Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
In previous articles we explored common reasons why business owners choose to sell their businesses and the importance of identifying your overall personal, financial and business objectives and setting realistic goals for the sale of your business, which correspond with your overall objectives.
Once you have made the decision to sell your business and identified your objectives and goals, you should spend time fine-tuning your business in order to enhance your chances of maximising your sale price and minimising your risk on the sale of your business. The fine-tuning process consists of four key stages:
1. Review Stage: Firstly, a diagnostic review of the business dealing with all of the issues that are likely to arise during the sale process.
2. Assessment Stage: Secondly, an assessment phase where each aspect of the business which needs improving is assessed with a view to determining which weaknesses should become a target for pre-sale improvement.
3. Planning Stage: Thirdly, a planning phase during which a pre-sale improvement plan is created for each weakness that you intend to try to overcome.
4. Implementation Stage: Fourthly, implementing the pre-sale improvement plan by taking such corrective action as is appropriate in order to deal with any issues identified during the review.
One way of looking at this process is to consider what information and documentation a buyer is likely to require before making an offer for your business or as part of its due diligence exercise and what warranties, indemnities and guarantees a buyer may seek as part of the business sale agreement. Hence, this process is often referred to as seller due diligence.
Seller due diligence is likely to cover a wide range of matters, including improving financial reporting, ensuring accounting and tax records are up to date, reviewing customer and supplier contracts and securing any key contracts, reviewing and protecting any intellectual property, assessing human resources issues and securing key employees, addressing any property related issues and dealing with any governance, licensing and regulatory issues. Naturally, the due diligence list will be dependent upon the nature of your business. By the end of the process, you should be in a position to:
(a) Show an efficient, organised and well-run business to any potential buyer;
(b) Feel confident in your ability to present a clear and consistent picture of your business to any potential buyer knowing that buyer due diligence is unlikely to alter that picture;
(c) Be able to respond efficiently and effectively to any reasonable requests for information and documentation from any potential buyer; and
(d) Feel comfortable with your ability to deal with any reasonable requests for warranties, indemnities and guarantees from any potential buyer because you have already addressed any likely issues.
The extent and nature of any fine-tuning process will inevitably be dictated by the circumstances surrounding the sale of your business, including your reasons for selling and the time and resources available to you. It may be that you simply wish to sell your business as soon as possible and are prepared to make price concessions to take into account weaknesses or risks in your business. However, ideally, you will be able to avoid letting events outside your control determine when you must sell your business and you will be able to delay selling your business until you have carried out your seller due diligence process in order to overcome weaknesses, remove or reduce risks and improve its attractiveness to potential buyers. The best way to avoid this is to maintain readiness and agility so that you are able to respond efficiently and effectively if an excellent opportunity arises to sell your business.
During the sale process, surprises can quickly derail buyer-seller momentum and deflate perceptions of value. Self-review and ample preparation time enables the seller to maintain control and minimise disruption to ongoing operations. Effective planning and preparation also enable a seller to anticipate, understand, and actively manage unforeseen events better and to keep the sale process on track. Conflicting signals compromise credibility and effectiveness by creating confusion and doubt and may put off potential buyers or cause them to reduce the price that they are willing to pay.
Below is an example of the seller due diligence process in relation to an issue that is likely to arise during the sale process:
It is important that you take an objective view when carrying out your review. A buyer is likely to prefer businesses which have limited their risks as far as possible, taking into account typical risks in the relevant business sector, and will be looking for the potential for higher profits.
Naturally, the better the position of your business in relation to any issue, the more it will contribute to attracting buyers, maximising your price and minimising your risk. Conversely, the worse the position of your business in relation to any issue, the more it will contribute to putting off buyers, reducing your price and increasing your risk.
