Exit planning: getting your business ready to sell

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 there’s no deal waiting on you.

Most of what comes up in due diligence is fairly ordinary. There might be no shareholders’ agreement, or one which was signed in 2011 by someone who has since left, or key staff might be on contracts with no restrictive covenants. The founder may have written the software or designed the logo and never assigned it to the company, the biggest customer may be on a handshake or on terms that let it leave if the company changes hands, and the statutory books may not have been touched since incorporation. None of that will stop a sale, but each one gives a buyer a reason to hold back part of the price, ask for an indemnity, or move more of the money into an earn-out that depends on things you won’t control.

By the time most sellers instruct a solicitor, heads of terms have been signed and exclusivity is running, so anything that needs fixing has to be fixed at the buyer’s pace and on the buyer’s terms. It’s much better to do that work a year or two earlier, when there’s time to do it properly and no buyer is waiting.

Why two to five years

Some fixes are quick, such as a board minute, an IP assignment or a missing share certificate, but others take longer than people expect. A new shareholders’ agreement means the owners have to agree with each other, which can take a while. If you’re changing employment contracts to add restrictive covenants, you need to think about what you’re giving staff in return, and that can’t be done in a week. A lease in your personal name, or a building owned by your pension, will move at the pace of the landlord or the pension provider, and 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 for shares acquired through EMI options there’s a separate two-year period which runs 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, you should start well before a buyer appears. The tax side of all of that is for your accountant, and 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, the exit readiness scorecard is my own tool, hosted on my separate DealAdvisory site. It asks a series of questions about the business and produces a short report on where you stand. It can’t read your documents for you, but it should give you an idea of whether it’s worth having someone do that.

Valuation and the financial side

I’m a solicitor, so I don’t value businesses or rebuild management accounts, although buyers will look closely at both. They’ll want to see adjusted earnings with a reason for every adjustment, monthly management accounts as well as the annual ones, and some idea of how much of the revenue is contracted and how much depends on you personally.

Where that work is needed I can introduce you to corporate finance advisers, who quote for it directly, and I work alongside them and your own accountant. The legal and financial sides do overlap, as earnings that look solid in a spreadsheet are worth less to a buyer if the contracts behind them can be ended on a month’s notice or on a change of control, and the contracts are something I can help with. 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 tend to come up on most sales. They include updating or putting in place a shareholders’ agreement, so that a buyer can see that every shareholder will sell on the same terms, and getting employment contracts for key people into shape. There’s usually some intellectual property to assign into the company, and it’s worth putting proper contracts in place with important customers and suppliers and checking what they say about a change of control. The company records often need tidying as well, so that the register of members is correct and the filings are up to date. My due diligence questionnaire will give you a fair idea of what a buyer will ask for.

Most owners would spread this over six to twelve months and do 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, as 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, which means the 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 say that preparation has its limits. It won’t make a buyer move faster than they want to, and some owners will do all of this and then sell to a buyer who barely looks at any of it. But you can’t know in advance which sort of buyer you’ll get, and if you can answer the due diligence questions quickly and without surprises, you’re in a stronger position in the negotiation than you would be if you were explaining problems as they came up.

What exit planning costs

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, and 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.