We’re back with another quick tips episode. Today’s Quick Tips episode is all about the simple steps in getting legally prepared before a sale. This is relevant for you to understand whether or not you’re a business preparing for a sale or if you’re an advisor, an accountant, or any other advisor for businesses who are preparing for sale or if you are a broker or an advisor dealing with businesses at sale in order to understand the legal elements that might trip your clients up when it comes to the point of transacting the deal if your clients haven’t been prepared in advance.
- Value locked in and risks locked out
- Lock in key contracts with clients
- Lock in key contracts with suppliers
- Ensure agreements are up to date
- Secure intellectual property
- Review employment contracts
- Consider lease agreements
- Clean up documentation and financials
- Quick recap
Value locked in and risks locked out
Essentially, I look at this in terms of what is the value in the business or company that you’re selling and is this protected? Is this locked in? Because a buyer is wanting, when they’re buying a business or company, to ensure that they are getting the value that you say you are selling to them and part of the test of that value is when the lawyers conduct a due diligence process and provide feedback on the extent to which the value in the business is locked in and the risks are locked out.
How do you prove that?
Let’s look at each of the different elements of value within a business and how we get those locked in from a value and risk locked out from a liability perspective.
Lock in key contracts with clients
Firstly, let’s look at contracts, so key contracts within an organisation which really are often the pinnacle of the due diligence process from a legal perspective.
So firstly, client contracts. Do you have key customer relationships that are important to the value of the business moving forward? If so have these customer relationships been locked in for a period of time, and if not is there a way to do that?
Now often what businesses can do prior to a sale is think about this and then reformulate the contracts that their clients and customers have signed or are subject to prior to the point of putting the business on the market. In looking at what we do with those contracts, number one it might be locking in the value so say for example having a set term or it might just be putting a contract in place if there isn’t a clear one in place.
It can also mean looking at the liability clauses within those contracts and ensuring that the business has proper risk protection moving forward.
The other thing that you might want to have look at is clauses that relate to change in control. Many contracts will have a clause in them under their heading change in control or some other similar heading where effectively they’re saying that if there is a change in control of that organisation the client needs to authorise such change in control.
Now if you are updating your contracts it’s a good idea to remove that clause so that when you come to the point of transition of the business and the due diligence phase you’re not having to deal with the risk that each of these clients might terminate when given notice of the change in control and indeed you’re minimising the effort involved in having to notify each of the relevant contractual counterparties of the change in control wherever those clauses are relevant.
So take all of your client contracts. Have a look through them. Have a look at whether or not you can lock these client contracts in. Sometimes that might be appropriate and sometimes not.
Have a think about the liability clauses. Could they be reduced? If a buyer is looking at these liability clauses, might this create some cause for concern for them.
And finally think also about the change in control and assignment clauses. Change of control is relevant if you’re selling the shares in a business and assignment clauses might be relevant if you’re selling the business or the assets out of the business.
Lock in key contracts with suppliers
Alright so that’s client contracts. Let’s move on now to supplier contracts and other key contracts within your business now similar to the client contracts, what we are doing here is we’re trying to lock in value and lock out risk or minimise risk.
Once again we are specifically looking for indemnity and exclusion of liability clauses here from the perspective of course of ensuring that your own risk is minimised if you’re subject to any indemnity or warranty clauses. But generally in supply contracts what you’ll be particularly looking for is the extent to which the suppliers have backed the goods or services that they’re providing your business because a buyer coming in will look at these supplier contracts with a view of how protected are we if issues have arisen due to an issue created by a supplier.
So say for example quality issues with goods provided or timing or quality issues with services provided. What protections are there for us as the buyer within that contract to minimise the risk involved in that supply relationship?
Also, if this is a key supplier once again you might want to consider locking in that supplier for a particular period of time so that a buyer coming in feels that they have the protection at least during the transition period of having the suppliers locked in.
And finally, once again think about those changing control and assignment clauses. Make sure those are reviewed so that if they do exist you can try and fix up these contracts prior to the point of sale.
