Grant McCall, Director and Head of Corporate
Many SME owners focus on growing their business, naturally so, but they can often overlook whether their business is ready for sale should an opportunity arise. The old adage of “you can’t time the market” applies so it is always advisable to ensure a business has a sale checklist in mind, as it progresses through growth. A well prepared business commands a premium, while a business with legal vulnerabilities could become a liability for a buyer.
Corporate compliance and company structure
The Companies Act 2006 is the primary piece of legislation that regulates companies in this country. The legal foundation matters and is sometimes overlooked by smaller SMEs who have not built a working relationship with a corporate legal team. What sounds expensive and synonymous with large corporations really is a concept of film. The majority of businesses in the UK are SMEs and whatever the size, there is a place for ensuring the company prospectus is maintained, in case a sale opportunity arises or comes unexpectedly.
If your company has informal equity arrangements, ambiguous director relationships, inaccurate or incomplete statutory books, sophisticated buyers and particularly private equity investors, will likely seek to discount the valuation or seek onerous indemnities to protect against future liability. Establishing clean corporate governance with documented board minutes, shareholder agreements and formal policies illustrates professionalism and awareness of statutory obligations. This can also reduce the time legal due diligence can take and ultimately reduces the risk of a buyer walking away or renegotiating price.
Financial and contract maintenance
Potential acquirers will scrutinise contracts, customer agreements and supplier arrangements. Undisclosed liabilities, informal verbal agreements or contracts containing onerous conditions or exit penalties can push a buyer towards a reduced offer or to demand a retention (to hold part of the purchase price in escrow until key customers or suppliers commit to a market standard legal agreement).
Legacy securities and personal guarantees
When acting for sellers we always want to make sure the directors or shareholders are not tied to any personal guarantees, usually given to secure lending or assets for the Company.
It is not uncommon for directors/shareholders to think securities or personal guarantees have been long discharged, usually because they were set up in the infancy of a business. That is not always the case however. Sometimes something as simple as an overdraft can leave a guarantee in force or a debenture in play. It is always advisable to evidence formal discharge of any securities or personal guarantees at the relevant time as they could prove a timely surprise if uncovered during due diligence.
Business sector regulation
Depending on your sector, you may face specific regulatory requirements. This could be GDPR compliance, accreditations, licensing, approvals or environmental obligations. Buyers increasingly demand clean compliance records or wide ranging ‘sweeper warranties’ to protect against a failure to evidence full regulatory or legal compliance. Advance planning of regulatory obligations can avoid emergency shuffling later.
When to start planning for exit
Exit readiness is not a ‘one size fits all’ process. We are always having strategy conversations with our clients as market forces can change all too often in the SME world. Typically, 12-18 months is a good time to start the company clean as going to market and finding a buyer will also take some time. Identifying any vulnerabilities that could impact a sale will at least bring into scope the time or cost needed to polish.
Bottom line
Engaging legal and tax support early on in the sale process should play an important role in helping to achieve a valuation that will not be chipped away at. For most SMEs, selling their business is a one-time shot and for that reason it is imperative not to leave value on the table or leave the door open for post-sale disputes.
Your exit strategy isn’t something to tackle when you’ve found a buyer. It is something to build and plan for in advance.
If you are an SME owner considering your future, now is the time to assess your legal position. Contact our corporate law team for a confidential consultation on optimising your company for sale.
The corporate team at AMD specialise in advising SME business owners and family owned businesses on acquisitions growth and exit strategy. Contact the team on commercial@amdsolicitors.com or 0117 9621205 as the team are always delighted to hear from business owners.
