Whether preparing for an imminent sale or developing a longer‑term strategy, early and deliberate preparation for an exit is critical to help avoid delays, valuation pressure or transaction risk once the sale process is underway.
In this article we outline some of the key legal and commercial issues that a company should consider in order to present itself as ‘transaction‑ready’ and to maximise shareholder value on an exit.
The Business and Its Operations
Understanding what the business is worth
Maximising shareholder value on an exit, and so valuation, is often one of the key concerns for the outgoing management team as well as the company’s shareholders. Obtaining a formal valuation ahead of a potential sale can offer a robust benchmark to help determine a reasonable sale price, whilst also assisting with forward planning and highlighting areas where value may be enhanced or protected if the exit is further in the future. Undertaking a valuation exercise can also help to inform broader strategic decisions around growth, investment and operational efficiency for the business.
Financial diligence often drives value discussions, and the absence of clear, organised financial information is one of the most common causes of transaction delays and justifications for price adjustments. To mitigate this risk, management should ensure that the company’s financial records are accurate and complete, address any tax issues early and maintain up‑to‑date supporting documentation. Ensuring financial statements are consistent, accurate and compliant with relevant accounting standards is also essential, as is being prepared to explain any material variances or anomalies. Beyond accuracy, sellers should also consider the quality and presentation of their financial information more broadly; many sophisticated buyers will expect audit‑ready financials.
An early focus on valuation enables owners to take a holistic view of the business before drilling into specific operational and structural components they may want to develop further ahead of a sale. Ultimately, an informed seller is likely to be better prepared for negotiations with potential purchasers and better placed to identify their priorities and red lines.
Corporate housekeeping: the foundations of a smooth sale
Maintaining accurate and complete corporate records is fundamental to demonstrating strong governance and can instil confidence in prospective buyers that the business is well organised and its corporate affairs are in good order. Key areas to review include:
- Statutory registers – registers of members, directors and persons with significant control (PSCs) must be accurate and reflect the current position of the company. Management would be well advised to ensure that the registers are up-to-date but also that historical information included is correct.
- Companies House filings – director appointments and resignations, share allotments and confirmation statements must all be correctly filed at Companies House. These administrative filings can sometimes be overlooked, so identifying and correcting any historic errors or omissions should be a priority in order to avoid raising concerns during the due diligence process.
- Key constitutional documents – the company’s articles of association and any shareholders’ agreements will contain details of any restrictions or approval requirements that may affect the proposed transaction. Management would be well advised to understand the requirements and to identify where there may be any issues or delays in getting required approvals so that this can be factored into the overall timetable.
Corporate housekeeping should also include: (i) reviewing whether historic share issuances and/or share buybacks were correctly effected and recorded; (ii) checking whether share certificates were issued to shareholders and where the originals are stored; (iii) confirming whether any options or other convertible securities remain outstanding and will need to be taken into account as part of the process; and (iv) reviewing any shareholder loan documentation to ensure consistency between statutory records, Companies House filings and internal documents. Identifying and addressing these matters early can help to prevent avoidable delays and demonstrate a sound corporate governance regime to prospective buyers.
Intellectual Property: ensuring rights are protected
Intellectual property (IP) often represents a significant proportion of a company’s value. This may include both registered rights, such as patents, trademarks and designs, and unregistered rights, such as unregistered designs, know‑how and trade secrets.
Ownership of IP is not always clear‑cut and records do not always reflect the position as understood by management. Action may need to be taken to update public records or to record arrangements in writing where formal agreements have not been entered into or reflect an outdated position.
An early review of the company’s IP portfolio should include, among other things:
- confirming ownership of all IP believed to be owned by the company and addressing any gaps, such as employee ownership for historic reasons;
- checking the terms of any licensing arrangements relating to IP and that the activities undertaken by the company are within the scope of the relevant agreement(s);
- verifying that registered rights are properly recorded and registrations have been maintained and are up-to-date with any registration fees paid; and
- identifying unregistered rights that may not be clearly documented but which may benefit from being protected.
Understanding the extent of the company’s IP portfolio, and confirming ownership rights and any restrictions, is important to ensure that the company’s value and assets are retained and properly protected. Taking early steps to clarify rights relating to IP, and strengthen protection where necessary, helps preserve value and mitigate any potential risks before a buyer begins due diligence.
Commercial contracts: understanding business relationships
Prospective buyers will scrutinise the company’s material commercial arrangements, such as customer and supplier agreements, as well as any standard terms of business. Well‑drafted, accessible and fully executed contracts help provide clarity over the terms on which the business operates.
Where written contracts are missing or outdated, time may be needed to renegotiate terms or formalise long‑standing arrangements. Reviewing contracts early also allows the company to identify:
- onerous or unusual terms;
- contracts entered primarily on counterparties’ standard terms; and
- change‑of‑control provisions capable of triggering termination or renegotiation, and to take action to renegotiate or update these where appropriate.
Addressing any issues in advance of commencing a sale process strengthens the company’s negotiating position by being able to describe arrangements clearly and it can also help to maintain continuity of key commercial relationships by engaging with counterparties early in the process where the terms of the engagement require notifications or consents.
