Business owners need watertight arrangements behind the scenes if their company is to be a lure for buyers. Kyri Papantoniou explains
A serious and sensible investor will want to do their homework. What is the investor buying into? How successful is the business? What are its prospects? Are there any major risks? These questions, along with others, will need to be evaluated in order to make an informed decision as to the attractiveness of the offering.
There are no hard and fast rules, but it goes without saying that a company that has prepared itself for a potentially detailed probing will be far more attractive than one in disarray. A business that has not taken the time to prepare may struggle to attract investment within a certain timeframe or at all.
An investor is likely to provide a due diligence questionnaire which may require the business to set up a physical or virtual data room to manage the potential volume of questions and document requests. For a disorganised business the administrative burden could be considerable.
So how can you prepare a business for legal due diligence? Below are three areas of considerations and tips on how to stay ahead of the curve.
Identify all contracts upon which the business relies. For example, hotels and restaurants may have entered into franchise or management agreements and will inevitably rely on a number of key supplier and customer agreements.
An investor is likely to request copies of contracts and seek comfort that these are up to date and valid, or whether any are due to expire or need to be renegotiated. A ‘change of control’ of a company can in some cases cause a contract to terminate, so it would be wise to carry out an early review of provisions such as this, which may be relevant to a potential investor.
Does your business own or use any intellectual property? For example, any trademarks, logos or copyright? It would be prudent to identify all material intellectual property rights. You should ensure that any registrations and licences are up to date and that rights are adequately protected. This will include ensuring that all paperwork relating to these rights is available for review.
If intellectual property is key to the business, it is likely that an investor would also seek details of any disputes or challenges for any infringement or validity or ownership of any intellectual property rights that involve or otherwise concern the company.
An investor will want to see that the company’s HR matters are in good order. For example:
• Are you able to provide anonymised lists of employees and details of their employment?
• Do all employees have a written contract?
• Are the contracts and service agreements up to date and available for review?
• Are there any disputes on the horizon, any claims or potential claims from employees?
• Are there any incentive arrangements or pension schemes in place for the benefit of employees and are these in good shape?
• Are senior employees restricted from competing with the business if they were to leave?
These are the sorts of issues the company should consider at an early stage so that it can answer questions relating to its staff and, in particular, its key management team.
The three areas of legal due diligence referred to above are intended as examples to highlight the kind of areas that may be of interest to an investor. There are, of course, many other areas that would be investigated from a legal perspective, for example, the company’s internal corporate governance matters, its assets (such as any properties) and any regulatory or external compliance matters.
The legal due diligence would also run alongside any financial and tax due diligence and this would be led by the relevant financial advisers. You should consult with these advisers and your lawyer at an early stage and together they can co-ordinate the process and work with you to ensure that it is seamless and that the end product is an attractive one worthy of investment.
While there are many issues to get in order, there can be little doubt that a well-prepared business is likely to attract investment much quicker – and on better terms – than one that appears to be in disarray.
Kyri Papantoniou is a partner at Fletcher Day