For business owners, realising the ambition to sell their company is often the culmination of decades of hard work, passion and turmoil.
They may be looking to retire, reacting to a change in personal circumstances or capitalising on a market opportunity, such as their sector attracting strong buyer interest. Paul Matthews, Director and Head of WHN’s Corporate and Commercial Team, discusses how to minisming legal risk in a corporate transaction can help to maximise a company’s value.
While a company’s goodwill, size, people, profitability, growth potential and a range of other matters are likely to be the most significant factors determining a purchase price, many owners – wishing to extract maximum value from a sale and complete it quickly – underestimate the importance of thinking about the buyer’s risk and taking pre-emptive steps, wherever possible, to minimise this.
In simple terms, when a buyer’s advisory team identifies a risk with the potential to affect the company’s value, operations or returns, it needs to be resolved or is likely to be factored into the price or structure of the deal.
Key areas of risk
Key areas of risk which could affect a sale include:
Employees: Employees are central to almost all companies and key staff can be vital to ensuring a smooth transition to new ownership. Do all employees have written contracts in place? Are they accessible, up-to-date and in line with current employment law?
Properties: Most businesses either own or rent property, making this a significant asset or fixed cost. It is important that all necessary property documents are in place, available and up to date to allow buyers to consider issues such as security of lease, future costs and dilapidations if they choose to move.
Contracts: Properly drafted client and supplier contracts give a buyer an indication of future revenue and allow them to assess risk. If the company has key clients, are there appropriate written contractual arrangements in place? If not, can this be remedied ahead of the sale? If a contract is due to expire shortly, can it be extended or renewed ahead of the sale process? If the company uses standard terms and conditions, are these up to date and fit for purpose?
Constitutional documents: These documents outline key issues including a company’s incorporation, name, shareholder structure and rights. They are key to passing on ownership of a company, but surprisingly often have been misplaced or not fully and properly completed when the company was first established. This can significantly slow down a sale and is better dealt with ahead of the sale process.
The role of a legal professional
An M&A lawyer’s role includes working with selling business owners to identify and address these issues as early as possible, aiming to resolve them as far as possible prior to the due diligence stage of an acquisition, where they are more likely to slow down or affect the final structure of a deal.
Where risks do remain, they are often addressed through indemnities. An indemnity is a promise from the seller to reimburse the buyer if a specific issue causes loss after completion. The more uncertainties a buyer’s legal team identifies, the more extensive the indemnities required are likely to be. An M&A lawyer will liaise with a buyer’s legal team to negotiate and agree these.
The type of deal, and the identity of the buyer, can also affect the amount of risk a seller needs to take on and how this is structured.
For example, in a management buyout, a larger proportion of the purchase price is often agreed to be paid on a deferred basis, meaning sellers need to consider the risk of the buyer defaulting on payment, and whether guarantees or security are available to mitigate that risk. Conversely, you would expect fewer warranties and indemnities on a management buyout, as the buyers will have significant knowledge of the business.
Earn-outs are a type of deferred consideration where a portion of the purchase price is dependent on the company’s performance after completion. Mechanisms such as this can reduce a buyer’s risk but involve additional risks for sellers, as there is the possibility that post-completion decisions taken by the new owners may adversely affect this earn-out, and such provisions need careful negotiation to limit this risk.
Part two of this three-part Viewpoint series will analyse deferred consideration in more detail.
Getting advice early
By liaising with an expert legal professional at the earliest possible stage of a potential deal, selling business owners give themselves the maximum opportunity to take action to resolve issues before the sale process begins – and therefore minimise their risk and maximise their company’s value.
Paul Matthews has over 30 years’ experience advising businesses across the North West on corporate transactions, including sales and acquisitions, management buyouts, company reorganisations, shareholder agreements, joint ventures and partnership law issues.
To speak with Paul on a corporate or commercial matter, contact him directly at Paul.Matthews@whnsolicitors.co.uk.
