How To Maximise Value When Selling A Business

How To Maximise Value When Selling A Business

As a business owner you may have recently purchased or started a business with the intention of spending many happy, successful, years working to secure your future.

The success or failure of a business will depend on the investment of time, hard-work and money.

As solicitors we know that some people own very successful small businesses, some are less successful but survive, and others struggle to get off the ground.

No matter what level success of your business currently has, you should always ensure that you have all its affairs in order so you can command the maximum value for your firm when you do decide to sell it.

Else, based in Burton on Trent have an expert team of commercial solicitors, some with more than 30 years legal experience, that specialise in preparing businesses for sale.

They have outlined some key points that you will need to address if you intend to make a healthy profit when selling your business.

Shareholder Or Partnership Agreement

No matter whether your run a registered company or a limited liability partnership, we would recommend that you have a document in place that outlines all parties rights when your business is sold.

Depending on the structure of your business, you will need a shareholder agreement or a partnership agreement that outlines the level of return on investment due to each owner, shareholder, partner or stakeholder in the company when the company is sold.

These agreements should include;

• Pre-Emption Rights

• Exclusion Clauses

• Transfer Of Shares

• Binding Sale Clauses

It is far easier, and often cheaper, to establish this agreement when you’re starting your business not as an emergency when you’re attempting to sell.

Company Books & Records

In our experience many organisations fail to regularly update their company records, including shareholder and director registers, which can cause relationship and financial issues when they intend to sell the business.

For example, if a shareholder that is no longer in place at your firm remains on the records they may have a claim to receive profits from the sale.

Again, this is a straightforward issue to resolve before you sell your business but it can become an expensive problem that can affect your company’s value.

Contract Of Employment

We would advise any business owners that are looking to sell their firm to ensure that water-tight contracts of employment are in place before they sell.

If you do not have strong confidentiality clauses and binding restrictive covenants in place when you announce your intention to sell you could see employees setting-up in competition, soliciting your clients or other employees, and ultimately undermining the business.

You should also ensure that grievance procedures are in place and properly communicated to all employees.

If they are in place it is essential that the business follows these procedures. The sale of a business can result in a range of employee grievances, which can escalate into full employment disputes and tribunals. Else Solicitors can advise you to help you minimise that risk.

Employment disputes can cost businesses up to £100,000 including legal costs. A simple and cost effective solution is to insure against this risk by ensuring that contracts, processes and policies are in place.

Legal Issues: Dispute Resolution

All disputes and litigation issues should be settled before selling your business.

Furthermore, business owners that are looking to sell should make adequate provisions in their accounts to provide security to a purchaser that any on-going dispute resolution is funded.

Making these provisions prior to or as part of a sale will reduce the risk of litigation issues arising in when you are enjoying retirement or have moved on to pastures new.

Commercial Property

Before selling a business you should consider who is registered as the owner of any commercial property that the business uses.

It may be more profitable for the property to be owned either by the business, its owners, or even by a pension fund.

Else’s expert team of property solicitors can advise you on the best course of action to take to meet your objectives.

Intellectual Property

Intellectual property (IP) is a right over something unique that you have physically created. These rights exist, with or without registration, in written works, inventions, names, logos, trademarks, designs, and confidential information.

It is surprisingly inexpensive to register a trade mark and this can be one way of ensuring IP rights are protected for the business, adding value when you eventually intend to sell.

You should also ensure that your IP rights are protected in your contracts of employment and work agreements so your staff and customers cannot undermine the value of your business or its products and services.

Check Your Contracts

Before selling a business you should ensure you have checked all of its contracts, including supplier sale agreements, purchase contracts, and client contracts.

Our commercial solicitors are specialists when it comes to contract law. They recommend that you check all of your commercial agreements, paying particular attention to whether they comply with your standard terms and conditions.

You should also examine all the payment terms, duration of contracts, termination rights and liabilities in contracts with your suppliers or clients.

For example, long payment terms in your agreements with clients could adversely affect the business cash-flow, or alternatively a supplier agreement without adequate rights to terminate can leave the business trapped with inefficient or poor performing suppliers.

For a business in which the main assets are its contracts with its clients, it is useful to ensure that when business ownership is transferred that the contracts do not simply terminate.

Bad Debt

Bad debts (when the debt has been determined as unlikely to be paid off) are seen ultimately as a negative affect to the value of a business.

It is essential to mitigate the risk of bad debt by investigating the financial stability of clients and/or suppliers. Else offer client monitoring services to highlight potentially troublesome or suspect business clients. This can include requiring references, to requiring the latest or interim accounts.

Where concern is found, Else can advise and draft guarantees for the performance of obligations and specific liabilities for all future debt.

A pro-active approach to debt is imperative. Strong contractual provisions in your agreements should include; payment terms of 30 days or less, interest on late payment, ability to suspend on late or non-payment, and an ability to recover third party costs of recovering outstanding amounts. These can all help to manage and mitigate the risk of bad debt.

Woe betide those who leave the above issues to the time at which the business is sold.

After all, one of the biggest times in life for business owners is the time at which they sell their business. Only careful planning will ensure the best possible value of return at the sale of the business.

If you are selling a business and would like advice from our commercial solicitors please call on 01283 526200 or email info@elselaw.co.uk.