Exit Readiness, think like a Buyer and not a Seller

Introduction

Exiting a business can be lengthy, complex and costly. Good planning minimises those difficulties, creates efficiency and improves the prospects of achieving the price you’re after.

Think well ahead

Well in advance of your planned exit (1-3 years ahead), gather up all your business’s key documents and information, review fully, index, save in one place and clean up any errors or problems you find – such as contract problems, potential disputes, compliance and employment issues. Essentially, create your ‘data room’ today and in the run up and get ahead of any challenges the buyer might raise.

Everyday life example

When selling your house, you present it in as good a condition as you can. You might have to paint, wallpaper, change curtains, replace the old boiler, do up the kitchen or the bathroom. You present the house in its best condition to attract an enthusiastic buyer who’ll pay the best price. With a business, it’s no different. Present the business in good condition and you enhance the possibility of a sale at a good price. So, let’s look at selling a business from a buyer’s perspective.

Consider what a buyer looks for

Buyers typically want a:

• Sustainable position in the business’s market or industry
• Diverse and consistent customer base
• Steady and continuing revenue stream and a sensible business plan or strategy

Understanding a buyer’s needs and how they value a business is important. You should prepare the business to be in the best shape possible to make it easy for a buyer to evaluate and attractive to buy. And remember, different buyers may see different value in different parts of the business.

I’ve handled many exits from the selling side and the buying side.  A buyer’s lawyer will do their best to identify problems with a business; often with a view to negotiating the price down for their client.

Clearly, it’s best to have identified issues early and have everything sorted out before the sale process begins. This avoid any surprises which may push the price down or reduce the likelihood of the sale happening.

Reasons for buyer due diligence

Key objectives of buyer due diligence are to:

• Confirm you own the shares in your company and that the company owns or has rights in its assets
• Investigate potential liabilities or risks affecting the business
• Confirm the value of the business
• Identify any impediments to the transaction, such as third party consents and regulatory approvals
• Inform negotiations about the scope and extent of the warranty and indemnity protection the buyer will require from you and any additional documents which may be required (such as a transitional services agreement)

Types of buyer due diligence

Typical buyer due diligence involves:

• Commercial due diligence. Looks at market or industry, relationships with customers, key competitors, strengths and weaknesses, production, sales and marketing, and research and development
• Financial due diligence. Buyer’s accountants do an in-depth review of the business’s financial position and reporting, past trading performance and future projections
• Legal due diligence. Looks at key legal risks affecting the business and the proposed

So, how best to prepare for due diligence ?

Pull together this information and keep it updated:

• Corporate structure chart – directors, shareholders, shares issued, options etc. Company records, board minutes
• Financial reports and accounts for the past 5 years
• Tax records for 6 years
• Financing arrangements – loan and security agreements
• Employee arrangements – contracts, terms of employment, pensions, manuals, policies etc
• Contracts – those fundamental to the business or which produce significant revenue. Look for contracts that aren’t in writing and consider if they should be
• Summary of IT arrangements and any key IT service contracts
• Key assets, including intellectual property rights
• Real estate interests – freehold or leasehold, planning & environmental materials. Get these reviewed by you lawyer who will pick up any problems in leases which can be addressed early on
• Licences or regulatory permissions required for the business
• Compliance aspects including those on anti-bribery and corruption, modern slavery, AML
• Privacy compliance information including your registration as a processor or controller, your Record of Processing, privacy notices (internal employee facing and external client/prospect facing), any DPIAs, LIAs, data processing agreements, Standard Contractual Clauses and so on
• Any pending, threatened or ongoing dispute or litigation including with employees
• Health and safety information
• Insurance

Why do this now?

• Surfaces potential issues. You can fix them or implement changes to improve the company’s marketability. Difficulties that can’t be resolved, can be managed by your advisers in how they’re presented and negotiating strategies can be developed in how to deal with them
• Identifies consents or approvals required for the sale. Your lawyer can then advise on the process, timeframe for obtaining consents and manage the impact on transaction timing
• Helps to prepare a sale information memorandum which is informative, persuasive and accurate. It will contain detailed information about the business, its operations and is a great selling tool
• Avoid sale pricing pressure. By doing this, reviewing the information and fixing problems, you’ll be well prepared when a buyer carries out due diligence which should be smooth and efficient. You’ll create buyer confidence that the business is sound and reduce the risk a buyer will try to re-negotiate the sale price.
• Flexibility. When you’re exit ready you can package the business so that it continues to operate as normal, but gives you the flexibility to move to a sale process at short notice. You can monitor market conditions and begin the sale process at the optimal time, often only needing to refresh the information and documents you’ve put together and update the information memorandum.

So to sum up, think like a Buyer rather than a Seller.  Create your ‘data room’ early on and keep it updated as you go.  It’s after all just good housekeeping and will ensure you have good legal foundations in place for the day today as well as when the time comes to sell.

Last word

A last word, while this article focuses on the organisational aspects of getting a business ready for sale, we mustn’t forget that it’s what in the documents you present that counts the most. Having poorly written contracts or no contracts, or accumulating unmanaged risks will affect the sale price no matter how orderly the data room is. This is where having good legal input in your business along the way makes all the difference. It means you can avoid pitfalls from the outset, design risk out as much as possible and optimise the business for sale.