Guest Article: Exit Readiness – Contractual Factors to Consider

Insights by Debra Martin, Partner – Geldards LLP.

Preparing a business for sale takes time and effort which has to be factored into every business owner’s timetable for an exit. This is because there are several strands which underpin the value of the business to a potential buyer. These strands take time to understand and fix or improve if the optimum exit value is to be achieved. This article focuses on the company’s contractual arrangements which can impact on a timetable for an exit.

Shareholder Agreements

The company’s contractual arrangements with its shareholders can impact on the timetable for an exit, especially where there are multiple shareholders or historic changes in share ownership. A well-written shareholders’ agreement and articles of association providing the ability to force minority shareholders to execute a sale is a valuable leaver to have in managing the timetable for an exit.

A comprehensive suite of documents and share registers which document all of the historic transfers of shares or buybacks which can withstand the scrutiny of the buyer’s due diligence will also be important. Fixing any failed buybacks or share transfers is incredibly high risk, very time-consuming and expensive. The buyer will not proceed with its purchase if these things have not been done correctly.

Transferring shares between spouses/children or family trusts presale can be tax advantageous, but there can be certain hold periods which are a pre-requisite to the tax benefit. These too need to be factored into the timetable for an exit.

Property Arrangements and Trading Premises

The company’s property arrangements can also have an impact on the timetable for a business owner’s exit. Buyers often want to buy the business on its own and don’t want to pay for the value of the freehold trading premises if the company owns it.

If the company leases its trading premises, it should have a schedule of conditions which determines the liability it should be carrying in its accounts for the cost of the  dilapidations it has to pay if and when it ever leaves the property. The company will need to be able to show it has security of tenure in its lease to avoid the risk of being unexpectedly ejected from the property by the landlord.

It will also be beneficial if the company can terminate the lease early in order to be able to relocate the business if it needs to expand. Dealings with landlords, agents, surveyors and the Land Registry can absorb more time than you think. It is definitely important to factor in early any required changes to the company’s property arrangements in any exit timetable.

Commercial Contracts

The company’s commercial contracts are of paramount importance in the context of an exit. Being confident that the company owns or has the right to use the assets it needs in the business (including data, intellectual property as well as the tangible assets) is key. With multiple third parties on the other sides of these contracts, it will certainly take time to carry out the analysis, let alone improve the position of the company over time.

It may not only be the terms of the contracts which need to be improved but the processes which are used in the business in order to enter into these contracts, whether they be supplier or customer contracts. Process design changes and the implementation of those changes can take time. Regulatory compliance is crucial too and applications for licenses and consents from public bodies is seldom a quick process.

The company’s contractual arrangements with its employees may not be thought to hold much value to a buyer but they do. Robust protection such as IP assignment clauses and robust enforceable restrictive covenants for senior members of staff is key to showing the buyer that the value it is being asked to pay for can be transferred. Making incremental improvements to any terms with employees can be disruptive and needs to be handled carefully and not be rushed. It is not something which a company wants to be doing in the run up to an exit

Geldards is a multi-disciplinary Firm with a passion for supporting business owners with all aspects of growing and developing their business wherever they are in their timetable for an exit.

VISIT: Geldards LLP
ABOUT: Debra Martin