JOANNA: Hi, it’s Joanna Oakey here and welcomeback to The Deal Room podcast! Today, we’re discussing the legal elementsin preparing for the sale of a business.
This area is relevant not only to businessowners and managers of businesses gearing up for exit, but also for accountants, brokersand other advisers working with businesses in this area.
In getting a refresh of the legal items thatneed to be thought about well before a sale, so as not to slow down the sale process onceit’s kicked off.
Now in upcoming episodes, we’ll be lookingat other elements of preparing a business for sale and we’ll be talking to businessowners and managers who’ve been through the sale process to understand what issuescame up that they weren’t expecting.
But for now focusing in this episode juston the legal items, we have on board our resident M&A expert Elizabeth Lee, who heads up ourbusiness sale merger and purchase division at Aspect Legal.
Liz is a commercial lawyer with an MBA degreewho has advised businesses for almost two and a half decades so she certainly bringsa wealth of experience to today’s episode.
Hello Liz! LIZ: Hi Jo! JOANNA: Thanks for joining in.
Great.
Ok so let’s talk first about why is it importantfor businesses and advisers who deal with businesses to understand why they should bepreparing themselves in advance for a sale coming up.
Importance of preparation LIZ: Well when you’re selling a businessJo, I think you want to give the business confidence that the purchaser confidence thatyou know as a seller you know your business inside out and not only that you’re wellorganized, you’re prepared and the purchaser will not come across any issues and problemsafter they purchased.
JOANNA: Yeah, I mean that’s the thing, isn’tit? We see this a lot when businesses enter intothe sale process and get to that point of due diligence, and we’ll probably in futureepisodes talk specifically about due diligence as well.
But get into this due diligence process ifat that point they start to see holes or risks or things that they weren’t expecting atthat point, it can have a major derailing impact on how the transaction flows or indeedwhether the transaction continues at all.
LIZ: Yeah, that’s right.
I mean it slows down the parties, there’sopportunity for the purchaser to try to renegotiate price because of concerns and so forth, youknow, and really you want to try and avoid that by being prepared before you put yourbusiness on the market.
JOANNA: Absolutely.
So I think it’s certainly true to say thatearly preparation helps with the sale price as well as reducing those issues during thatdue diligence process.
LIZ: That’s right.
And it helps speed up the transaction too.
JOANNA: Absolutely it does.
Great.
Okay.
All right.
So there are all the reasons why we mightwant to prepare early.
So maybe let’s now launch into what thethings are the businesses should be considering in terms of getting themselves sale ready.
So I guess the first area that I often thinkof is business structure.
Is it the right structure for sale? The right structure for sale JOANNA: I’ve seen in the past examples ofhigh value sales or multimillion dollar sales where the structure was inadequate and leavesbusiness owners then in the position where they’re paying more tax, much more tax thanneeded to.
You know, I’ve seen instances where businessowners have paid millions more in tax than they need to.
So I guess business structure right from thebeginning is an important element for businesses to think about.
LIZ: Yes, correct because I think that thereare different concessions available, tax concessions, as to whether you sell shares in a companyor the business depends on the circumstances of the vendor too, as to why they’re selling.
So I think consultation early with the accountantsso that you know exactly what structure you want to present to the buyer in the most financiallyefficient manner is important.
JOANNA: Absolutely.
Fabulous! Okay, so business structure is super important.
And I guess also understanding the structureof the sale or the potential ways that a sale can occur.
Because quite often we have as you rightlysaid Liz, we can be selling the assets or the shares or full business, but I guess ourother way of structuring transactions is whether or not when you’re looking at selling youwould be considering things like earn outs or deferred payments because all of thosecan be really important considerations.
LIZ: Yeah absolutely.
Exactly.
JOANNA: And sometimes I find that sellersare really scared about the concept of deferred payments and earn outs, which is understandable,we sometimes spend a lot of time negotiating.
LIZ: Yes, that’s right because they’vesold their business.
They’ve given control of their businessto the buyer but yet they haven’t received the full consideration.
JOANNA: Yeah.
LIZ: And not only that they’re not runningthe business anymore.
And so to have an earn out based payment whereyou can’t control how the earn out occurs.
