[EP 052] 6 Things you can do to speed up your business sale (A Legal Perspective)

Joanna: Hi Joanna Oakey here and welcome back to The Deal Room podcast, a podcast brought to you by our commercial legal practice Aspect Legal. Now today, we are back with a quick tips session, and in our Quick Tips session we have Elizabeth Lee back with us from Aspect Legal.

Hi Liz welcome back.

Liz: Hi Joanna.

Joanna: Great. So now today, we are talking about the second part of our series on tips on getting a transaction across the line fast. Now you the listener, if you missed our first part of this session, head back to our show notes and you’ll see in previous episodes where we have Part 1 of tips on getting a transaction across the line fast. And in that episode, we talked all about the issues that can occur to slow down a transaction.

But in this episode, what we want to do is talk about how you as a seller or if working with a seller or in fact a buyer as well can go about ensuring that a transaction is most likely to proceed at the speed that you want it rather than be slowed down by external events or information leakages that we spoke about in our first episode. So let’s kick it off and we’ll probably follow a similar order that we followed in the last podcast about this topic about what slows down a transaction and how we can go about preventing it moving forward so leads.

1 Have your due diligence material ready

Joanna: Liz, last time we talked first about the issues where a seller doesn’t have due diligence material ready and I think this is probably one of the areas that is most likely to slow a transaction down.

Maybe let’s talk about some examples we’ve seen of how this can be done well and how people can set themselves up to ensure that due diligence materials are ready to roll and not causing a matter to slow down.

Liz: Yes, absolutely. I think due diligence is an important aspect for any purchaser of a business, and therefore if you’re a seller you need to make sure that you are absolutely prepared to give the buyer everything that they need to see before they purchase the business. And to anticipate that the seller can speak to the lawyer their lawyer and get it right on the sorts of documents they need to be prepared with in anticipation of due diligence that a purchaser might want. These are fairly standard usually with due diligence. The purchaser would want to look at custom contract, employee agreements, intellectual property such as you know any registered trademarks, any business names, domain names. You’ve just got to think about getting all the getting hold of all the documents that a purchased purchaser might want to have a look at.

Joanna: And I guess the level of due diligence of course varies depending on the value of the transaction and of course on the risk profile both of the business and of the buyer themselves in relation to how much they will want to see and how thoroughly they will want to go through it.

But certainly it’s a good idea, number one, to have as much information as you can have ready to go right from the outset. I think right at the moment, Liz, we’re talking about I guess what sort of things a buyer is likely to want to see. But I guess, there’s also an element in relation to process. So if you’re a seller you need to have an understanding of what might be required by the buyer so you can go and get that together. But also having a think about, I think with your advisers, about the process by which you will be transferring this information. Because certainly from a buyer’s perspective, it can get a little bit cumbersome if they’re constantly just receiving dribs and drabs of e-mails here and there with bits of information. So sometimes we will go about the process with our clients and helping them set up either a data room or if it’s a big matter or some shared drive for smaller matters where information can be more easily shared. So I guess that’s a consideration as well. How will the sharing happen.

Liz: Yes and certainly. I think with documents that contain more sensitive information such as customer details employee information the purchaser might want to hold back on provision of certain parts of this information until they’re more sure that the transaction is going ahead. But they got to start thinking about well what can they provide in the early stage just so that purchaser has comfort as to the level of information that they need in order to make the decision to proceed with the transaction.

Joanna: And sometimes it can be a multi-stage approach just as you’re saying where you start off with high level information and then as the potential buyer works through it and confirms their seriousness, we work down into more detailed provision of information. But I guess on the process side as well, it’s also I think important for sellers to remember and for buyers also to remember that it is very important at the end of the day for either side to be able to prove and to understand what information has passed over. So that’s another good reason for having a really good thorough process rather than a hotchpotch approach which we see very often. I mean you know to be honest more often than not it’s a combination of a hotchpotch approach. And I think you know the reason that would walk you about this is that it really aids the process if there’s been a lot more thought put into how these transfer of information will occur in a way that’s easily trackable and couldn’t relate back to perhaps providing a disclosure letter in the future referring back to the information that’s been provided.

Liz: Yeah. So I think that the hotchpotch sort of approach comes through when there isn’t proper planning with the processes in place and that’s where transactions could start to be hindered and slowed down because all of a sudden the seller realises that they have to get so much more information together and they’re scrambling. And so in order to have a hassle free speedy transaction occur, you really need to be well planned from the outset, and if you’re not well planned that’s when you know time delays creep in.

Joanna: Yeah. And we’ve certainly seen in many instances I think where whether we’re acting for the buyer or the seller where the seller has said yes I’ll have all of that information that’s fine but then it just doesn’t come in a timely manner and you can really seriously impact the speed at which a transaction progresses and sometimes it can even lead to a transaction falling over or if that then engenders concern in the mind of the buyer.

