Selling a founder or family-owned business is a complex decision and it can be time-consuming and challenging but with thorough preparation and by being on the front foot, there is much more likelihood of a smooth and successful sale process delivering maximum value and minimising disruption to the business.
Thomas Plant, a Principal Associate at global law firm Eversheds Sutherland, offers five tips for potential sellers to consider when embarking on a sale process of a founder or family-owned business.
1. Prepare well in advance for due diligence: Unfortunately there is no way to avoid buyer diligence so it is best to prepare in advance. You will be required to provide a huge amount of information about all aspects of your business to preferred bidders. This can be very time consuming and also feel intrusive. Often, the wider organisation will not know about the potential transaction making it more challenging to gather the necessary information. Ask your advisors to provide tailored information request lists and work with them to collate the documentation well in advance in an electronic data room. A well populated and organised data room will result in a much smoother process and avoid unnecessary questions further down the track.
2. Proactively deal with diligence issues: If we are not undertaking vendor due diligence, we strongly advise our clients that we complete a health check on the key information being provided. This allows issues which could concern a buyer to be identified early and either be remedied in advance or a plan agreed as to how the issue will be presented and dealt with as part of the sale process. It is not uncommon for unknown diligence issues to lead to price reductions, additional buyer protection (indemnities/warranties) or consideration being deferred. This can often be avoided if you are in control of the process and not reacting to issues a buyer may discover in diligence.
Common legal diligence focus areas where we often identify issues include:
- Share capital: Are the business’ filings at Companies House and statutory registers up to date and consistent?
- Share buybacks: Has the strict statutory procedure been followed and can you provide the documentation to evidence this?
- Disputes: Are there any ongoing disputes or litigation which relate to the business? If there is, it is not necessarily an issue but you need to work with your advisors to make sure this is presented in the right way and at the right time.
- IP: Is all material IP owned and controlled by the business? It is not unusual for trade marks or domain names to be registered in shareholders’ names or for IP in websites to be owned by consultants or web designers.
- Contracts: Where is the business’ revenue concentrated and do you have appropriate written contracts in place to support this? You will also need to develop a strategy on how any contracts with termination rights on a change of control will be addressed.
- Employees and pensions: Are employees employed by the right entity, are their terms appropriate and could the business have any liability under a defined benefit pension scheme?
- Data protection: There are very few businesses which are fully compliant with the complex requirements of GDPR but this will often be a focus area for buyers. It is worth investing some time to ensure your business has taken the right steps towards compliance and that this can be evidenced.
3. Utilise W&I insurance: Warranty and indemnity (“W&I”) insurance is a product that prices the risk of the transaction and passes it to a third party insurer. In the past 20 years, W&I has gone from a tool of last resort to now being an integral part of many transactions. In a competitive sale process, we regularly see sellers use W&I insurance to de-risk the transaction and their sale proceeds, often securing a position of nil or very limited recourse. Your legal team will be able to guide you through the W&I process and engage specialist insurance brokers so that this can be built into the sale process.
4. Be aware of the regulatory environment: Regulatory oversight of M&A transactions has increased significantly over the last few years in a number of jurisdictions. It continues to be important for competition advice to be obtained at an early stage but, in addition to this, foreign investment regimes will also need to be carefully considered. Over the last few years, jurisdictions worldwide have introduced new foreign investment screening regimes or expanded existing regimes to enable governmental control of inbound investments into certain sectors. These regimes no longer only focus on the military and defence sectors and have become more wide-ranging and can apply to a transaction regardless of the parties’ turnover or the deal value. Early consideration of foreign investment regulations is prudent, as a filing could delay the timeline for the transaction, and failure to notify or completing prior to clearance could result in significant penalties.
5. Appoint the right advisors: Make sure you appoint the right advisors to partner with you as early as possible in the process. Select experienced advisors with a track record and who you believe you can work with.
Eversheds Sutherland’s global corporate law practices advise a range of clients, from some of the world’s largest corporations to growing and start-up businesses. Our team has more than 500 corporate lawyers in locations around the world, advising on mergers and acquisitions (M&A), initial public offerings (IPOs), takeovers, private equity, venture capital, debt and equity issues, fund formation, corporate reorganization, corporate governance and company secretarial.
Thomas Plant is an experienced M&A lawyer who acts for large corporates on complex cross border M&A transactions and regularly advises shareholders of large corporates on sale processes. If you require more information please contact ThomasPlant@eversheds-sutherland.com