This is another good reason why you should go through this process well in advance of a sale because the change in control clauses within these contracts can create a lot of work and sometimes the risk that negotiating a new contract with a supplier, once you put them on notice of a change in control in the organisation, might expose that relationship i.e. that the supplier might decide to leave.
Ensure agreements are up to date
The next thing that I want to mention in relation to all agreements within a business is to ensure that your agreements are up to date. Many times we are brought in for either a due diligence process to review the contracts of an entity that our clients are acquiring or on the flip side to help businesses in preparing for a sale and we pick up a large number of contracts that have expired or past their expiry date.
This can be a real pain if from a seller’s perspective you now need to recreate the process of getting contracts renewed. The earlier you look at these agreements and understand whether they’re on foot currently, whether they have exposures, and whether or not they are indeed expired, the longer you have to resolve these issues before the business is offered for sale.
We’ve covered off client contracts, key supplier contracts, and other general contracts within a business. There’s a couple of other areas that I’m going to highlight very quickly and because this is a quick tips session, I’m not going to go into them in great detail but just enough so that you’re aware of the key areas to look out.
Secure intellectual property
Firstly, intellectual property is often an area of great value in a business. It’s really important that prior to the point of sale you investigate what intellectual property there is in the business. Ensure that you have a proper chain of title in relation to that intellectual property i.e. that you can prove to a buyer that you are the rightful owner of that intellectual property because a buyer as part of their due diligence process will generally analyze intellectual property if it’s seen as something of value to the organisation that they’re purchasing.
They will look back to ensure that there is a chain of title in relation to ownership or alternatively or perhaps additionally they will require that you provide warranties and indemnities in relation to ensuring that they won’t suffer any loss due to any third party action from someone else who claims to own the intellectual property.
What does this mean in a general context? It means if you’ve got trademarks or brand names that you’re using, make sure they have the proper trade mark registrations for all of the countries in which you using these marks. Ensure that if you have important intellectual property that’s been created for the organisation, you have contracts that demonstrate in the background that whoever created that IP for you has assigned that to you if it was a third party.
Review employment contracts
Also in terms of getting your house in order, you need to consider your employment contracts. Are they up to date? Are you employing or engaging your staff in the right way?
Quite often we’ve seen issues appear because buyers have come in and during the due diligence process recognised that staff within the business have been incorrectly classified, say for example as contractors when in reality they would probably be deemed workers within or employees within the organisation. So that’s something that you should ensure is reviewed and is properly in place before the business is put on the market.
Consider lease agreements
And the final element that I’m going to talk about here is your premises. For many businesses premises isn’t important. But if premises and location is important to your business, then it’s really important that all of the leases in relation to those premises are reviewed to ensure that they have the most optimal conditions possible for a transfer to a buyer.
That might mean that you need to enter into a new lease period with new options so that the new owner will have the opportunity to access future options in relation to locking in the value of the business in that location.
If the premises are freehold, so for example if you or a structure behind you as the owner owns the premises, then it might be a good time to put in place more considered leases if for example the lease in place is short or not as commercial as perhaps it could be for a new buyer who might be taking over the business.
Clean up documentation and financials
And finally, getting ready for due diligence will require that you have your house in order in relation to documentation and financials.
Now of course that is an entire episode in and of itself. In fact it’s probably a few episodes and certainly not a quick tips episode. So in the future we’ll talk about due diligence in a far more detailed way and we’ll also have some great accountants on board to talk about due diligence from an accounting perspective.
Well that’s it for the quick tips episode for today about getting your house in order, in order to prepare for a future sale of the business.
Just as a quick recap, the things that you need to bear in mind are how you can lock in value and minimise risk in contracts with clients, suppliers, employees, and other key parties including location if location is important to ensure that when buyers look into the business they can see the value within the business and aren’t overly concerned with risk elements that they pick up along the way.
If you like more information about this topic, check out episode 4 for our legal tips to prime your business for market with our resident mergers and acquisitions expert, Elizabeth Lee.
Disclaimer: The material contained on this website is provided for general information purposes only and does not constitute legal advice. You should not depend upon any information appearing on this website without seeking legal advice. We do not guarantee that the contents of this website will be accurate, complete or up-to-date. Liability limited by a scheme approved under Professional Standards Legislation