Preparing to sell your business

January 22, 2008

Plans to sell businesses have been influenced by the proposed changes to the capital gains tax regime. When considering a sale of your ebusiness, one part of the process will be a review of the legal position of your company. The purchaser will want to know that there is no unquantified risk in the key areas of your ebusiness before proceeding.

When there is more than one interested party, the normal procedure is for the company to set up a data room containing the important legal and financial documentation. This is made available for review by potential purchasers. The use of material in the data room will be subject to a set of rules including non-disclosure agreements. These agreement is also important in terms of respecting the provacy of individuals such as your employees.

You will need to plan ahead and have completed a review of your business in good time before the time of compiling the information for the data room to avoid any problems arising at the last minute that may jeopardise the deal. But what sort of problems are common?

A typical problem area is employment contracts. These need to be reviewed for compliance with legislative and case law developments. Do the contracts include restrictive covenants for key employees with sensitive information about your company and/or specific knowledge about your business? If the restrictive covenants were drafted say, three years ago, has the law changed so as to render them unenforceable? This would leave your customers and goodwill open to attack by former employees. How long will you need to re-negotiate restrictive covenants with the relevant key employees?

Another area where there may be gaps in legal protection is intellectual property which is particularly important for information and technology companies.  Where website designs and logos are an important asset, you need to have a written assignment of the design rights from any consultant or third party involved in developing the design. If this has not been done, a third party may own part of your assets and you may be unable to prevent that part of the design appearing in a competitor’s product or on a competitor’s website. This kind of issue can be a common problem where a business which started as an owner/manager or partnership was later transferred to a limited company.

There is always a risk that the company may face claims post sale. This can be reduced by reviewing the obligations and liabilities of the company under the contracts entered into with suppliers and customers. Warranties and indemnities given to third parties should also be checked to assess how onerous the obligations are and also the potential liability of the company that may arise pursuant to the warranties and indemnities it has given. Terms and conditions should be checked to ensure they will not expire or require renegotiation just as a new owner takes control. It may be necessary to terminate contracts that might trouble a potential buyer or that damage the company financially or serve little purpose. All trading - whether online or otherwise, business and other arrangements with third parties should be put in writing where possible. The company should ensure that all contracts are signed and dated and that any amendments or variations are documented and formalised.

Where business partners decide to go their separate ways at an early stage of a company’s development, the company often buys the departing shareholder’s shares. There are a number of formalities to be followed in this process. A failure to comply with the formalities may mean that the purchase is capable of being declared ineffective and the former shareholder restored as a shareholder. In this scenario you will need to approach the former shareholder to get him to sell to the company the shares which you thought had already been sold. Will you be able to persuade the shareholder to accept the same price for his shares?

Whilst some of these problems can be rectified more easily than others, they will almost all lead to a delay in the transaction. The delay may prove fatal if the purchaser or investor finds an alternative target for its interest during this time. Many of the typical problems can be averted by the company putting in place a legal risk management plan. Where a plan is not in place, a company contemplating a sale or share offering should conduct an early review of possible problem areas to prevent complication or disruption after the sale or offering process has begun.

Related pages:

Corporate more

Tax and Incentives more

Technology, Media & Digital more

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