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Preparing to sell a business

PREPARING TO SELL A BUSINESS

By Jeremy Parsons

A potential purchaser of a business will almost always conduct a due diligence investigation of a business before the completing the purchase. Therefore it is important when selling a business to have all the information to hand that a purchaser may require to complete this process. This will enable the vendor to present the business to prospective purchasers in the best possible light. In turn, this will help ensure the optimum sale price, the minimum risk to the vendor, and a smooth and efficient sale process.

VENDOR CONSIDERATIONS: PREPARING FOR THE SALE

1. Ensure contracts have been entered into with all key customers:
If there are no written contracts, they are expired or only have a short period left to run, a purchaser is likely to be very wary of relying on the income stream from the customer. If it is a major customer,it could also impact on a purchaser’s ability to obtain finance. The business should also have robust contracts in place with all suppliers and employees.

2. Identify and protect intellectual property:
All intellectual property associated with the business should have been identified and properly protected. This may include domain name, company name and trade mark registration.

3. Search the Personal Property Securities Register:
A purchaser will always search the PPSR to check what security interests have been registered against the business assets. Therefore it is a good idea for the vendor to do so first so it canstart communication with the parties that have registered security interests to ensure they will be released when amounts owing have been repaidon settlement.Lawyers are usually involved in this process but for secured parties with significant interests such as banks, it may be advisable to start discussions early.

4. Third party consent:
Check whether any third party’s consent is required to transfer or assign any contracts, leases, licences, consents or intellectual property. If so, check the process that will need to be followed to arrange the consent or assignment.

5. Check that lease documentation is up to date:
If the business premises are rented, a purchaser will always want to check the lease documentation. Therefore, the vendor should ensure that all lease documentation is up to date including all rent reviews, rights of renewal and lease variations. Incomplete lease documentation has the potential to cause significant delays to settlement of a business sale. If a lease is to be assigned to the purchaser, the landlord will need to consent to the assignment. In some situations, but not always, it may be appropriate for a vendor to start discussions with the landlord early about the potential business sale. In addition to this, an inspection of the property may be required to ensure that there are no surprises when formal consent to assignment of the lease is requested.

6. Due diligence on the purchaser:
A vendor may also wish to conduct a level of due diligence on the potential purchaser. This would givean indication of the likelihood of:
  1. reaching an agreement with the purchaser;
  2. the purchaser having the capacity to fund and complete the purchase; and
  3. the purchaser being capable of complying with any obligations after completion such as making any earn-out payments.
7. Other considerations:
  1. All licences and consents required to operate the business are up to date and been complied with.
  2. Any previous, current or potential litigation in relation to the business should be identified.
  3. Debtor reports should be reviewed and any bad debts written off.
  4. If the premises are owned, that all building consents and code compliance certificates have been obtained and there are no outstanding notices to fix anything.

VENDOR CONSIDERATIONS: THE SALES PROCESS

Once the business is ready for sale, the vendor will provide information about the business to potential purchasers. This may be by way of an Information Memorandum which would usually include a summary of the business and the industry in which it operates, financial information and some of those matters referred to above such as those relating to the lease and intellectual property.

Before providing information about the business to any party, they should be required to sign a Confidentiality Agreement (also sometimes referred to as Non-Disclosure Agreement). This will prevent any person to whom the information is disclosed from using it to the vendor’s detriment. Such an agreement will, among other things, state:

  1. what is meant by confidential information;
  2. the purpose for which it is being disclosed; and
  3. that the information is not to be disclosed (except to advisors) or copied and must be stored securely.

If a prospective purchaser is interested in progressing further, after signing a Confidentiality Agreement and reviewing the Information Memorandum, then more detailed information about the business can be provided. For smaller transactions this can be by hard copy or email exchange of information between the parties. For larger more complex businesses information is often submitted to a ‘Virtual Data Room’ where files are uploaded to a cloud based file storage service for review by the purchaser and its advisers. Files are usually put into categories such as financial, employment, supplier contracts, customer contracts, property and intellectual property. Generally there is a Q&A function allowing the prospective purchaser to submit questions to the vendor.

If a vendor is well prepared for a purchaser due diligence investigation, it can greatly assist the chances of a successful business sale. If you have any questions about the above or would like more detailed information or advice tailored to your own situation feel free to contact me on09 915 4381, or email jeremy@dhlawyers.co.nz.

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