In our extensive practice in the area of sales and acquisitions, we have seen many instances of deals that have been impacted by issues that are often preventable with early planning.
Given accountants often end up acting as a general business adviser for their clients, we thought that it would be useful to put together a list of tips and traps we have seen in preparing a business for a future sale.
Top 5 traps
- Overly complicated organisational structures – whilst a business structure for an organisation may have originally been created with specific requirements of the owners in mind, when leading up to a sale, an overly complicated structure can create a major hazard. Complicated structures, such as ownership through trusts (or multiple trusts), can sometimes create a limit on the pool of potential purchasers (for example, many overseas buyers are wary of purchasing into a structure with any sort of complications), can create hassles during due diligence, and can cause the addition of many onerous warranties and indemnities. Where possible, you need to get in early – to ensure that the structure is “cleaned up” well in advance of a sale.
- Inaccurate or incorrect documentation – common examples of this is where a lease or important contract with a key client or supplier is held by another entity owned or controlled by the owners of the business. This can delay the completion of due diligence by a potential purchaser and create unnecessary angst by the purchaser.
- Risky practices – some businesses might be operated with certain known risks. For example, where contractors used by the business might in certain situations be deemed to be employees of the business.
- Failure to lock in key clients and suppliers – contracts that are not easily assignable by the seller may weaken the bargaining position of the seller. If there is a risk key clients and suppliers have the option to terminate their contract on a sale of a business, a purchaser may wish to have this risk reflected in the purchase price.
- Choosing legal representatives that are too adversarial, or who have limited experience in M&A – we have had many many complaints in the past about “previous” lawyers used by clients, accountants and business brokers, who have acted in an overly adversarial or uncommercial manner. Choosing a legal adviser is an extremely important step in a business sale or acquisition. It is a difficult enough process as it is without having additional obstacles interposed between the seller and the purchaser.
Top 3 tips
- Encourage your clients to plan early – if your clients are considering a possible future sale, encourage them to think about structure, key contracts and risks of the business as early as possible. It might sound a bit obvious to say – but it has been proven to us time and time again – that the earlier an organisation starts on preparing the business for sale, the higher the likely sale price, and the quicker the sale process is likely to take.
- Engage key advisers early – as part of the early preparation, encourage your clients to also engage key advisers early to guide them on the process. This will allow them to set a realistic timetable to get the deal done.
- Protect the goodwill of the business – get confidentiality agreements prepared early so that any discussions with potential purchasers will not be leaked into the marketplace. This can destroy confidence among clients, suppliers and employees of the business. Ensure all trade marks or business names are registered.
Aspect Legal offers a number of services to assist businesses in sales and acquisitions.
If you are considering an acquisition or sale or if you have any tricky questions that you need a sounding board for – just give us a call on 02 8006 0830 or send an email through to us, and we will be in touch for a free discussion.
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