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The Selling Process - Preparing your Business for Sale Part 2

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In the first half of this Part 3 we looked at preparing for the sale process and using a broker and the wider professional team.

Once you have your team in place and a buyer then the legal process starts in earnest.

The main document to be agreed by the legal teams is the Sale and Purchase Agreement, which deals with all the terms of the transaction. This is the contract you and the buyer will sign at completion.

There will be clauses in the Sale and Purchase Agreement with give rise to differences of opinion between lawyers acting for seller and buyer. Your lawyer needs to recognise what is just a tactical joust between lawyers and what is really important to you to keep the process moving forward.

A sales process needs momentum. Even so, some deals can take up to six months to complete. It is not always possible to predict how conditions will change during that time, but good advisers will help their clients understand timing issues. A talented set of advisers will ensure that the sale process runs smoothly and will maximise value.

A key part of preparing for sale is raising the image of your company and again a strategy for doing this should be in place long before a sales process gets underway.

Results Count

The value and importance of good advisers should not be under-estimated– but fundamentally results count.

A track record which shows steadily increasing profits during normal market conditions and the resilience to remain profitable during an economic downturn inspires confidence in a potential buyer.

If that record shows that in good times and bad your company has out-performed comparator companies in your sector then you should expect a premium valuation. The wise buyer will also look behind those bottom line figures to see how they have been achieved. Of course, keeping a firm grip on costs will enhance the bottom line but businesses cannot be built on cost-cutting alone.

Inflating profits by starving the company of investment in equipment or people is a short-term, temporary tactic that will not help you to achieve a premium price. No new owner wants to start by putting back into the cost base costs which should have never been cut in the first place.

A buyer will also want to examine whether the profit growth is based on:

  • winning new customers,
  • opening up new markets,
  • launching new products or
  • has been achieved artificially by acquisitions which may have left the company servicing a significant debt.

The value of sustained generic growth is higher than that of expensively acquired growth. A buyer will also look at the results in the light of the broader picture for the future of the sector in which your company operates.

Buyers will be wary of your company’s future projections and will view them in the light of the broader landscape. Your company’s past can build confidence; its future builds the purchase price.

Assets – a plus or minus

It may seem self-evident that the more valuable your business assets, the higher the price it is likely to attract. However, assets that depreciate in value over time can depress the price whatever their current book value.

Assets are categorised as tangible and intangible.

Tangible assets include premises, car fleets, machinery, IT equipment, investments, debtors, stock and order book. The impact of substantial property holdings can fluctuate with market conditions. The value of expensive manufacturing machinery or IT equipment will be written down as the years go by but few buyers want to be confronted with urgent capital expenditure requirements. That commitment will be reflected in the price offered.

Intangible assets include intellectual property such as brand names, patents and copyright; intellectual assets such as contracts or licences; and intellectual capital which is the accumulated knowledge and skills of the business, including the staff. All can enhance the price your business is likely to attract.

Part of the sale process will be to produce an asset register, showing exactly what the company owns and its value.

Resolve disputes and outstanding litigation

It is unwise to go into a sale process with unresolved legal issues. These can range from disputes with suppliers or customers, with official bodies ranging from the tax authorities to the environment agency or with employees claiming to have been treated in a discriminatory way.

You may believe you are 100 percent in the right and that any claim against you will fail. A potential buyer will want to be protected from the worst possible outcome of any potential litigation.

This protection could be reflected in a lower purchase price or putting part of the price paid into escrow or seeking other assurances from you such as warranties or indemnities that ensure you underwrite the risk.

It may be painful and frustrating to settle a dispute you believe you can win but it will remove what could be a major stumbling block in the sale process.

If you have any disputes or need any advice then contact Partner and Head of Dispute Resolution, Stephen Poyner on stephen.poyner@fdrlaw.co.uk.

Data rooms and due diligence

All businesses, whatever their size, face a hurdle in the sales process which can be time-consuming and frustrating for seller and buyer alike. It is known as due diligence.

Due diligence covers three broad areas –

  • financial which includes checking results and projections and other accounting matters;
  • legal which includes verifying deeds of ownership, contracts, employment records, health and safety matters, litigation history; and
  • commercial which is an assessment of the business’ market position.

The documents or their emphasis will vary from industry to industry.

The Due Diligence process is generally effectively and efficiently managed. These are managed  by virtual data rooms which provide 24 hour access and involve a secure website where password-permitted representatives of the buyer and its team bidders are allowed to visit to view the documentation.

At FDR Law we are able to set up and manage your transaction data room for you.

The due diligence workload for management and particular the finance and HR departments, if the contents of the data room have to be assembled from scratch, is overwhelming. The result is almost certainly that vital information will be missing from the data room, requiring more work for you as the seller to find or re-create the missing documents and frustrating the buyer.

The way to avoid this is to begin collecting the required data under appropriate headings as a normal process of business long before a sale is contemplated.

Our experienced team can work alongside you to collate this data and populate the data room without bringing the day-to-day business of your company to a standstill.  

If you want any more information or if you are considering an exit strategy and want some legal advice and assistance then please contact our Head of Corporate, Margaret Evans Margaret.evans@fdrlaw.co.uk or ring Margaret or another member of our commercial team on 01925 230 000 or visit our website at www.fdrlaw.co.uk  

**This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest. Specialist legal advice should always be sought in any particular case **