Preparing your business for sale

Selling a business is often the most significant financial transaction of a business owner’s professional life. Whether you are planning retirement, pursuing new ventures, or responding to market opportunities, careful preparation is critical to maximising value and ensuring a smooth transaction.

Advance planning can significantly improve deal certainty, reduce risk, and strengthen your negotiating position. Below are the key legal and commercial considerations when preparing your business for sale.

Start planning early

Whether you are looking to sell in the next few months or the next few years, the sooner you can start preparing your business for sale the better. It is important to get your house in order before commencing negotiations with prospective buyers because any underlying issues will be discovered by the buyer during the due diligence process, which could potentially affect your negotiating position, result in a lower purchase price or even result in the buyer pulling out of the purchase altogether.

Structure: Shares or assets?

There are two main ways of selling a business: a share purchase or an asset purchase.

Share purchase: The buyer buys the shares in the business, therefore acquiring the whole company “warts and all” including its assets, rights, and liabilities (whether known or unknown).

Asset purchase: The buyer only acquires certain assets from the business, such as fixed assets, customer contracts and goodwill, therefore avoiding taking on historic liabilities (subject to certain exceptions, such as TUPE).

Whether it is an asset purchase or share purchase the buyer is likely going to want to carry out some form of due diligence on the company, but even more so in a share purchase where there is a higher risk to the buyer if the company does have hidden liabilities and the principle of caveat emptor, or buyer beware, generally applies. It is therefore essential for buyers to carry out their own investigation of the target company through a due diligence review, which is effectively an audit of the target company’s legal, business and financial affairs. The due diligence process is a crucial negotiating tool for the buyer because they can then use their findings to negotiate contractual protections or adjust the purchase price. It is therefore vital for sellers to deal with any possible problems before the buyer conducts their due diligence.

Key points to consider

Tax and accounting issues:

Firstly, speak to your accountant to make sure that all statutory accounts are fully up to date, internally consistent and accurately reflect the performance and position of the business. A buyer will inevitably require access to filed accounts, any draft accounts and often several years’ worth of historical financial information as well. Any accounting anomalies, historic errors or tax irregularities will need to be addressed in advance as this enables the seller to reduce the risk of price chips and minimise the scope of warranties requested by the buyer. Early preparation also helps to demonstrate to buyers that the business is professionally run.

Operator’s licence:

For a removals company it is highly likely that maintaining a vehicle operator’s licence is an essential the company’s success.  In a share purchase the buyer takes on the whole company including the operator’s licence and therefore any issues such as ongoing DVSA investigations or public inquiries could be a cause of major concern to buyer and as such sellers should carry out a full review of their compliance with operator’s licensing requirements, which could even include an external audit.

Customer contracts:

If key contracts are not properly documented, it creates multiple issues. Firstly, your legal position in the event of a dispute is far less certain, particularly in relation to the scope of services, liability caps, payment terms and termination rights. Secondly, without written terms you may have no enforceable minimum term or notice period and from a buyer’s perspective, that uncertainty directly affects the valuation of your business, because customers could walk away at short notice with little or no consequence. Therefore, in due diligence buyers will focus heavily on the quality of your top contracts and a business with robust, signed agreements containing clear pricing, limitation of liability provisions, defined notice periods and, ideally, fixed or rolling minimum terms is significantly more attractive than one relying on informal agreements.

Employees:

The buyer will request details of all employees, copies of their contracts of employment, details of any benefits they are entitled to, copies of any handbooks and key policies. They will also scrutinise any existing or threatened employment claims, grievances or disputes, so sellers should be looking to review current disciplinary and grievance processes to ensure they’re being conducted in accordance with contractual terms and procedures.

Any outstanding tribunal claims or risks of future claims can have a direct impact on deal terms, so taking a proactive approach and dealing with any management issues early can reduce any potential delays and the scope of requested warranties.

It should be noted that these are just a few of the key points for sellers to consider and does not reflect the full extent of the enquiries which will be made by buyers during the due diligence process.

Sellers who invest time in preparation for sale are far better positioned to negotiate from strength and to protect the value they have worked hard to build.

Contact the Backhouse Jones corporate team at corporatedept@backhouses.co.uk to discuss how we can help you prepare for a successful sale.

This article was written by Emily Carpendale.