Preparation is the key to success with most things in life and is particularly important when you are trying to attract a buyer for your business. This is because any potential acquirer will almost certainly want to carry out pre-purchase checks to ensure that your organisation is legally and financially sound, and it is not saddled with unacceptable debt or unquantifiable liabilities.
The process of carrying out these checks is known as ‘buyer due diligence’ and, as Tom Bodkin, one of our corporate team explains ‘it is the outcome of this process that will usually determine whether or not the proposed purchase of your business will proceed. It will also influence the final price that the buyer is willing to pay.’
Given its pivotal importance, it is crucial that buyer due diligence is handled with care and that wherever possible you appoint an experienced solicitor in advance of any sale being agreed. They can help you to get ready for the process and will help to head off any potential problems.
‘Regrettably, many business owners delay consulting a solicitor until the terms of a proposed sale have already been agreed and the due diligence process is about to begin. This can be a false economy, as there may be issues within the business which concern the buyer and which lead them to reduce their offer, some or all of which could have been addressed had a lawyer been consulted just that little bit earlier,” comments Tom.
Why it pays to seek legal advice early
A lawyer who is used to dealing with business sales will have a good idea of the sort of enquiries that a buyer is likely to want to make and the issues that could set alarm bells ringing, provide a negotiating point, or even put your proposed sale at risk of collapse.
By seeking legal advice at an early stage, you can tap into this insight and use it to your advantage. You can prepare for the due diligence process, for example by:
Eliminating potential risk factors
Of particular importance is the advance warning that a lawyer can give you about potential problems within your business, which might lead to a prospective deal being undermined or a previously agreed sale price being substantially reduced.
For example, it may be that not everyone working within your business has a written contract of employment, or that not all senior personnel are bound by a restrictive covenant preventing them from working for a competitor for a set time after their employment ends. This may be off-putting to a potential purchaser who will be concerned about continuity of key personnel and the risk of employment disputes which would be difficult and costly to resolve in the absence of appropriate contracts.
A lawyer who is instructed before due diligence takes place could help you to sidestep this issue, by supporting you to consult with employees and senior personnel to ensure that the required documentation is put in place and on mutually acceptable terms.
Likewise, a lawyer could also help you to address:
Areas of your business that are likely to be scrutinised.
While every business sale is different, the key issues that most buyers will want to investigate and on which early legal input will usually be required include:
Your buyer will also want to investigate and understand the nature of any actual or prospective litigation risks that you may face. For example, as a result of a customer threatening to sue you for breach of contract, a former employee claiming that they have been unfairly dismissed, a competitor alleging the unlawful poaching of staff or a regulator giving notice of their intention to launch an investigation which could result in you being fined or having an important permission or authorisation revoked.
For further information and advice on the sale or purchase of a business, and specifically on due diligence related issues, please contact Tom by email at [email protected]
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.