That’s very risky for the seller.
JOANNA: Yeah.
And then on the flip side though sometimesthat can garner high value and increase a potential pool of buyers.
So I guess the tricky thing is always in sortof understanding what the risks and potential benefits are in looking at some of these alternativeapproaches for structuring a sale.
LIZ: Yes, correct.
JOANNA: So it’s getting the advice againonce again isn’t it? Speaking to your lawyers and your accountantsand your brokers who are expert in this area so we can help guide you in relation to whatthe options are and what they mean at the end of the day.
LIZ: And to maximize your return, right.
And so if you are going to go down the pathof earn out be very clear to the vendor as to well what are the conditions that shouldapply during the period of the earn out.
And so if you’re clear about that upfrontyou spend less time haggling and negotiating it because you’ve already agreed upfrontcommercially.
JOANNA: Absolutely.
Okay great.
So I guess then the next area that businessescan look at in preparing for sale is really considering what the value is in their businessand how to lock in those elements.
What are some of the areas I guess is thatwe see where value really sits for many of our clients in their businesses? Locking in the value of your business LIZ: Well it depends on the business, doesn’tit? I mean for some businesses it could be theclient contracts that are really valuable.
For some businesses there some key staff that’svaluable you know.
Maybe that it’s the staff that’s the valuein the business or it could be IP, could be location off the premises, you know, it couldbe any of those things.
JOANNA: So and so I guess it’s looking ateach of these areas.
So maybe firstly in relation to IP, it’sa good point you’re raising that, IP can be critical sometimes to a business.
So the question is how has a business recognizedand protected all of the IP within their business? So IP can come from brand protection so trademarksprotecting the business brand which can sometimes be really important to buyers that we’veseen? LIZ: It could be the business name that hasa lot of value out in the market.
JOANNA: And it can also be I guess other areasthat might have intellectual property value to a business, so staff manual, training manualchannels advertising material.
So it’s all about identifying these thingsand ensuring number one that they’re protected when they can be say for example through trademarks,but also that the chain of title I think is established and that’s a really importantone because sometimes we see businesses that have intellectual property created say forexamples by suppliers or contractors and they haven’t had it in place documents that accuratelyor fully show their ownership that the ownership has been assigned to them from this intellectualproperty that’s been created by contractors and other service providers down the line.
LIZ: Yes, absolutely.
Particularly in relation to perhaps any specificapplications or software that a business has developed and they outsource to someone overseasto develop their software for them where’s that make sure that there is document thatproperly vest the IP in them.
JOANNA: And because often if it’s been creatednow, but you’re looking at selling your business in five years’ time and then suddenlyin five years’ time you find that a buyer wants to have confirmation about the chainof title in relation to this intellectual property, it’s too late for you to go backand find the supplier and get that assignment.
Or indeed they may want a high hefty pricefor assigning it at that point.
LIZ: Or you end up having to give indemnitiesthat in relation to it in case any issue arises in the future which means that as the selleryou take on the risk.
JOANNA: You’re bearing that risk and takingthat on into the future, that’s absolutely right.
Yeah.
All right.
So and I guess sometimes the supplier contractsyou know they might sometimes be key supplier contracts that are important to lock in whichis less often than like contracts but it can be the case.
And I guess with these key supplier contractsone of the things that is important for you to be thinking about when you’re enteringinto these agreements as a business owner even if you’re not likely to sell for thenext few years is the types of risk clauses that sit in these contracts because they’rethe sorts of things the buyers will be interested in when they’re looking to buy a company.
The risk clauses that you’ve signed up towith client and supplier agreements.
LIZ: That’s right.
The extent of indemnities that you’ve givenor the extent of guarantee including personal guarantees that you might have given.
JOANNA: Absolutely.
And that’s an I guess on the personal guaranteeside once again, businesses should be ensuring that a number one aren’t giving personalguarantees or number two recording any personal guarantees that they’ve given so that whenit comes to the point of sale they are absolutely aware of which personal guarantees need tobe released through that sale process.
JOANNA: All right.
And I think the other areas you talked onare really relevant as well the lease.