Liz: Yes absolutely.

Joanna: Alright okay so we’ve talked about having dd (due diligence) material ready. So, I think the action point on this is for sellers to be aware of what information they might need to be handing over and to have it ready and in place well in advance of finding a potential buyer and then being quick in handing over that information.

2 Assess internal information prior to transaction

Joanna: Next let’s move to the risk of problems occurring during the due diligence phase that are unexpected. Here I guess we were talking about the issue with not so much the provision of information, but once the information or documentation is provided then the buyers taking a dim view of the information or finding holes in information that’s been provided. So what can our buyers do to protect themselves against this situation.

Liz: Well, I think, firstly, sellers should be to step back before they provide information, assess the information independently, put themselves in the shoes of the buyer and assess whether or not a buyer would be concerned to receive that information. And then have a plan in place to address any concerns that a buyer might express upon seeing that information. So again it all comes down to planning. If for unexpected reasons, a buyer takes issue with some information that a seller provides, then I think you’ve just got to speak to your advisers consider what the risks are and how those risks might be managed from a legal view point.

Joanna: And I think it’s interesting quite often our clients will be referring to us or come into us at the point where the transaction is already on foot. So therefore quite often it’s too late for us to help advise in preparing the business prior to transaction. But certainly I think we see the best outcomes when we and you know other advisors have had the opportunity to work with businesses gearing them up for a sale, to get them ready. So you know either number one, holes can be identified and fixed, or number two, at least holes are identified and the risk is readily apparent to the seller, so they’re not surprised by a buyers response to seeing the due diligence material.

Liz: Yeah that’s right.

3 Make sure background documents are correct

Joanna: So the next element we talked about in terms of issues that we see creep up causing transactions to be slowed down is where background documents haven’t been correct. So I guess for example here, share registers not reflecting what the shareholding actually is or other background documents not showing what they should show.

Liz: Yeah. For example, contracts with customers aren’t with the right selling entity. It runs through different entities. Yeah that can happen. I’ve seen that happen.

Joanna: And so the fix for this is proper planning in the background you know and having the right people review this information well before the point of finding a potential buyer, so that you can ensure that all of your contracts are lined up and all of your background documents are correct.

Liz: Yeah. I think that that leads to a smooth you know transaction occurring and in a timely manner.

Joanna: Yeah absolutely. I can actually think of a couple of examples right on this point of matters where we’ve actually been acting for the purchaser where we have gone in and started some simple due diligence and then found out you know that leases haven’t been registered in the correct names and business names are registered in all sorts of weird random names. And when you’re acting for a buyer that really can concern you because it’s certainly often reflects on what the management of the business has been.

Liz: That’s right and adds to the cost to the buyer after the transaction to have to rectify all this.

4 Consider third party consents needed

Joanna: Absolutely. All right. So then all of this I think dovetails in with the next area that we talked about which is third party consents not really being thought about and arranged ahead of time. So obviously we’re going to say here okay you keep yourself plan in the beginning, let’s talk functionally and practically, Liz, about what sellers can do in terms of getting their head around what third party consents they should be thinking about well in advance.

Liz: Yeah, so usually with landlord consent that that is often the most time consuming exercise and therefore that’s one of the starting points that a seller should focus on. Look at the lease and see what are the procedural requirements, how long you know a landlord would take two to respond. Typically, they won’t they won’t give their consent overnight you can be guaranteed of that. One week maybe if that they act quickly but in most cases they will require information about the incoming purchaser. So although you can’t you know request landlord consent to far ahead of time at the same time you can anticipate what’s needed so that you could address that with the purchaser quite early in a phase.

Joanna: Yeah because once again we’ve seen this as being something that can slow down a transaction particularly if the communication with the landlord has been very late and or if the if the system that the landlord and their advisers are flowing through is a slow moving system, which can sometimes be the case.

All right. And I think another area of third party consents that we should perhaps touch on here is a change in control clauses that might be seen in supplier and client agreements. So that’s another area where an organization quite regularly may need to think about third party consents, and the preparation in relation to this area is getting familiar with the contracts that relate to the key assets of the business to ensure you know which ones will trigger requirements for third party consent from that counterparty.

5 Ensure money is ready for settlement, and encumbrances removed

Joanna: So then the second last area that we talked about in our last podcast, which we should touch on now is finance and this of course quite often is sitting on the buyers side of needing to make sure finances in place, but it can also be really relevant to the seller if they have a security interests registered over any of their assets of the business. So I guess finance can be a two way street. There can be issues on both sides of the fence that could slow the transaction down. Let’s talk about that for a bit, Liz.

