What lies beneath… preparing your business for sale

When selling a business, you naturally want to achieve the highest price possible but there are a number of factors especially around contractual liabilities which could affect the final value. Understanding what they are and dealing with them before the sale can help you to achieve the best price possible, rewarding you for your years of hard work.

The type of sale may also impact on contractual liabilities.  A share sale means the company remains the contracting party to all existing agreements.  The buyer will be buying the shares in the company.  The company remains the owner of the business and all its assets and liabilities.  Accordingly, the buyer will indirectly acquire all those historic liabilities unless there are specific provisions in the sale documentation effectively imposing those liabilities on the seller.

If the business is being sold as an asset sale, then the buyer may choose only specific assets and contracts as part of the purchase.  The liabilities associated with the business will remain with the seller unless there are contrary provisions in the agreement.

Before the sale is negotiated, the seller should carry out detailed due diligence to pre-empt any issues which the future buyer’s own due diligence process will discover.  There can be a variety of issues which may come up around contractual liabilities. It is important to check all commercial contracts for provisions which would impact the sale. On a business sale, a prohibition of assignment would prevent a sale of the contract. On a share sale, a change of control provision would allow the contracting party as a result of the sale.  These issues would affect the purchase price.

Other contractual issues of interest to a buyer include auto-renewal, minimum purchase commitments, exclusivity clauses affecting future activities, price increases, indemnities, guarantees, warranties, limitation of liability and termination provisions.

Be aware of any personal guarantees which may have been given by directors for bank loans, lease and hire purchase agreements or commercial property tenancies.  The seller should insist on these being released by the buyer.

Where there is an asset rather than share sale, there may be obligations under the  Transfer of Undertakings (Protection of Employment) Regulations 2006 affecting both the seller and buyer.  Due diligence should look to identify commission and bonus payments or profit-share arrangements, redundancy or pension obligations as well as restrictive covenants on key members of staff who may have left or want to leave the business.

Before any sale it is vital to protect the intellectual property of the business such as trademarks, domain names, licences including those created by third parties and where ownership has yet to be assigned correctly.

Checklist

List all contracts and correspondence around them and review for any variations required.

Understand which need the consent of the other party the business is contracting with and consider seeking the necessary consent ahead of the transaction.

Identify any hidden liabilities within each and if they could trigger any future claims after the sale.

Review whether you would be willing to offer an indemnity or warranty (and the likely cost) to cover any of the risks identified. To find out more about preparing your business for sale, get in touch with our team today.