So location, locking in location, what canbusiness owners do to lock in their location in their lease? Locking in location for lease LIZ: So making sure that you’ve got a securedlease essentially that there’s an appropriate term with appropriate option to renew, thelease is registered, just to make sure that you’ve actually got an ironclad tenure onthe premises.
JOANNA: Absolutely.
Yeah.
And then and I guess staffing is also a relevantarea in terms of locking in the value of the business.
And obviously retention of staff is alwaysrelevant to business owners anyway, but particularly if you’re gearing up to sale.
Retention of staff issues is something that’simportant for business owners to think about.
LIZ: Yeah.
You want to make sure that there’s appropriateprovisions in your staff contract with regard to there being confidentiality clauses, someappropriate restraints and investing of IP that they’ve created throughout their periodof employment.
That’s all really important to make surethat they are in place because if a purchaser comes in and sees that the employment contractdoesn’t quite protect the business sufficiently then there’s extra work to be done to satisfythe purchaser in due course.
JOANNA: Absolutely.
I mean they’ll be really concerned to makesure that staff don’t have the ability to run off and take the client base with them.
LIZ: And also with some businesses who havea large force of contractors or casuals, as a vendor you’ve got to be very careful toensure that you know what your legal obligations are in terms of accruing the right amountof long service leave and so forth.
And yes, casual staff can have entitlementamount to long service leave.
And so you’ve really got to make sure thatall that is properly provisioned for, otherwise you’re going to be looking at a discountedsale price.
JOANNA: And we’ve certainly seen in thepast quite a few examples of issues that have been caused when buyers take concern or potentialbuyers, prospective buyers take concern with organizations that have a large level of contractor-basedpersonnel as part of their staff.
LIZ: Yes.
Yes.
When the arrangements with the contractorstaff isn’t set up appropriately to minimize risk.
JOANNA: Great.
OK.
All right so I think that’s a good summationof the areas of locking in the value in the business.
I guess the next area to think about is beingprepared for due diligence.
So what the things are that business ownerscan do now to be setting themselves up so that when the business is sold in the futuregetting ready due diligence is an easy rather than a hard process.
What are the sorts of things that businessowners should be thinking about with due diligence? Getting ready for due diligence LIZ: Well, you look at the list of the elementsthat have value in the business such as contract staff, employment agreement and to make surethat there’s appropriate contracts in place that are not going to present issues to youlater down the track.
So make sure they’re in order essentially.
JOANNA: And that you’re fully compliantwith all your legal obligations, so I guess it’s just getting that house in order.
Making sure the trucks are secure and you’remeeting legal obligations.
I guess it’s also about putting systemsin place to ensure that you’re able to access documents and contracts and financials easily.
So it’s about putting in place systems toensure not just number one that you’re compliant, number two that you have thoroughly capturedvalue and warded against risk, but also that you can find these documents in the futureright.
Because that’s an issue that we see everynow and again, and sometimes it’s particularly difficult for smaller businesses to actuallyfind all of the information that we need to hand across as part of the due diligence process.
LIZ: Yes correct.
JOANNA: Particularly often I guess businessessay for example let’s take a lease as an example, businesses that have a long termin their lease may have signed this least five years ago, so haven’t looked at itfor five years and if they can’t find it that’s a problem.
LIZ: Yes particularly if it’s not registered.
JOANNA: Yeah absolutely.
Absolutely.
Good.
Okay.
All right.
So I think the main element then now out ofeverything that we’ve talked about here is making sure your business getting yourbusiness sale ready so that you can run it in a sale ready state.
And I think all of the things that we’vetalked about here, locking in the elements of value in your business, having systemsin place so that you’re orderly protecting your intellectual property are all sorts ofthings that are good for good running of a business anyway, right.
It’s not just about being sale ready.
This is great for businesses to do anyway,but if for some reason you have to sell your business then quickly then you’re in a stateyou’re able to do that.
LIZ: You’re ready.
JOANNA: That’s right.
Exactly.
And I guess this relate also not just to businesssale, but also being ready for if you need to get finance for a business or bring partnerson board or any sort of other JV arrangements that you might be looking at there.
Consequences of failing to prepare JOANNA: So let’s talk about what if youneed to sell quickly and you don’t have time for all of this preparation.
