Deal Killer No. 2 – Poor Housekeeping

deal-killers-no-2What’s involved in Due Diligence is one of the questions that comes up regularly at our Masterclasses. This isn’t altogether surprising as most business owners haven’t sold a business before.

One part of the Due Diligence process relates to your corporate housekeeping.

Whilst you may think that is hardly likely to cause a deal to fail, it’s important to remember that the buyer’s acquisition team will be looking, in great detail, for any areas of risk. Poor housekeeping provides a ready-made opportunity for them because you will not be able to respond quickly to the detailed questions you will be asked or you will reply in a haphazard way, providing part of the information and then following up.

This is a real red flag to a buyer; it indicates (at best) that your business is not well organized and at worst that you are trying to hide something. That could raise questions about your internal control systems, leading to suspicions about quality and consistency of your products and services and, ultimately, the impact this will have on forecast revenues.

In particular, the buyer’s advisers will be looking for any non-standard terms and conditions, such as exclusivity clauses, termination rights, non-assignable contracts or indeed anything that could potentially reduce the value of the deal.

They will also want to understand matters of corporate governance so you will be asked for copies of board meeting minutes, shareholder agreements etc.

This potential deal killer is totally avoidable and by preparing early you will not only reduce the risk of a failed transaction, you’ll find the whole process a lot less stressful and reduce the costs associated with an unnecessarily drawn-out due diligence process.

The information you’ll need to provide does depend, to an extent, on the industry sector in which you operate. However, there are certain common documents that you will need to provide:

HR – When a buyer looks at your company they’ll want to know who your employees are so make sure all your employees have up to date contracts. Highlight any contracts where there are potential legal issues. In particular, they will want to know about the employment terms of key employees who will be important in the transition to new ownership and potentially to the success of the new business going forward.

Workplace Pensions – this is now always included in Due Diligence so make sure your business is compliant with current regulations and that your paperwork is up to date.

Material Contracts – you will need to supply copies of all material contracts, which typically will include:

  • Supplier contracts
  • Client Contracts
  • Leases – for premises or equipment
  • Distribution and/or agency agreements
  • Guaranties, loans, and credit agreements

Intellectual Property – if you have any registered Intellectual Property, compile a schedule of all trademarks, service marks, trade names, copyrights and patents that relate to your products, services, operations or company name(s).

Insurance – you’ll need to produce copies of all relevant insurance policies, including Employee Liability, Health Insurance, Key Man insurance, Public Liability insurance.

Financial Documents – as well as your statutory and management accounts you will need to have Corporation Tax and VAT records available for inspection.

This isn’t meant to be an exhaustive list and your lawyer will provide detailed advice and guidance. However, by preparing early you will reduce the risk of poor housekeeping de-railing the transaction or reducing the amount you receive from the sale of your business.

If you’d like to find out more about preparing a business for sale, come along to one of our free Masterclasses. You’ll find our spring schedule at www.evolutioncbs.co.uk/events.

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