For many businesses, a sale represents the culmination of years of hard work. Whether the aim is to retire, realise some of the value built up in the business or move on to a new venture.

Preparing for a sale shouldn’t begin once a buyer has been found. Many of the issues that cause difficulty during a transaction arise from matters left unresolved years earlier.

A buyer will usually carry out detailed due diligence before committing to an acquisition. Problems identified during that process can lead to delays, additional warranties or indemnities in the sale agreement, a reduction in price or, in more serious cases, the buyer walking away.

Here are seven areas worth considering well before a sale.

1. Are the company’s corporate records in order?

A buyer will want to establish precisely who owns the company and whether its shares have been properly issued and transferred.  Problems can arise where historic share issues or transfers were not properly documented, statutory registers are incomplete or Companies House records do not correspond with the company’s own records.  These issues can usually be resolved, but dealing with them in the middle of a transaction can cause unnecessary delay. An early review of the company’s records can remove potential obstacles before a buyer starts asking questions.

2. Are the arrangements between shareholders clear?

Businesses often begin with founders, family members or business partners operating relatively informally.  Before a sale, the company’s articles and any shareholders’ agreement should be reviewed for restrictions on transferring shares, rights of first refusal and other provisions that could affect the transaction.  If the shareholders haven’t entered into specific arrangement to regulate their relationship and a possible exit this should be looked at  before a sale process starts.

It is also important to identify outstanding shareholder loans, options or other arrangements relating to shares. Where not every shareholder wishes to sell, provisions such as drag-along rights, which may allow a majority to require minority shareholders to participate in a sale, can become particularly important.

3. Are your key commercial contracts fit for a sale?

The value of many businesses depends heavily on relationships with key customers and suppliers.  A buyer will want to understand the contracts underpinning those relationships, including their duration, termination rights, pricing arrangements and significant liabilities.  Particular attention should be given to change of control clauses. These may allow a customer or supplier to terminate a contract, or require consent, if ownership of the company changes.  If a significant proportion of the company’s revenue depends on a contract that could disappear following completion, that is likely to concern a buyer.  If no written contracts exist for a particular customer or supplier consider getting these in place.

4. Does the company own its intellectual property?

Intellectual property can be one of a business’s most valuable assets. It can include software, branding, website content, designs, databases and technical materials.  A common misconception is that because the company paid for something to be created, it automatically owns all the intellectual property in it. That is not necessarily the case.  For example problems can arise where material was created by say a founder before the company was incorporated or by an external consultant without appropriate written terms.  Businesses should therefore identify their important intellectual property and ensure that ownership and licensing arrangements are properly documented.

5. Are employment and consultancy arrangements properly documented?

People are often central to the value of a business.  A buyer is likely to look closely at key employees and consultants, particularly where important customer relationships, technical knowledge or intellectual property depend on particular individuals. Employment and consultancy agreements should therefore be up to date and contain appropriate provisions dealing with matters such as confidentiality, intellectual property and non-competes.  It is also worth considering whether the business is excessively dependent on its owner. If all significant customer relationships and commercial knowledge sit with one individual, a buyer are likely to regard that as a risk.

6. Are there unresolved disputes or compliance issues?

Not every dispute will prevent a business from being sold, but surprises during due diligence rarely help.  A buyer is likely to ask about existing or threatened litigation, complaints, regulatory issues and other potential liabilities.  These matters may also need to be addressed through disclosures against the warranties given by the sellers in the sale agreement. Depending on their significance, a buyer may seek additional contractual protection or a specific indemnity.  Identifying potential problems early gives the seller and their advisers an opportunity to manage them before negotiations are advanced.

7. Is the business ready for due diligence?

A useful question for any owner considering a future sale is: If a buyer asked to see the company’s key legal documents tomorrow, could we produce them?  During a transaction, sellers are generally expected to provide corporate records, material contracts, employment documentation, property documents, intellectual property records and details of disputes and liabilities.  Trying to locate and organise everything while negotiating the transaction and continuing to run the business can place considerable pressure on management.  Preparing early also gives the seller an opportunity to identify weaknesses before the buyer does. Some can be corrected; others can at least be understood and a strategy agreed for dealing with them.

Even if there are no imminent plans to sell, carrying out a legal health check can be beneficial.  In summary this could include a review of:

1. statutory books and Companies House records;
2. articles of association and any shareholders’ agreement;
3. share ownership, options and shareholder loans;
4. key customer and supplier contracts;
5. intellectual property;
6. employment and consultancy arrangements; and
7. existing disputes and compliance issues.

A well-prepared business can make due diligence easier, reduce the risk of last-minute renegotiation and give a buyer greater confidence in what it is acquiring.

If you are considering a sale, even if it is still some way off, our Corporate and Commercial team can review your existing arrangements and identify issues that may be worth addressing before a buyer is approached. An early review can help put the business in the best possible position when the time comes to sell.

This article is for guidance only and does not represent legal advice.