We're seeing a lot of companies, particularly within the life sciences and technology sectors, being purchased by larger organisations looking to expand their offering.
Through our experience of dealing with companies in an exit situation, we have recognised some common issues that can often cause delays and increase costs if they are left undealt with until the later stages of a transaction.
To address those issues we have established some top tips for you to consider when preparing your company for a sale opportunity.
1. You are only as good as your team
Get your team of advisors in place at an early stage. Advisors are often overlooked during the early stages of the negotiations as parties seek to keep costs down and deal with negotiations themselves. However, having financial and legal advisors in place throughout these early stages can assist you in obtaining the best and most tax efficient deal and ensure the most value for your business is returned to you. You may find yourself across the table from experienced purchasers who have done this many times over and have learnt over the years how to sell a proposal that may not be as desirable as it first seems when analysed in more detail.
Additionally, it's often the case that signed heads of terms, when scrutinised in a legal context, can be ambiguous or incomplete. This leads to negotiation down the road which could be avoided if legal advisers have the opportunity to comment on the heads of terms before they're entered into.
By getting your advisors in place early, you will be given the support you need to manage the transaction, whilst continuing to run the business.
TOP TIP: Get your team of advisors in place at the beginning of any discussions/negotiations, so that they can assist and support you with the transaction whilst you continue to run your business.
2. Corporate clean up
Once a deal has been struck and heads of terms are agreed, the purchaser will want to start their due diligence on the target company. This is the purchaser's opportunity to rummage through the target company's records to try and establish if the company has any "dirty laundry" before they pay out the agreed price.
Although a necessary exercise that occurs on all transactions, from a seller's perspective it can feel as though you're being criticised on how you've run the business to date and any significant issues that arise can result in re-negotiation or even stop the deal in its tracks. With that in mind there are a few areas where we often see problems arise that can, more often than not, be assessed and "fixed" quickly. Consider the following questions and address any concerns you may have with your advisors:
- Are your accounting records and statutory books all up to date and held by the company?
- Is all integral intellectual property owned (or licenced on suitable terms) to the company? Do you have the necessary documentation on hand to prove this?
- Is the intellectual property adequately protected? Has it been registered?
- Do you have executed and dated copies of all key contracts with customers, suppliers and staff?
- Have you taken the necessary precautions to comply with data protection legislation? Have you checked if you are required to register with the Information Commissioner's Office?
- Are your company’s website domain names registered in the name of the company?
- Do you have all the correct option paperwork in place? For example, with EMI options, do you have evidence that the EMI options have been registered with HMRC (there is no confirmation provided and so you need to take and retain a screenshot at the time of submission)?
- Have you got adequate records regarding any R&D tax relief claimed?
- Are all your tax returns up-to-date and filed?
- Are any non-executive directors (NEDS) being engaged through a service company?
- Are the NEDS being paid through the payroll?
Finally, get your records organised and downloaded onto a secure document platform so that you can easily provide access to the purchaser when the due diligence process kicks off.
TOP TIP: Fail to prepare, prepare to ... deal with lots of due diligence questions which can be time consuming, cause frustration and slow the deal down.
3. Don't forget the other guys
Although it's common place that the company directors and/or founding shareholders will take the lead in any negotiations with interested purchasers (and indeed this is encouraged in order to streamline the negotiation process), engagement with minority shareholders, optionholders and/or existing investor shareholder groups is often overlooked during a transaction and can cause issues down the line.
If you are dealing with these other shareholder groups, you will need to engage with them early and establish answers to the following key queries:
- What financial risk will the investors be willing to accept (if any)?
- Will the investors/minority shareholders/optionholders be expected to give any warranty protection to the proposed purchaser/investor?
- Will investors/minority shareholders/optionholders be seeking separate legal representation?
Are the minority shareholders/optionholders easily contactable and able to provide the necessary paperwork prior to the sale? Are your contact details with these groups up to date?
The answers provided to the above questions should be addressed. Otherwise there is a real risk that these other shareholder groups could cause delays or even de-rail a potential deal at a later stage.
TOP TIP: Speak to your legal advisers on how to balance progressing negotiations with the purchaser whilst keeping the other groups in the loop.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.