Liz: Yeah that’s right. So with financing you know you find with the smaller transactions they tend to be financed you know through bank or some other financial institution. And as a purchaser you’ve got to know what your financial requirements are to make sure that the money will be ready for settlement. And if there are encumbrances on the assets of the business that you are purchasing as a buyer, you need to make sure that you communicate very clearly and understand the mechanics of getting those encumbrances removed and have assurance from the seller that they will be removed. And as a seller, you’d have to make sure that you know who to contact and how long it’ll take them to remove the encumbrances and to find out what it takes to get those incumbents removed.

Joanna: I can think of a couple of transactions actually that have come to us at the last minute and wanted to move really quickly and only for us to find that there’s PPSR registrations in place that the seller hadn’t even been aware of. And the problem with those is you know everyone then has to track back and find the proof as to what those registrations related to in the first place and then get particularly dealing with banks they can be quite slow in removing those security interests.

Liz: Yeah that’s right. With banks, they’ve got big processes in place procedure. It’s just time consuming.

Joanna: So it’s all about being aware of this in the beginning, and once again, engaging with your advisers early on in the process. So all of this can be dealt with. Because quite often it doesn’t necessarily take a lot of work but it just might take a lot of time while still waiting for the secured party to do their bit.

All right. And we’ll actually Liz what I’m looking at list, the last thing we talked about in that previous podcast was removing encumbrances. It looks like we’re ahead of ourselves. We’ve actually covered that off. So look I think we’ve but we’ve certainly not talked about everything that a seller and a buyer should be thinking about in terms of timing but we’ve covered on the main areas at least that we practically see as creating the most problems in getting transactions across the line quickly.

6 Get the right advisors on board

Joanna: I think the other thing that probably we should mention here is the quality of the advisers who are involved in the process, and certainly I think there’s a real benefit to having both sides of the transaction be served by advisors who deal in this area regularly. Because I think advisers are one of the things that we didn’t talk about in the previous episode, but certainly something that is a reality of our practice from day to day. If we’re dealing with counter parties who have advisers who aren’t used to this space, whether or not that’s you know accountants or lawyers or whatever the case may be, that can really slow a transaction down. Notwithstanding that we have lots of practices in place here to help speed up the process as much as possible. We are we are we hamstrung a little bit by sometimes the parties that we’re dealing with on the other side. So I think having the right advisers on both sides of the transaction and advisers who understand what they’re doing in this space really also helps to speed that transaction through.

Liz: Yes, I agree and a styles of the advisers too. Because I think there are some advisers are more pragmatic than others, and those who are less pragmatic can sometimes slow down the process because you know they’re sort of stuck to the hard and fast rules, they’re inflexible and it makes it hard for the parties to close the deal in a timely fashion, when ordinarily in other situations, advisers would work around some practical difficulties in order to get the parties to complete in a timely manner.

Joanna: Yeah absolutely. I think that’s interesting that’s where this area of sales and acquisitions can be quite different to other areas of law because there’s a massive benefit in commercial approaches, commercial approaches that balance sensibly and pragmatically the risk elements as well. Because otherwise you can end in situations, wherein advisers may be used to litigation are overly aggressive but not particularly pragmatic, or used to the transaction so overly concerned and perhaps make their clients overly concerned by warranties that might be usual during the course of these sorts of transactions.

Liz: Yeah. Just to give an example, we’ve seen transactions where the solicitors acting for the seller is insistent upon having deeds of assignment for property signed by the landlord before they’re willing to complete the deal where even though the landlord has given its indication that and certainly issued consent documents for the parties to sign and so it’s not very pragmatic, because I think that the risk of the landlord in the last minute withholding its consent is is very low rent when they’ve issued documents for all parties to sign and so forth. A party to insist that all those documents have to be signed including by the landlord, it’s just impractical because it end up slowing the transaction down and delaying completion.

Joanna: Yeah and I think when your knee deep in these matters after a while, it’s just the reality that you get a feel for what contains real risk and what are the things you really need to be aware of and not cloud the issue with a non-pragmatic attitude to areas where the risk in reality is extraordinarily minimal and highly unlikely to occur.

All right. Great. Hopefully that’s a useful overview for our listeners, be they buyers, sellers or advisors who are acting on either sides of the transaction. If you want to contact Liz or any of our lawyers at Aspect Legal in order to help ready you or your clients for an acquisition or for a sale, then you can just pop over to our website at www.aspectlegal.com.au, and there you can organise for a free consultation for your clients with our team where we can talk to you about the specifics involved in your or your client situation.

Well thank you, Liz. Thank you so much for coming on board today. I enjoyed it. I hope you did too and I hope the listener did as well.

Liz: Thanks Joanna. Always a pleasure to be speaking to you.

Joanna: Great. Okay wonderful. That’s a wrap. And we will see you next week for another episode of The Deal Room podcast brought to you by our commercial legal practice aspect legal. See you next time.