Preventing Uncertainty In Business Sales (or how to make your buyer happy!!)

‘Uncertainty will cost you pound notes!!’ 

This should be a mantra for anyone selling their business.  If a buyer is not completely clear about the risks involved in the business he is buying then he is more likely to ask for a deferment in payment of the money due to you or possibly even a reduction in the overall purchase price.  Such tactics are becoming more prevalent in today’s climate. However, all is not doom and gloom as a good business will always sell and a seller can turn their business into a good business by reducing the risks a buyer faces.

Reducing a buyer’s perception of the risks involved comes from planning your exit.  You must not be forced into a situation where you end up selling because you need to get out of a business.  Any buyer who senses desperation will aim to get a better deal for himself.  To prevent this happening you should do the following things:

  • Give your buyer certainty of income:
    • all buyers want to know that what they are buying will make money long term;
    • if contracts are not in writing a buyer will argue that it can’t predict the future;
    • review all written contracts and make sure they are up to scratch and tie your customers in on your terms;
    • watch out for ‘change of control’ clauses that allow your customers the chance to renegotiate or end a contract on the sale of your business;
    • make sure your terms and conditions of sale and or website conditions of sale are up to date with current legislation, for instance, data protection and cookie policies.
  • Get your advisory team right:
    • unless you’re a serial seller of businesses you’ll need guidance;
    • don’t rely on your local accountant who has done your accounts for the last 20 years or your lawyer who bought your house unless they also sell businesses regularly;
    • do engage an expert or that cheap quote from your mate at the golf club will end up looking very expensive.
  • Do deal with problem situations:
    • that difficult customer could cost you thousands;
    • if you know of product problems or potential claims settle them well before you plan to sell and make sure your settlement is in writing and legally binding.  If it isn’t the buyer’s lawyer will have a field day with asserting that there could be future claims against the company.
  • Make sure your key assets are secure and in good condition:
    • a buyer will not risk buying something it could lose;
    • if you have lots of plant and machinery make sure it is regularly maintained under a maintenance contract;
    • if you lease key assets then:
      • make sure the terms of the lease contracts can’t be challenged on the company sale;
      • make sure that you have always complied with the terms of the lease;
      • make sure the lease isn’t about to end.
    • If you are very IT reliant make sure you have a water tight disaster recovery plan and that all your data is backed up;
    • If you are focussed on a sector that is about ideas or innovation make sure:
      • Your intellectual property is protected and that it is in one place and that the Company clearly owns it.  The buyer will be buying your brand and needs to know it has total ownership;
      • Make sure your employees can’t claim ownership over anything they’ve developed and that there are proper restrictive covenants preventing them going elsewhere and damaging the company.
  • Make sure you have a happy and properly contracted workforce:
    • Happy employees work harder and earn a buyer more money;
    • Make sure your employees’ terms and conditions are in writing and up to date with all legal requirements.  Employees like the certainty a contract brings and a buyer will be happier if it can see what its obligations are in black and white;
    • If there are any disputes, settle them;
    • If there is a problematic employee that needs to be removed take the advice you need to get rid of him or her, particularly if they are senior enough to have a material effect on the business
  • Don’t tie yourself into long term liabilities:
    • Don’t sign long term contracts that are commercially burdensome;
    • If you’re tied into a long-term deal that is starting to look expensive, bite the bullet take advice on the contract terms and negotiate a release.
  • Do make yourself redundant:
    • A buyer will want run your company his way and not rely on you;
    • Put in place a management team and make sure they buy into the future of the business and are motivated.  This can be done by share option or bonus structure and a buyer will be much happier if there is a well functioning team he can rely on;
    • If a buyer doesn’t need you it’s easier to argue that the cost of your salary/dividends should be added back into the profit multiple thus increasing the purchase price.
  • Do know where all your records and documents are:
    • If you can’t find that property lease or your company’s statutory books a buyer will start to worry about how you’ve run your company;
    • Conduct an audit and make sure that you have the documents that show who owns what and that give your company security.  In particular, make sure you have all property details including deeds and leases.

All of the above steps take time and should be looked at least 12 months prior to sale and ideally 24 months before sale.  Ideally, you should get a third party to help you look at all the aspects mentioned above because what you believe are not problem your buyer may see differently and it is their perception that matters. If followed properly you will turn what can be a difficult sale process into a much happier experience for all involved and importantly an experience, which doesn’t cost you money!

For more information please contact us on reception@hcbsolicitors.com

Adrian Leonard
Senior Associate
Corporate Law

HCB Solicitors
www.hcbsolicitors.com

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