Employment arrangements: securing the team that drives business value
Employees are an integral part of a business and are often central to its value. Buyers will want assurance that key personnel are engaged on appropriate and enforceable terms. Discounts to the valuation may be requested if the business appears “founder‑dependent” or lacks a developed second tier of management and there are no arrangements to ensure continuity of the business post-transaction. In advance of a sale, companies should identify where the business is overly dependent on founders and/or key individuals and put in place clear succession plans and knowledge‑transfer processes as required.
For certain companies, particularly those within the technology and software sectors, it is common for businesses to have contractors engaged in addition to any employees. Recognising and understanding the differences between the two categories, the rights and protections afforded to each, is crucial in ensuring workers are properly classified. It can also help in persuading the buyer that appropriate structures are in place to ensure compliance with legal obligations, limiting any risk post-transaction.
Early review steps should include as a minimum:
- ensuring all employees have up‑to‑date, written employment agreements;
- reviewing senior management contracts for appropriate confidentiality, IP and restrictive covenant protections; and
- confirming the correct classification of workers, particularly where the business engages contractors as well as employees.
Planning ahead can also support employee retention throughout the transaction process. Proactively considering retention and incentive arrangements can help maintain stability and continuity. Whether through retention bonuses, equity awards or revised remuneration structures, ensuring key individuals are motivated to remain with the business can significantly benefit transaction execution.
Data protection: demonstrating compliance and managing risk
Data protection compliance is an increasingly important area of focus for prospective buyers, particularly where the target business processes significant volumes of personal data or operates in a consumer-facing or technology-driven sector. Non-compliance with data protection legislation, including the UK General Data Protection Regulation and the Data Protection Act 2018, can give rise to significant regulatory, financial and reputational risk, each of which a buyer will want to understand and evaluate.
Companies preparing for a sale should consider reviewing their data protection framework at an early stage, including:
- confirming that appropriate privacy notices, data processing agreements and data sharing arrangements are in place and reflect current processing activities;
- reviewing the lawful bases relied upon for processing personal data and ensuring these are properly documented;
- assessing the adequacy of technical and organisational security measures in place to protect personal data; and
- identifying any historic or ongoing data breaches, regulatory correspondence or individual complaints that may need to be disclosed during the due diligence process.
Taking proactive steps to demonstrate a mature and well-documented approach to data protection compliance can help to reduce the risk of warranty or indemnity exposure in the transaction documents and instil confidence in prospective buyers that the business manages data responsibly and in accordance with its legal obligations.
The Sale Process
Participating in and co-ordinating a sale process is a significant undertaking that can take many hours of management time when it is important that the business is continuing to perform at a high level. There are some preparatory steps that can be taken to help to ease this burden.
Building your advisory team
Preparing for a sale can be complex and resource‑intensive. Engaging an experienced advisory team early ensures the business receives tailored guidance aligned to its strategic objectives and can help minimise issues and maximise returns. The right advisory team can assist with strategic decisions, such as whether to pursue a bilateral sale or competitive auction process, provide introductions to potential purchasers, prepare early-stage marketing materials and help to plan communications with employees, customers and suppliers.
Early engagement allows advisers to develop an in‑depth understanding of the company, structure the sale process and help to mitigate issues that might otherwise cause delay to the transaction timetable or impact valuation. Early engagement also drives efficiency, avoiding unnecessary delays and costs that can arise when advisers are brought in at a later stage with limited knowledge of the intricacies of the company.
Data preparation: organisation is key
Organisation is an essential component of an efficient due diligence process. Early preparation enables the company to identify information gaps, any legacy issues that will need to be dealt with or explained and inconsistencies that can be addressed before the pressures of a live transaction take hold. In undertaking preparatory steps, a seller will be better positioned to manage the timetable and narrative of the sale process.
Collating key documents into a structured, centralised repository well in advance of launching a sale process can help to facilitate timely responses to buyer queries and reduce the risk of unexpected issues arising during the process. Sellers may wish to pre‑structure a virtual data room (VDR) with standard folders – corporate, financial, tax, commercial, IP, employment and regulatory – and upload documents during the preparatory phase. Maintaining an indexed, version‑controlled data room minimises delays once the process begins and can be beneficial when considering what should be generally disclosed for the purposes of the warranties in the transaction documents.
How we can help
Preparing for sale is a significant milestone in the life of any business and one that requires careful planning and rigorous preparation. The steps outlined in this article are most effective when undertaken early, well before a buyer is engaged. Identifying and addressing potential issues in advance of the commencement of a process enhances valuation, reduces execution risk and helps instil confidence in prospective buyers by ensuring that the business is structured, documented and positioned to maximise its attractiveness for sale.
The team at Bird & Bird advises on every aspect of transaction readiness, from strengthening corporate governance and commercial contracts to advising on employment matters, IP protection and sector-specific regulatory compliance. Whether you are a business contemplating a sale in the near term or investors preparing for a future exit, we can help you take the right steps now to realise your company’s value and approach the sale process with confidence.
For further information, please contact:
Fiona McFarlane, Partner, Bird & Bird
fiona.mcfarlane@twobirds.com
