Dave Paterson, Head of Corporate law at Blacks Solicitors, discusses what business owners need to know if they’re considering selling their business and how to make it attractive to potential buyers.
Growing a business from scratch can involve a significant amount of time and effort. However, there comes a time when most owners want to sell up. Selling a business is a complex process which requires a number of key considerations.
The countdown
According to the Chinese proverb; ‘When is the best time to plant a tree – 20 years ago. When is the next best time – now.’ Business owners should begin planning for the sale of their business three to five years before it’s put into action.
This does of course depend on what shape the business is in and the life circumstances of the seller, and any potential purchasers. However the earlier you start, the more time you’ll have to identify any gaps in the business and opportunities to sharpen it up.
Incentivising staff
In the vast majority of businesses, the people are the key assets and it’s important to know that they are all committed to the business either contractually or under other circumstances.
If you are preparing a business for sale, incentivising people to stay will be attractive to potential purchases. If staff or directors with key client relationships aren’t enamoured with the potential business acquirer, it might also be worth incentivising them with a long-term incentive plan (LTIP), or share options.
Governance
Unless advised to the contrary in the Articles of Association and/or shareholders’ agreement, you can’t force people to sell. However, according to ‘come along’ or ‘drag along’ obligations, if three out of four directors want to sell then the minority can’t block this, provided they benefit the same as everyone else.
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Customer relationships
Customer relationships are key for potential purchasers because that’s where the sales come from. If customer contracts or framework agreements are coming to an end, or there are onerous terms, they will often be used as price chips.
Are there any change of control provisions after a change of ownership? There could be a problem if you buy a company based on recurring incomes under contracts, but there’s a clause that says the other party can terminate the contract and expected recurring income is lost. It’s often worth renegotiating clauses so that you don’t lose value or the deal.
Property
Get the structure right so you have property where you want it to be. Do you want it in a separate company or a group structure so you have a holding company, trade and property company? Do you want to sell the property or take it out and then, post completion, have an income through renting it to the new buyer?
CSR
It’s good culture for a business to be receptive to CSR activities. If you have a culture that is 50 years out of date and the acquirer is very forward thinking, it may be a challenge for the buyer trying to bring those two businesses together. Investing in modern practices like CSR activity will open your business up to more opportunities to sell.
For more information on corporate law matters, please visit https://www.lawblacks.com/business/corporate-law/.
