Many a small business owner has fantasised about receiving an offer they can’t refuse for their business and giving it all up to sip cocktails on a sun lounger in Barbados.
The sale fantasy described above does not generally extend into the realm of due diligence, which, simply put, means the buyer’s advisers asking questions about the target business before the buyer signs the sale contract. At the due diligence stage, the buyer is looking to find out what shape the target business is in, by focusing on certain fundamental aspects of the business. If you were to receive ‘an offer you couldn’t refuse’, would your business be in the right shape for a sale?
As a company lawyer, the due diligence process is all too familiar to me. Strikingly, this period can be utterly draining, or it can be a walk in the park. One of the main differentiators between these two contrasting experiences is the state of the target business. If a business has been operated in an open, consistent and methodical way, in compliance with industry best practice and the law, then generally the due diligence process is likely to be straightforward.
Regrettably, managing a business strictly in adherence with industry best practice is not necessarily easily done, no matter how small, or simple, your business is. Even the best-run businesses discover inadvertent instances of non-compliance – very often during a due diligence exercise – which can adversely impact on the sale price.
A common mistake, particularly in the start-up phase, is registering intellectual property, like domain names, in personal names, instead of in the business name. Another is overlooking key terms in commercial contracts, like the ability of a major supplier to end the contract if there is a change of control of the business. Even seemingly minor errors, like late filings at Companies House, can come back to bite when a buyer’s solicitors are combing through the books.
Having a ‘clean slate’ is not impossible but does require a concerted effort on the part of business owners, ideally from day one. The key areas that are targeted by a buyer’s solicitors during the due diligence exercise are business structure; accounts and finance; contracts and trading; assets and intellectual property; insurance, consents and compliance; litigation and disputes; real estate; employees and pensions; health, safety and the environment; and tax.
Business owners should set aside time in the early days to look at these key areas and assess what practices and procedures they should be adopting so as to limit problems later on. Whatever the size of the business, or its underlying systems, these areas should be reviewed, at least quarterly, so that any issues can be identified and remedied as soon as possible. Then, when the fantasy offer becomes reality, the business should be in shape for that sale.