Avoiding the pitfalls of selling an adviser business
Lawyer Alastair Manning looks at the pitfalls of selling a business and outlines, in his expert opinion, how to avoid them...
There has been considerable consolidation in the adviser market over recent years and sales of businesses have been on the increase. Selling your business can be a stressful time, but there are a few steps you can take, both before and during a sale, to ensure the transaction proceeds as smoothly as possible.
Below we look at some of the common pitfalls that can trip up a sale, how to avoid them and the consequential delays or worse, the collapse of the transaction.
Preparing for sale
To ensure your sale proceeds efficiently, there are several areas which you will need to prepare. Having some of these ready in advance of the sale will ensure that when your buyer raises enquiries, as part of their due diligence, you are ready and will present an organised and professional view of your business to the buyer. Your buyer will raise due diligence enquiries across all aspects of your business and will be even more thorough if it is a share sale.
Ensuring you have the right information to hand will allow you to provide material responses which will both speed up the transaction by reducing the need for follow-up enquiries and instil confidence in your buyer that you are not trying to hide anything.
Buyers will request up-to-date accounts, as these are what justify the valuation that has been agreed at the heads of terms stage. Completion accounts are prepared to value the assets and liabilities in a business on the day of completion of sale and can lead to an adjustment of the purchase price. Ensuring your accounts are up to date helps to limit the range of the adjustments made at completion.
Similarly, warranties and indemnities are a key part of the disclosure process during a sale. These refer to promises about facts (warranties) and cast iron guarantees to cover payment for certain events (indemnities). Your lawyer will advise you carefully on how to handle these as they are common sticking points and sometimes cause business sales to fail if not skilfully dealt with. It is very common for sellers to get to a stage of a sale where they start to ‘agree to anything' to ensure the deal closes. However, the legal advice you're given at this stage will be invaluable. It is worth taking your time over these key negotiation points as breach of warranty and/or indemnity claims later down the line are not uncommon.
What are you selling, and what is the buyer getting?
It's easy to say I'm selling my business, but what does that really mean you are handing over? Mostly it boils down to two things:
Existing clients
If your business' value is intrinsically tied to the clients and contracts you hold, then you will need to prove that you can novate (transfer) those contracts to ensure that the sale of your business won't result in the termination of those contracts and client relationships. Some contracts may contain change of control provisions, which require you to notify (or obtain consent from) the other party of the proposed change of control of your business. This process could take weeks or months, so it is worth reviewing existing that are key to your business as soon as possible.
Intellectual Property
It's vital that you have documentation proving that you have the intellectual property rights to any business logos, designs, coding, or software that your business relies on. Simply commissioning something does not make it yours, unless you have expressly applied for and been handed over the rights.
Other areas you will need to address are:
Restrictive Covenants
Buyers are, unsurprisingly, likely to want to prevent you from setting up a competing business or joining a competitor in the immediate future. Restrictive covenants can last anywhere between 3-24 months (potentially up to 36 months if know-how is being sold) and so it is really important that you plan for this and ensure you are able to carry on earning a living, if applicable, or have a plan in place on how to manage your finances during this period.
Employees
Employees are nearly always what makes a business and it is important you keep them informed along the way as to how, if at all, they will be affected. Sales of businesses often trigger resignations, redundancies and even employment claims. It is important to prepare for this, comply with TUPE requirements and to have a plan in place to reassure staff and minimise potential disruption.
Corporate filings
While it is often one of those administrative tasks that is overlooked, it is actually a legal requirement for all companies in England and Wales to create and maintain a statutory register. A buyer will always require a copy of the update to date statutory register on completion, so it's vital that this is prepared well in advance if it isn't regularly maintained to avoid any unnecessary delay.
And finally, limiting your liability
Whilst you can't ever plan for every outcome and unforeseen circumstances are a part of life, you can take steps to ensure you don't leave yourself wide open to potential liability claims.
These types of claims can take the form of post-completion claims from former employees, customers or a creditor who has been forgotten about during such a busy period of the business. Your lawyer will be able to negotiate, on your behalf, financial limits for your potential liability and put in place time periods in which a potential claim could be pursued.
While there are undoubtedly pitfalls to negotiate, ultimately, when selling your business if you are properly prepared you will have a much greater chance of completing the sale to both parties' satisfaction.
Alastair Manning is a solicitor at Devonshires
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