Keeping your Company Shipshape

It is surprising how often the "little things" can be those that create the most disturbances on a sale process. For this reason, it will inevitably pay for you to give thought to reviewing various administrative issues within the business.

Statutory Books

These are the "log book" for a company and show ownership, directors and record transactions that have taken place. It is always surprising how often the statutory books of the company are not properly kept up to date. Although this is often easily rectified, there are issues that can arise from statutory books that can create significant problems.

Insurances

Another area where it may be appropriate to review the company's provision is that of insurances. This is particularly the case where a company may have a significant risk of employee liability, product liability or other risk areas, such as trading in the United States. Having a formal insurance review, with a report to the board on the appropriate levels of comfort, may be helpful in providing the purchaser with comfort that these matters have been properly addressed.

Intellectual property

Intellectual property may also be an area to be reviewed. This covers a whole range of issues, from ownership of copyright on websites to the licensing of technology.

One common area of dispute relates to the availability of software licences. Vendors ought, before getting too deeply into a sale purchase, effect an audit of their computer systems to ensure that they have sufficient licences for the software operated on their system. Again, this is a matter this is easily resolved if there are "pirate" software programs running on their systems, but, it is better to deal with these issues before getting into the sale process.

A review should also be undertaken as to whether or not a company has properly protected any intellectual property that it uses in its business. This can range from patents or trademarks through to domain names. Potentially, significant value in a business can be lost if it has not taken steps to properly protect its intellectual property.

Environmental issues

Environmental issues are becoming a larger concern as environmental legislation becomes more aggressive in its enforcement of appropriate standards. Environmental issues therefore become quite significant areas for negotiation on business disposals. This is particularly the case where the purchaser comes from an American background, or has experience in America, where there is much more extensive and well-developed environmental legislation.

Often, purchasers will come from a point of view in these transactions where they expect the vendors to enter into a full environmental indemnity. This is common practice in the United States. In this country, this is a practice which is often resisted, but resisting an environmental indemnity, or even more extensive environmental warranties, is easier to do if there is available information to demonstrate the narrowness of any environmental exposure within the business.

To do this, it is sensible to carry out an audit of the environmental status of the company or business to be sold. The first step here is to look at what discharge consents, if any may be required. This may relate to the discharge of pollutants into the atmosphere, through to the drainage of surface water into the local sewers. All these are issues that ought to be reviewed at an early stage.

On a more general level, few vendors are likely to thank you for suggesting that they dig up their factory to discover what, if any, pollutants lie underneath the surface. In any event, sometimes the best advice to a business in these circumstances is to let sleeping dogs lie.

A purchaser however may have an eye on the approach that is likely to be taken on a subsequent sale. To a degree, he may even be anticipating changes in environmental law that impose greater obligations on land- owners. It is possible to undertake a desktop review relatively cheaply to ascertain from historic ordinance survey maps and other available documentation what the property has been used for in the past.

This may be helpful in demonstrating a period of "safe" usage and satisfying a purchaser's concerns. At the very least, it is helpful in determining whether a more invasive environmental investigation should be undertaken.

Grants

Vendors ought to be encouraged to review what, if any, grants they have received in the business in the period prior to a sale, and the terms applicable to each of them. Often grants, such as regional development assistance, are provided on terms that require repayment if there is a change in control of the business within a period of time after the grant is provided.

The government agencies responsible for issuing grants are reluctant to provide finance to companies that have the effect of inflating the sale value, particularly where that sale is realised in a short space of time. In practice, often the government agency involved will not seek to enforce repayment of the grant, but it may be appropriate to approach the government agency concerned and investigate what their attitude might be. This may enable the vendors to present information to the purchaser, which is sufficient to satisfy any concerns they may have that there is a contingent repayment obligation within the company that is likely to be crystallised.

Within the extensive warranties that are often found in the sale and purchase agreement, there are areas which commonly give rise to problems which are capable of being dealt with in advance. Doing this can save much time and expense in the negotiations relating to a warranty schedule.

Contracts

Many of these issues relate to the contracts entered into by the company. A purchaser will be seeking comfort that the company has entered into contracts to protect its business, and has not left itself unreasonably exposed to risks of product liability and other similar claims.

For this reason, it is often beneficial to a company to carry out an audit of its contract documentation and the way in which it is implemented. Terms and conditions of trading- whilst not the sexiest of topics- often form the core contractual documentation, on which a company conducts its business. As a matter of good practice, these ought to be reviewed on a regular basis, certainly at no more than two or three year intervals in any event.

In circumstances where there is an exit, particularly in contract-based businesses, this review should be carried out at an early stage. Failure to do this may result in the purchaser seeking additional warranties, or even indemnities from you, against perceived weaknesses in the company's contractual position.

Often, when we come to review contracts entered into by companies, whether as part of a disclosure process or in due diligence, we find that there are a number of contracts which contain termination provisions linked to a change in ownership of the company. In many instances vendors are surprised to find that these provisions exist.

Equally, it is often the case that these provisions are contained in the contract merely because they are "standard" and had they been addressed when the contracts were first entered into it may have been possible to negotiate them away. It is all too easy to sign off on "standard" form documentation, such as hire purchase and leasing contracts, without reviewing them in detail.

However, a little bit of time spent on these housekeeping issues can remove potential issues in a sale further on. Similarly, any particular onerous provisions, such as liquidated damages clauses, need to be reviewed in the context of the possible effect on the value of the company should it be sold.

Whilst standard form documentation should be reviewed, perhaps more important still is a review of the company's contractual provision with regard to its most material contracts. These may be contracts for the supply of goods or services to the company (for instance where the company is reliant upon one or two major suppliers for the bulk of its needs or for critical components) or contracts for the supply of goods and services to customers.

A review should be undertaken to ascertain whether or not these give the company the necessary level of security of trading. Is the supplier or customer able to change the level of dealings with the company without notice, or even to terminate the agreement? These issues will have an impact upon the business to be sold, and potentially its value.

Outstanding disputes or litigation

If there are outstanding disputes or litigation, thought should be given as to whether or not these can be resolved. Clearly no-one is likely to thank you for suggesting that they settle litigation at a disadvantage merely to smooth the process of a sale, but disproportionate time can be spent addressing these issues in a sale process. A cost benefit analysis needs to be undertaken on any litigation or dispute to see whether or not they are capable of being resolved satisfactorily - whether a little bit of time invested now might benefit later.

For instance, a claim for damages may be discounted entirely when a purchaser looks at the value of the company. If the vendor believes that the claim has value, it may be better for him to settle the claim and realise that value prior to the sale.

Alternatively it may be appropriate to seek to transfer the benefit of any claims which the company may have which are contingent, and not reflected in the value being paid by a purchaser, to the vendors or another vehicle owned by the vendors. This will have taxation implications which will need to be reviewed, but may give the vendors the opportunity to fight their corner for their own benefit, although inevitably, at their own cost.

These are just a few of the areas that ought to be addressed when looking at companies or businesses that are being marketed for sale. There are many others, and every business is different.

However hopefully we have demonstrated that a little bit of thought and time spent reviewing the situation of a company early in the process can help to smooth the path to a sale and, even, add value on completion of that sale.

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