When it comes to a business sale you need to "know your business". It is far too easy for assumptions to be made that are not incorporated in the sale agreement itself. In this article, we comment briefly on some of the things you should think about before seeing an agent or putting pen to paper.
We think internal due diligence should be considered for at least the following matters:
Relationships: Increasingly, it is relationships that provide the true value of any business; without them, there is often no business at all. When selling, you need to ensure that the relationships you have forged are documented to a reasonable standard, and that the benefit of them is capable of being transferred to a purchaser.
Assets: Too often we see the assets list left incomplete, or to be agreed, in a signed agreement. Not only can this call into question whether the certainties required for a binding contract actually exist, poorly considered asset lists give rise to a number of minor, but frustrating problems. Do you simply expect that the purchaser will take over the photocopying contract, for example? It is better to identify these issues before negotiating with a potential purchaser.
Premise Leases: The better your relationship with your landlord, the easier it will be to ensure a smooth handover of the leased premises. Don't forget - you remain on the hook should the purchaser default under the lease and you might want to provide a limitation on your liability as part of selling the business.
Security Interests: You should obtain a search of the Personal Property Securities Register and see who has registered security interests against your assets. You will need to arrange for these to be released before any agreement can settle and this isn't always something that can be accomplished in a few days.
Stock and Work in Progress: You will need to consider how any work in progress is addressed on the settlement date. Practically, the business' customers are unlikely to be happy receiving two separate invoices in respect of the same work, which means a valuation exercise will need to be done in conjunction with the stock-take.
Employees: The position of employees should be considered carefully. As the vendor, it is usually preferable for the purchaser to be obligated to employ all your current employees. However, many purchasers prefer to take a "pick and choose" approach. In either case, you should be fully aware of the provisions of your employment contracts because your employees will technically be redundant once the sale has been concluded. You need to give careful thought to this; standard form agreements do not make any specific provisions as to how employees should be looked after when a business is sold.
Intellectual Property: IP rights should be reviewed before contemplating a sale. Ensuring your IP is protected and registered if appropriate clearly assists in preserving a business's value. If there are trademarks or other branding used informally in your business, registering them before attempting to sell the business is almost always a good idea.
Corporate Governance: You should be aware that the sale or disposition is, in the case of a company, likely to be a "major transaction"within the meaning of the Companies Act 1993. As a consequence, in addition to ensuring the transaction is approved by the board of directors, shareholder approval must be obtained.
Other matters will also need to be resolved before an agreement can be concluded. Most of these, such as the scope of warranties, whether a restraint of trade should be included, and how much "vendor assistance" should be given will be points for negotiation as the agreement develops. Others will be very specific to the type of business being sold; for example, franchise agreements. You should however be very wary of accepting even the standard warranties included, for example, in the ADLS business sale form unless you have analysed carefully any weak points that have or could arise from the business's operation.
Nothing in this article is suggested to put you off selling your business, or making the process unnecessarily difficult. However, it is our experience that many vendors sell without giving the same consideration that they do to the important decisions in their life. This can have a detrimental effect on the value the business realises and lead to unexpected complications after the sale has been completed.
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© McVeagh Fleming 2013
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.