I guess what can our listeners do or theiradvisors do? What’s the consequences? I guess the real consequence is that you mightend up with a lower sale price than you originally hoped for.
I guess you don’t have time for preparationthat might be another.
LIZ: Yeah.
When you don’t have time, you tend to rushthings through and when you rush errors creep in and so forth.
And it’s just not an ideal position to bein to have to sell quickly and not be prepared for your sale and it just presents poorlyto the purchaser.
And again has an impact on price and becauseyou have to get out quickly.
JOANNA: Yeah, absolutely.
And if any of our listeners have clients whoare looking for a future sale but they aren’t told until the last minute that their clientsare actually thinking of selling, so this can often happen I know to accountants orbrokers, I guess the advice for you is to help your clients get the right advice fromexperts quickly from people who understand the area so that they can help guide yourclients through what to do and get themselves ready as quickly as possible.
Because these sorts of things can crop upfrom time to time.
And it’s about making sure if that happensthat you’re getting the right advice in place from people who understand the area.
LIZ: That’s right.
And it’s a whole range of people, you’vegot accountants and lawyers and other financial advisers.
Four key action steps JOANNA: Yeah, yeah.
Absolutely.
Okay.
All right.
So I think probably the action steps thenfor our listeners from the things we’ve talked today are first, well number one, checkout our website which is thedealroompodcast.
Com to get a transcript of today’s discussionand also an e-book which we’ve prepared here at Aspect Legal that helps businessesget ready for sale.
And we also have a number of checklists there.
But let’s run through I guess the four keyaction steps for our listeners or any business in relation to preparing for a sale.
What’s the first one do you think? LIZ: Well, it’s just to [1] make sure thatyour business structure is appropriate to sale.
JOANNA: Absolutely.
Yeah, I think that’s a good first step.
And I guess that second step then is probably[2] thinking about the key areas of value and locking them in.
LIZ: Yes.
And make sure that your contracts are allin in order and in place to maximize the value of your business.
JOANNA: Absolutely.
So we’re locking in intellectual property,I guess client contracts as you just mentioned, key staff, lease.
LIZ: The property lease, yeah.
JOANNA: Yeah, absolutely.
And I guess supplier contracts as well.
And so then the third area to look at is [3]establishing systems for reducing risk.
So I guess that would be making sure youragreements are up today.
As I said before being careful about indemnityclauses and liability exclusion clauses, and buyers hate you know broad indemnity clausesand liability exclusion clauses.
LIZ: And also to make sure that those contractsdon’t have prohibitive clauses regarding assignment or change in control.
That’s a very key clause in your contractswith customers and suppliers.
JOANNA: Absolutely.
LIZ: Just so that they can’t get out ofthe contract just because you’re selling a business.
JOANNA: Yeah absolutely.
And I guess fourth finally is [4] run thebusiness sale ready because it’s good for your business and it’s good for you if youneed to sell the business on a quick or urgent basis.
JOANNA: Great.
Okay.
Well that’s all.
Thank you so much for joining in Liz.
LIZ: You’re welcome.
Quick recap JOANNA: Just a quick recap for our listenersin this episode, we talked about the legal elements in preparing for the sale of thebusiness for owners and managers of businesses gearing up for exit, but also for accountantsbrokers and other advisers who work with businesses who might possibly be gearing up for a salein the next five years.
Thanks for listening in if you’d like moreinformation about this topic head over to our website at thedealroompodcast.
Com.
If you’re looking to buy or sell in thenear future you can organise a free consultation with us or if you have clients who are lookingto buy or sell we can also organise a free consultation for them.
We also have a number of free checklists availablefor you or if you have clients this can be co-branded also with your business.
Throughout our website on thedealroompodcast.
Com,you’ll also be able to download a transcript of this podcast episode if you’d like toread it in more details.
And you’ll also find details there of howto contact our lawyers at Aspect Legal if you’d like help with any of the items thatwe covered today.
And finally if you enjoyed what you heardtoday please pop over to iTunes and leave us a review.
You’ve been listening to Joanna Oakey andLiz Lee from Aspect Legal on The Deal Room Podcast.
See you next time!.
Source: Youtube subtitles
