For many business owners in the sector, 2022 will involve securing that first (or further) investment – or it could be the year that a business is passed on.
Working towards a successful investment or sale can be a stressful process, likely to put a strain on the business itself. Whether an external investment or sale is a priority or something being considered, thorough early preparation is vital and will undoubtedly alleviate pressures further down the line. This is particularly the case in the property sector, where any title or other issues that arise can often be harder to rectify with HM Land Registry, the landlord or other third-party involvement, raising the potential for increased delay and costs.
First steps
It is crucial to put the right advisory team in place at the outset. Solicitors and other professional advisers should have some sector familiarity, they should get to know the commercials and operation of a business and they should understand its short- and longer-term goals.
Working with accountants, financial planners and other advisers from an early stage is vital. Whether preparing for a sale or seeking an investment, valuing the business accurately means that vendors should neither be short-changed nor see the business left behind. Owing to the impact of the pandemic, be prepared for the inevitable questions from potential buyers or investors about business impact. Some business owners may prefer to wait until their business has returned to pre-pandemic growth. However, it may well be that a business has bounced back quickly or did not suffer any impact.
If planning an exit, a vendor should consider their personal tax situation (and what tax reliefs are available) in addition to working out when it would be prudent to leave the business in terms of achieving personal finance goals and short-term cash flow.
Employees are likely to be crucial to the success of a business and will be vital in securing an exit or investment, since the buyer or investor will be banking on the continued performance of staff. Consider whether to lock in key employees with financial incentives such as share options. Strategically, decide when to bring senior employees into the circle. The timing of such disclosure is important: too early and this may cause unnecessary anxieties as the key terms of the transaction are not yet known; too late and trust and confidence relationships with the management team may be undermined.
Housekeeping
Prior to opening up a business to due diligence examination, legal and financial advisers should conduct a due diligence exercise on the business as a priority. Addressing any red flags prior to a due diligence process has a number of key advantages, including:
n The number of issues to be discovered by the buyer’s or investor’s advisory team is likely to be greatly reduced, increasing the likelihood of achieving preferable terms and price. Years of hard work in the business could be undone if significant issues are exposed, eroding its value.
n Nobody wants to be forced onto the back foot during negotiations, wasting valuable time fixing issues that need not persist. Addressing red flags will alleviate time pressure and will focus minds on getting the deal done.
n Fixing significant or even nagging issues will leave a business in better shape going forward, even if the deal collapses (which can happen for any number of reasons). An added bonus is that any professional fees incurred may justifiably be charged to the business.
The due diligence process
Common issues often crop up in due diligence, which can often be easily resolved if discovered early. Examples include:
n Gaps in document coverage. Do key documentation and records (for example, title deeds, leases and licences), including any originals, proving ownership/right to occupy property exist? Ensure that documents are complete, signed and dated properly. If gaps emerge, take steps to ensure that the necessary documentation is in place.
n Landlords should complete an audit to ensure that business compliance is in order and up to date. For example, is the documentation showing that tenants’ deposits are protected in a licensed government scheme available? Were energy performance certificate assessments carried out on rental properties? Is data protection compliance in order and up to date?
n Mortgages and facility agreements are likely to be valuable assets of the business and could be subject to “change of control” clauses. Such provisions can cast doubt as to whether a contracting party might terminate its relationship with the business in the event of a sale/significant investment. Audit key contracts to identify these clauses early and put in place a strategy for obtaining any necessary consents. To the extent that mortgages and debentures are in place, check that these charges were filed correctly and in time at HM Land Registry/Companies House.
n Employees are likely to be a key asset of the business; some may have never been issued with an employment contract, or such agreements may have been inadequately drafted. Check to ensure that employment contracts contain robust and enforceable restrictive covenants guarding against the risk of competition and ensuring non-solicitation of customers and staff. Check too that employees are on sensible notice periods. Issue new terms if necessary and, if consultation is required, start that process early.
Key takeaways
If you are planning for an exit or investment in 2022, put the business on a solid foundation to achieve the best possible deal. Put a legal and financial advisory team in place early, arrive at a sensible value for the business, plan for tax and act on the results of housekeeping. Undertaking thorough preparation will be well rewarded.
Simon Stone is an associate in the corporate team at Goodman Derrick LLP
