The best time to prepare your business for sale is before you need to sell

Whether you are planning to sell in the next 12 months or the next five years, taking steps now to prepare your business can help maximise value, reduce transaction risk and make the process significantly smoother when the right opportunity arises. In this briefing, partner Thomas Clark and legal assistant Mark Norman explain the key steps business owners can take ahead of a sale, which may also help reduce the level of professional fees incurred during the transaction process.

One of the first things a buyer and their advisers will examine is how well the business has been managed from a corporate governance and record-keeping perspective. Issues that often emerge during due diligence include:

• missing or incomplete statutory records

• historic share issues and transfers that have not been properly documented

• Companies House discrepancies or missing filings

• poorly maintained board or shareholder records

Whilst these issues are often fixable where there is time to do so, if they arise at the time of a sale they can create delays, increase costs and raise concerns about how the business has been run. A business that is well-organised sends a simple but powerful message to a buyer: this is a company that has been professionally managed.

Many growing businesses operate for years without revisiting shareholder agreements or ownership structures. However, when a sale process begins, historical arrangements can quickly become a source of difficulty. Questions to consider include:

• are shareholder agreements still fit for purpose?

• are drag-along and tag-along provisions up to date?

• do all shareholders have aligned objectives regarding a future sale?

• are there any minority shareholders whose interests may complicate a transaction?

• has comprehensive tax and accounting advice been sought in respect of shareholdings?

Addressing these issues well in advance can help avoid difficult negotiations at a critical point of the sale, and where it involves tax, could increase tax efficiency ensuring that shareholders retain as much of the proceeds as possible.

Business owners often refer to their largest customers as a strength. However, a buyer may see them differently. If a significant proportion of revenue comes from one or two customers, the buyer's perceived risk may increase dramatically and this can affect valuations.

A concern that may arise is what happens if that customer leaves following completion? Businesses that can demonstrate a diversified customer base, long-term contractual relationships and recurring revenue streams are often viewed more favourably by potential acquirers.

Reducing customer concentration risk is rarely a quick exercise, which is why planning ahead is so important.

Founder dependency is one of the most common issues encountered in owner managed businesses. Many founders are deeply involved in:

• key customer relationships

• strategic decision-making

• operational delivery

• business development

Whilst this may have been instrumental in achieving growth, it can become a concern for prospective buyers. The more a business relies on its founder, the greater the risk to a buyer following completion. Developing a strong management team, delegating responsibilities and documenting key processes can significantly enhance both value and attractiveness to buyers.

Retaining talented employees up to and following a transaction is often critical to preserving value. If key members of the management team are likely to leave in the run up to a sale or thereafter, buyers may view the acquisition less favourably.

Appropriately structured incentive arrangements can help align the interests of senior employees with those of shareholders and encourage long-term commitment to the business, it can also make it easier to bind senior employees into the business after a sale.

When implemented effectively, incentive structures can create a stronger management team and a more attractive business from a buyer's perspective.

Perhaps the most valuable exercise for any business owner considering an eventual exit is to step back and view the company through the eyes of an acquirer. Ask yourself the following questions:

• would I be comfortable investing in this business?

• are there any avoidable risks that could affect value?

• could the business continue to thrive without its current owners?

• is the management team capable of driving future growth?

The businesses that achieve the smoothest transactions and strongest valuations are often those that have spent years preparing for the opportunity rather than months reacting to it.

Selling a business is rarely just a legal transaction. It is often the culmination of years of hard work, investment and ambition.

The good news is that many of the issues that can delay, disrupt or reduce value in a transaction are identifiable and often fixable well before a sale process begins.

At Russell-Cooke, we can help prepare a business for sale long before the transaction begins. We can undertake reviews of statutory books and records, look for issues amongst due diligence, and help put employee incentive schemes in place.

Thomas Clark is a partner in the corporate and commercial team, advising clients on a wide range of matters with a main focus on acquisitions and disposals. Mark Norman is a legal assistant also of the corporate and commercial team.