Create a table and list the issues which are likely to arise during the sale process (for example, employment contracts). Create a suitable assessment scale and apply that scale to each issue listed (for example, 1-5 where 1 is very poor and 5 is very good). In the example table below, we have completed the first 3 columns for 3 issues.
|
No. |
Issue |
Grade |
Improve – Y/N |
Steps |
|
1. |
Do all employees have contracts? |
5 |
|
|
|
2. |
Are all employment contracts identical or similar? |
3 |
|
|
|
3. |
Are key employees subject to restrictive covenants? |
3 |
|
During this stage, you need to determine whether any issue may affect your business or make it less attractive to a buyer. If so, then you need to decide whether you have the desire, ability, resources and time to address that issue and improve the position of your business. In particular, you should consider whether the issue is likely to be of high importance to the success or attractiveness of your business and whether the cost of dealing with the issue is likely to be less than any potential price reduction (or increased risk) that you may suffer if you do not deal with the issue.
By way of example, in the table above it may be that whilst all employees have contracts of employment, you have only updated contracts of employment when taking on new employees and not when reviewing existing staff so that some of them may be “out of date”. Similarly, as existing employees have been promoted to key positions, their contracts of employment may not have been updated to include provisions (such as restrictive covenants) which reflect their new status. In the example table below, the decision has been made to address issues 2 and 3.
|
No. |
Issue |
Grade |
Improve – Y/N |
Steps |
|
1. |
Do all employees have contracts? |
5 |
N |
|
|
2. |
Are all employment contracts identical or similar? |
3 |
Y |
|
|
3. |
Are key employees subject to restrictive covenants? |
3 |
Y |
|
During this stage, you need to plan the steps that you will take to address the issues which you identified in stage 2 during the assessment stage. This should include a clear plan setting out what steps will be taken, when and how they will be undertaken, by whom and the resources which will be allocated in each case.
In the example table below, the decision has been made to address issues 2 and 3 by requesting the businesses Solicitors to review the existing standard contract of employment and key employee restrictive covenants, preparing new contracts where appropriate with a view to implementing them at the forthcoming annual employee reviews when salary increases will be discussed.
|
No. |
Issue |
Grade |
Improve – Y/N |
Steps |
|
1. |
Do all employees have contracts? |
5 |
N |
None |
|
2. |
Are all employment contracts identical or similar? |
3 |
Y |
Solicitors review standard contract by [X]. New standard contract by [X]. Implement at review by [X]. |
|
3. |
Are key employees subject to restrictive covenants? |
3 |
Y |
Solicitors review restrictive covenants by [X]. New contracts by [X]. Implement at review by [X]. |
You will need to consider the extent to which you are prepared to let staff know that you are planning to sell your business. Upgrading contracts of employment often occurs when annual employee reviews, salary increases or promotions take place. Accordingly, such changes are unlikely to be considered unusual when they occur at such times.
During this stage, you will be implementing the plans that you made in stage 3 during the planning stage. It is important that you try to stick to your plan as far as possible but, where it is not possible, that you reassess your plans.
As part of this process, it may well be that you introduce new policies and systems which will help you ensure as far as possible that issues do not reoccur (for example, annual employment contract reviews sufficiently long before annual appraisals). This may depend on your expectations as to how long it will be before you sell your business.
Below is a list of some of the broad categories of typical seller due diligence issues, which you may wish to consider as part of your seller due diligence process. You are likely to have to consider specific issues within each category even if it is simply to assure yourself that you have no concerns with those issues. However, you should bear in mind that whilst many issues will be relevant to all or the majority of businesses, every business is unique and every business owner is unique.
Ultimately every decision to sell a business and every business sale is based on individual circumstances. There is value in most businesses so, if you wish to sell your business, there is always likely to be a buyer no matter what your reasons are for wishing to sell it. However, the earlier you create an exit strategy and start preparing your business for sale, and the more time you spend fine-tuning it for sale, the better your chances are of maximising your sale price and minimising your risk. In order to maximise your return from your sale, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning. Determining your objectives, setting your goals and carrying out a thorough seller due diligence process early on when selling your business and creating a viable exit plan and keeping it up to date means that you will be ready to take advantage of any good opportunity to sell your business.
Need to talk?
If you would like to discuss the seller due diligence process, please contact us. We can help you formulate and carry out a seller due diligence process that is right for you and your business.
Whatever stage of the business sale process you have reached, we can help you to understand the business sale process, to choose the option that is right for you and to realise the value of your business.
Contact us
If you would like more information about selling businesses or would like to discuss a potential or existing transaction, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
