In recent months there have been a considerable number of business buy-outs in the UK in part driven by the technological advances in sectors where online services are key to growth. This has been true of travel businesses, for instance, but also of businesses in the wider retail sector generally.
Business owners, particularly those with operations online or with e-commerce components, who are looking to sell sale their company or to acquire competitors as part of their growth strategy, should be well prepared to implement these strategic decisions. But what are the key things they should be aware of?
Whether they are contemplating bringing in an external, minority investor or considering the sale of a controlling stake or even the entire share capital of a company, there are some fundamentals that owners should be giving some advance thought to in order to give themselves the best possible chance of completing a successful transaction at the optimal valuation.
It is by no means uncommon for companies, particularly those of the owner-managed, high-growth variety, to have committed all their time and energies into running the business and only minimal resource to ‘housekeeping’. The result can be a company that to an outside investor looks disorganised, gives them grounds for nervousness or concern and will invariably prolong the due diligence process.
Corporate advisers will play a key role in ensuring that the company is taken to market at the right time, in the best possible light and that it is brought to the attention of the right kind of buyer or investor. Advisers will also help to ensure that the company and its management are prepared for the sale process and that the business is well-organised and presented as such. Being prepared in this way will pay dividends on a number of levels.
Time for a health check
Once the decision has been made to bring in external investors or put the company up for sale, management would be well advised to invest some time and effort in carrying out an objective audit of where its ‘weak points’ are so that it can take steps to rectify any issues or think through how it can deal with them in good time before inviting a third party to commence its legal and financial due diligence. Waiting for the transaction to get underway before resolving the problems is likely to cause delays to the timetable which in some circumstances can be fatal to a deal.
The health check is a process that a company’s lawyers and financial advisers are well placed to assist with. Such advisers should be experienced in understanding what it is that a buyer or investor will be looking for and can therefore help a company anticipate problems, come up with solutions, or think through and advise on how and when to present such issues to a buyer.
From a legal perspective, the company’s lawyers will pay particular attention to the items that are fundamental to the value of the business. Where a business has a large emphasis on intellectual property, such as a technology company or one with a significant online offering, this would involve analysing the company’s IP portfolio and establishing whether it has all the requisite licences and whether there are trademarks or patents that have not been registered but can and should be.
In the case of companies that have significant commercial supplier or customer contracts, such as those in the retail sector, checking that material contracts are fully executed and identifying whether or not they have change of control clauses would be a key focus. From the financial perspective, this preparatory phase might involve examining a company’s internal financial controls and ensuring that processes are in place to enable the preparation of reliable monthly management accounts and budgets.
It is important to remember that a buyer or investor that is carrying out due diligence will be doing so in order to confirm that the valuation it has placed on the business and therefore anything that it discovers which can undermine its valuation will hand it the initiative, strengthening its bargaining position in future negotiations and giving it reason to re-evaluate the price it is prepared to pay.
Managing shareholders, stakeholders, employees
Taking the time to anticipate any hurdles that other stakeholders in the company could place in the way of a transaction is also a worthwhile exercise. The influence and disruptive potential will depend on the size and form of an investment but having a clear feel for the expectations, views on the company’s strategy and prospects and, if necessary, building consensus amongst them is an important part of the process. Understanding the terms of the company’s articles of association and any shareholders’ or financing agreement is also crucial as they will dictate the rights and obligations of stakeholders and may influence the way in which any third party investment is structured.
Whatever form the transaction takes, the potential for uncertainty and distraction amongst managers and employees should not be underestimated. A buyer or investor’s due diligence process can be invasive, time consuming and will detract from focus on operations, hence the benefit of being prepared and dealing with potential diligence issues ahead of time. Proper thought therefore should always be given in advance to the extent to which staff are to be engaged in any process and how they can be managed most effectively.
Once a buyer or investor has become fully engaged, there are of course a number of other areas of focus and challenges that require thought and attention in the context of a transaction, however, giving these elements of the preparatory phase due consideration sufficiently far in advance will set an owner or manager in good stead for the next phase of their growth story.