If you’re thinking about selling in the next two to five years, the most useful thing you can do now is find out what a buyer’s solicitor and accountant would find if they started due diligence tomorrow, and fix it while nobody is waiting for you.
Most of what they find is ordinary. There’s no shareholders’ agreement, or there is one and it was signed in 2011 by someone who has since left. Key staff are on contracts with no restrictive covenants. The founder wrote the software, or designed the logo, and never assigned it to the company. The biggest customer is on a handshake, or on terms that let it walk if the company changes hands. The statutory books haven’t been touched since incorporation. None of that is fatal, but each one gives a buyer a reason to hold back part of the price, ask for an indemnity, or push more of the money into an earn-out that depends on things you won’t control.
I see this from the transaction end. By the time most sellers instruct me, heads of terms are signed and exclusivity is running, so anything that needs fixing gets fixed at the buyer’s pace and on the buyer’s terms. I’d much rather do that work a year or two earlier, at a sensible speed, than at eleven o’clock the night before completion (which I’ve done, and don’t recommend to anyone).
Why two to five years
Some fixes take an afternoon: a board minute, an IP assignment, a missing share certificate. Others take longer than people expect. A new shareholders’ agreement means the owners have to agree with each other, which is sometimes the hardest part. Changing employment contracts to add restrictive covenants needs thought about what you’re giving staff in return, and it won’t be done in a week. A lease in your personal name, or a building owned by your pension, has its own timetable set by a landlord or a pension provider who is in no hurry; I’ve written about selling a company when the lease is in your name or your SIPP owns the building.
Structural changes have time limits of their own. The conditions for Business Asset Disposal Relief generally have to be met for the two years before the sale, and shares acquired through EMI options have their own two-year clock running from the date the option is granted. If you want to insert a holding company, bring key staff in through EMI options or reorganise the share capital, the time to start is well before a buyer appears. The tax side of all of that is for your accountant; I deal with the legal structure and the documents.
Where to start
The exit readiness review is the usual first step. I go through the business as a buyer’s solicitor would and give you a written report saying what’s fine, what needs attention and what will cost you money if it’s still there when you sell, with a fixed fee to fix each item.
If you want a quicker first look before paying for anything, my exit readiness scorecard asks a series of questions about the business and produces a short report on where you stand. It’s no substitute for someone reading your documents, but it’s a reasonable way to find out whether you need to.
The numbers are someone else’s job
I’m a solicitor, so I don’t value businesses or rebuild management accounts. Buyers will look hard at both. They’ll want to see adjusted earnings with a reason for every adjustment, monthly management accounts rather than just the annual ones, and some sense of how much of the revenue is contracted and how much depends on you personally.
Where that work is needed I introduce clients to corporate finance advisers I trust, who quote for it directly, and I work alongside them and your own accountant. The legal and financial sides do overlap. Earnings that look solid in a spreadsheet are worth less if the contracts behind them can be ended on a month’s notice or on a change of control, which is where I come in. There’s more on that in my article on how much your business is worth.
What the legal work usually involves
It depends on what the review finds, but the same things come up again and again. Updating or putting in place a shareholders’ agreement, so a buyer can see that every shareholder will sell on the same terms. Getting employment contracts for key people into shape. Assigning intellectual property into the company. Putting proper contracts in place with important customers and suppliers, and checking what they say about a change of control. Tidying the company records, so the register of members matches reality and the filings are up to date. My due diligence questionnaire gives a fair idea of what a buyer will ask for.
Most clients spread this over six to twelve months, doing the items that matter most first. You don’t have to do all of it, and you don’t have to do it with me. The report is written so that another solicitor could pick it up.
When you’re ready to sell
When a buyer comes along, I act on the sale itself: heads of terms, due diligence, the share purchase agreement or asset purchase agreement, and completion. There’s more on how that works on my selling a business page.
I should be straight about what preparation does and doesn’t do. It won’t make a buyer move faster than they want to, and some owners do all of this and then sell to someone who barely looks. But you don’t know in advance which buyer you’ll get, and a seller who can answer the due diligence questions quickly, without surprises, is negotiating from a better place than one who is explaining problems as they come up.
Fees
The exit readiness review is a fixed fee, from £3,500 plus VAT depending on the size of the business. The follow-up work is quoted item by item once the review shows what’s needed, so you can decide what to do and when. The sale itself is quoted separately, also on a fixed fee. Everything is agreed in writing before I start.
If you’re thinking about selling, even if it’s some way off, get in touch and tell me a bit about the business and your timescale.
