Here are a number of things that business owners need to consider if they’re looking to sell their business. Here, Nigel Hoyle, head of Corporate law at Blacks Solicitors, discusses his 5 top tips on how to successfully prepare a business for sale.
Planning ahead
It can be all too easy to wait until a sale before beginning to prepare a business, however planning should begin at least three to five years in advance. The earlier that the process is progressed, the more time there’ll be to identify any gaps in the business that need to be addressed. This will also provide the opportunity to sharpen the business and make it more attractive to potential purchasers.
Competitive tension when selling a business will secure a strong sale price, and give a seller various options and enable them to consider which purchaser will be the best fit to buy the business.
It is however important to note that planning ahead and how the business is prepared will very much depend on what shape the business is in, the life circumstances of the seller, the type of business and its sector, and the potential purchasers.
Don’t forget employees
People are the key assets to any business and without them, it simply wouldn’t run effectively or become profitable. And of course profitability is crucial to ensuring a successful sale.
Even before considering selling their business, business owners should ensure that staff are committed and incentivised, whether that be contractually or otherwise. Staff can be incentivised through a number of methods, including long-term incentive plans (LTIP), and share options.
If staff or directors with key client relationships aren’t enamoured with the potential sale, either because of the sale itself or the potential purchaser, this can cause issues later down the line and potentially impact the sale.
Leadership and governance
Whether there are plans to sell a business or not, business owners should consider drawing up and implementing a shareholders’ agreement as this can provide for many eventualities. The absence of a shareholders’ agreement opens up the potential for costly disputes and disagreements.
It must be noted that unless provided for to the contrary in the Articles of Association and/or a shareholders’ agreement, one shareholder can’t force another to sell their shares.
However, ‘drag along’ obligations can enable a contractual position where a majority of shareholders can require the minority shareholders to sell their shares on the same terms as the majority. Remember that those looking to purchase a private company will almost certainly be interested in buying the shares if they can purchase 100 percent.
Protecting customer relationships
Sales come from a business’ customers, and potential purchasers will be well aware of this. A business will only be successfully sold if customer relationships are prioritised and protected before, during and post sale.
If customer contracts or framework agreements are coming to an end, or there are onerous terms, this will often be used as a bargaining tool to bring down the price by the purchaser.
It’s advisable for business owners interested in selling to consider whether there are any change of control provisions in the customer (or supplier) contracts which would entitle the other party to terminate the contract after a change of ownership. If there are any issues with change of control clauses this can be fatal to the deal. It might be worth considering a renegotiation of such clauses to avoid losing any value or even the deal itself.
What about property?
It’s not all about the business itself when it comes to a sale. Potential sellers should make sure the structure is right so that any property is where it needs to be. For example, does the business owner want to sell the property with the business, or take it out and, post completion, have an income through renting the property to the new buyer?
Property can be incorporated into a separate company or into a pension so it’s important that this valuable asset is considered throughout the sale process.
