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It is vital to get your house in order before selling a business. Pre-planning by following these ten points can alleviate time, stress and legal costs and may reduce the risk of potential buyers chipping at the price.
1. Statutory Books
It is a statutory requirement to keep the company’s books up-to-date and every potential buyer will want to inspect the books prior to completion. A seller should ensure that the books are accurate and current as improperly maintained registers will hold up the transaction and may increase the risk of losing potential buyers.
2. Intellectual Property (IP)
Intellectual Property forms a significant aspect of many businesses. In preparation for sale a seller should ensure that a clear record of all IP owned by the company can be produced. A seller should record all registration details and consider registering any logos or patents that have not yet been registered. If the domain name is held in any name other than that of the company, this should be transferred as soon as possible to prevent any delays or issues during the transaction.
3. Legal Issues and Documentation
No one wants to buy a business that is involved in costly litigation so in preparation for sale a seller should try to ensure that all legal disputes are resolved and all legal documentation is sound. Examples of legal documentation that should be reviewed to identify any inconsistencies or issues are the company’s terms and conditions, employment contracts, articles of association and shareholder agreements.
4. Management and Employees
If the business cannot operate without the seller then there is effectively no business to sell; a buyer should be buying your business, not your services. A buyer will want to see that the management team is well trained and that sufficient systems are in place to deal with the effective operation of the business.
In preparation for sale, an accurate inventory of assets should be compiled. Each asset should be considered in turn to ensure equipment is well maintained, determine whether any assets need to be replaced or establish whether any assets are leased. If any assets are leased, the consequences and timings of termination should be considered. In owner-managed businesses it is common for there to be an overlap between assets owned by the company and those owned by the seller. Any overlap should be rectified pre-sale to prevent confusion or concern.
It is imperative that the company’s accounts are in an organised state. All accounts should be filed correctly and any tax liability should be paid prior to sale. It is recommended that tax advice is sought to ensure the proposed method of sale is the most tax efficient. Any bad debts of the company should be considered when reviewing finances, a buyer will request records of outstanding debt during the due diligence process and a high level of debt may deter potential buyers.
In preparation for sale a health check should be carried out to ensure that the company is compliant with all applicable legislation. The applicable legislation will depend on the form of business - for example, in the case of a nursery the seller would need to ensure that DBS procedures were strictly complied with and that Ofsted requirements were met. If the company relies on IT of any kind then it is advisable to ensure that clear IT policies and a formal disaster plan have been implemented. Complying with relevant legislation will reduce the need for a seller to indemnify a buyer.
Whether you are selling a property together with the business, or ending a tenancy, it is advisable to consider the current property contracts in place and seek legal advice if necessary.
9. Contracts and Clients
Any potential buyer will want to know the company’s top customers and suppliers and prior to sale a list should be put together with any documents or contracts in support. A buyer will want confirmation of any continuing obligations on the company and it is advisable to gather together all contracts for utilities/ support contracts so they can be produced to a potential buyer.
If the Company has any current loan agreements or charges it is recommended that prior to entering into a sale transaction the seller liaises with the bank to ascertain any repayment terms or how to release existing charges. In preparation for sale the seller should ensure it has copies of all loan agreements, associated security documents (such as debentures or legal charges) and any guarantees given by the company or by any third party to secure the company’s liabilities.
If you are thinking of selling your business and would like to discuss any aspect of this article please contact the FSP corporate team.