation of such schemes should be easily accessible and reviewed to ensure any requirements are complied with.

Property, plant, and machinery

If the company owns any property, consider whether this is a core part of the business or whether it needs to be transferred out pre-sale. If so, you may wish to start this process early so as not to delay completion. Similarly, it is often helpful to compile a schedule of assets owned by the company and consider whether any assets need to be transferred out, i.e. a company car you wish to retain post-completion.

Tax

Have you sought tax advice in relation to the proposed transaction? There are often tax implications that influence the structure of the deal. The earlier these are identified and considered, the easier it will be to accommodate them.

The matters discussed above are just some of the many considerations required when preparing to sell your company. The importance, and relevance, of these factors will vary from company to company. Therefore, it is important to engage the right team of advisers as soon as possible.

Our team of M&A lawyers are highly experienced in advising companies and individuals on private acquisitions and disposals and routinely act on deals of varying sizes across a wide range of industry sectors. Please do not hesitate to contact us if you have any questions or would like to discuss further.