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How to prepare your business for sale or investment

Written by James Lyons on Monday, 03 February 2020. Posted in Investment, Finance

Preparing your business for sale or investment can seem like a monumental task, but it need not be if you plan in advance

How to prepare your business for sale or investment

Preparing your business for sale or investment can seem like a monumental task, but it need not be if you plan in advance

Seeking investment from others or looking to cash out by selling your company are all part and parcel of being in business. While this is the case, many entrepreneurs fail to prepare their business properly for these eventualities. When a potential investor or buyer is interested in a business they will naturally want to undertake some due diligence and open up the books. This is where many owners fall short as they naturally focus on the day to day running of their company while the legal and financial housekeeping falls down the priority list. This makes preparing for a sale or investment a huge task, when it need not have been with a bit of forward planning.

Common mistakes

A common error that business owners make is simply not having formal or correct documentation in place, or having it but it not being up to date.  A common omission is when a business owner wants to sell shares in a company and the buyer wants to view the register of members to verify who the current shareholders are. It is noteworthy just how many companies have never put together a share register as they have never needed to provide it to anyone. Company secretarial registers and housekeeping don’t tend to engage or excite many entrepreneurs, but it’s something they need in place.

Another area where businesses often get caught out is when it comes to trading contracts. A number of day to day transactions, including regular dealings, may take place over email correspondence and the extent to which formal arrangements are put in place can depend on the nature of the relationship between the parties. Any buyer or investor will want to look at the key contracts and their current or updated terms and conditions without sifting through multiple items of correspondence. They will want to be able to see the contract is formalised and robust, that it is in the correct name, for example in the company’s name rather than in the name of one of the individual directors or shareholders’ and that the terms are clear and up to date.

Frequently, owner-managed businesses also overlook other forms of contract such as employment or consultancy agreements, either for themselves or close associates.  Buyers or investors will be seeking clarity as to the terms upon which key individuals are engaged and remunerated by the business.

Businesses should also ensure they have all proper registrations in place; these may include registrations to help enhance or protect the value of the business such as intellectual property rights like a brand name or design. Many business owners will have this on their to do list, but for many that’s exactly where it stays, on the to do list.  Other registrations may be required by law, for example data protection, depending upon the nature of the business.  As with contracts, it is also important to ensure that all relevant registrations are in the name of the company, rather than in the name of one of the directors.

Opening your books

If you are trying to attract a buyer or investors you will want to impress them with the professional nature of your business. As a result, the best way to do that is to have all paperwork in order before you open up your books. To make sure this is the case it is advisable to engage a legal professional early on in the process so that they can give you a due diligence checklist of items they would expect a prospective buyer or investor to request. This will ensure that your lawyer can pre-empt any potential gaps or problems. I would always urge businesses to do this before they open up their books to a buyer or investor, as having everything in order at the outset will impress and increase your chance of securing the investment or sale that you need. 

Apart from the legal housekeeping it is crucial that all financial accounts and records are correct and up to date, supported by well-substantiated business plans and financial projections. Naturally, financial investment is driven by the finances. It is all about getting your accounts up to date with sufficient detail.  

Business owners should also have an idea of the value of their business before they seek a buyer or investor. They shouldn’t wait for a buyer to offer them a sum. When you sell your house you would get an estate agent to value it before putting it on the market and it’s the same with a business. Any valuer will want to see the accounts, business plans and projections so business owners should have all of that ready for their own advisers or valuers before providing them to third party investors or buyers. The housekeeping isn’t just the legal side of things, it is the financial side as well.

Be prepared

In an ideal world, entrepreneurs would keep all of their paperwork, contracts and registers up to date and neatly filed away. However, whilst the increasing use of virtual data rooms and cloud storage can help to facilitate this exercise and bring some discipline to it, in reality the intense nature of running a business and making it a success means, for many, housekeeping is low down on the priority list. While this is understandable, business owners should keep an eye on the long game and their ultimate goal. If you start getting your business ready to open the books at an early stage you won’t have such a big mountain to climb further down the line.

About the Author

James Lyons

James Lyons

James is a corporate lawyer with national law firm Devonshires. He has extensive experience advising on all aspects of corporate transactions and joint ventures, having acted for UK and international clients including start-ups, SMEs and listed PLCs together with clients in the public sector. His expertise also includes managing large corporate transactions and joint ventures in the real estate sector for PLCs, Registered Providers, private investors and international funds. James trained at magic circle law firm Allen & Overy before moving on to Olswang. More recently, James has been a corporate partner at both Trowers & Hamlins and in the London office of Ashfords prior to joining Devonshires in September 2016.

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