Today’s market for buying and selling businesses in the UK is geared very much in favour of sellers, with trends reflecting a significant drop in the number of quality businesses for sale. In times like this, it can be tempting for sellers to sit back and assume a passive role in the process.
However, in both buyers’ and sellers’ markets, taking a back seat will inevitably lead to missed opportunities. If you assume that the best buyers will necessarily walk through the door and give you an optimum price for your business in whatever condition they find it, you are setting yourself up for a non-sale at worst and a sale at below market value at best.
So how do you avoid this situation? Essentially, you need to put your company in the strongest position possible. And to do this, the one piece of advice we hear within our network again and again, is to plan everything. And this is just as true now as in a buyers' market.
Just how important this preparation is immediately clear when you consider previous successful business sales. Ed Macnair, founder of SaaSID, grew his company from initial launch in late 2012 to a sale within just 14 months, delivering a five-fold return for investors. Ed spoke to us at the time of the sale in November 2013 about how he achieved such a high return in such a short period of time: “I think from the day we founded the business we built it and we built it to sell. i.e. we made sure we documented every single process, every single procedure. We made sure that our IP was well protected from the get go. We made sure that our contracts were rock solid.
“Because I knew that at some stage somebody would have to conduct due diligence on this business and I needed to make sure that that was as easy as possible and as transparent as possible.”
As Ed confirms, there are a lot of different aspects to consider when it comes to planning a sale. But let's narrow this down to an often overlooked but essential value-adding area of business: commercial contracts.
Contracts in which Your Company is the Customer
Even within your contracts, you will find numerous areas to deal with, many of which business owners are too busy to notice during day-to-day operations. It might be simpler to start by addressing contracts in which your business is a customer, you simply want to tidy things up to make the company as appealing as possible when potential buyers come to do due diligence.
Firstly, it's broadly seen as wise to avoid contracts with minimum volumes where possible as these can make a buyer wary should they see themselves as potentially failing to meet strict purchase obligations. On the other hand, contracts in which you are tied to a single supplier can also throw up warning signs to buyers who might worry that the contractor would struggle to meet an increased level of demand at a future date.
As in any aspect of a business purchase, financial matters will need to be addressed as a matter of importance when you come to review commercial contracts. If you're clearly not getting the best price from a supplier or you've been pushed into short or non-negotiable payment terms, doing something about it before you sell the business just adds a little something extra to increase the company's 'kerb appeal' to buyers.
Legal issues are always going to be important and, daunting though they are, it will do you no good to ignore them when it comes to reviewing your contracts ahead of a sale. Buyers will want to know about which country the contract relates to and whether or not claims can be brought in jurisdictions outside of the UK; if you have taken out contracts of this nature, they can prove very expensive should any claims emerge in the future and are likely to throw up a red flag to any buyers undertaking a thorough due diligence procedure.
While you're addressing the legal side of matters, it's worth checking the liability clauses to check if any suppliers have limited liability for breach of contract or negligence. In many cases these issues can be negotiated by legal experts, it's mostly a matter of doing it for the potential buyer to make their lives simpler should they go ahead with the purchase, and, therefore, making your business all the more valuable.
Contracts in which Your Company is the Supplier
The first point to review in contracts you're providing is the termination clauses. A starting point for most due diligence in this area will be to address whether or not customers have a legal option to terminate a contract upon a change of ownership or control of your business – an obvious problem for anyone looking to buy your business - you can then move on to checking that there are no clauses in a contract that could see a future owner lose out for something simple like a missed deadline.
Then, just as you checked the liability clauses of contracts in which you are the customer, you need to assess your own customers' contracts with you and ensure that you have capped liability to prevent any future buyer from the massive financial risks involved in unlimited liability.
On a more positive note, one of the best things to do when reviewing your customers' contracts ahead of a sale is to ensure that the value your business provides is reflected on paper. Implementing clauses that allow for future price increases; providing licensing or ownership for Intellectual Property (IP) that might arise from a client's contract; preventing a customer from poaching any of your key staff working on the contract and addressing the standards of service to ensure they reasonably reflect the efforts provided and expectations given, will all help to both reflect the existing value of your contracts and allow buyers to see where they can potentially increase earnings in the future.
The contracts you have with your company are an essential part of its value. The list of preparations when it comes to selling your business is endless, but don't neglect a review of this area; it's one of the most likely to improve your returns when you come to getting quotes and bids in for your business.
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