For business owners, preparing your business for sale and making it as attractive as possible for potential investors and acquirers is an important exercise to be considered as part of the wider preparation for commercial due diligence. Business owners should think of this in almost the same way as preparing a house for sale – sorting out those little odd jobs before starting any sales process can add value not only in terms of saving time when the process starts but can also potentially increase the value of the business to a potential buyer.
Preparing for commercial due diligence will help potential buyers to understand a business’ commercial matters such as:
- its key commercial contracts;
- any data protection issues; and
- any intellectual property matters.
As well the associated risks concerning such matters.
Being aware of the likely questions which will be raised during the commercial due diligence process will help to highlight and potentially either avoid or mitigate risks and complications to ultimately ensure that the best possible valuation of the business can be obtained.
Commercial Contracts
Business relations
Being able to demonstrate the relationships that the business has with its suppliers and customers will be a key aspect of the commercial due diligence process. To do so, we would recommend that a review of your key commercial contracts should be completed to:
- assess whether the existing contracts provide adequate protection to the business. Consideration will need to be given to:
- whether the contracts have been formed on a standard or bespoke basis, as the construction of the contracts will provide understanding as to the complexity (legal and commercial);
- understanding their value;
- understanding the extent of each party’s contractual duties included within the commercial contracts; and
- establishing whether there are any onerous obligations.
- identify whether the contracts are a burden or a benefit to the business and to highlight:
- those contracts which are revenue-generating contracts; and
- those which are not profitable (or potentially are no longer fit for purpose).
Carrying out this exercise will determine the relevance of each contract and will allow focus on those contracts which are of a significant value to the business (and identifying those which need attention to make them profitable, or alternatively those which should be exited if possible before any sale process starts).
Is there certainty of revenue? How long is the contract and does the contract allow for an early exit?
Any potential buyer will want to ensure that they receive the benefit of the contracts following acquisition of the business and will have certainty of revenue going forward. Given this, consideration will need to be given to:
- any change of control provisions in the business’ key contracts. The inclusion of change of control provisions within a contract may trigger certain consequences. For example:
- Such provisions may allow a supplier or customer to terminate a contract following the sale of the business (which could therefore put revenue for the buyer at significant risk);
- Alternatively, a change of control provision may simply require notification of a change in the ownership of the business to a supplier or customer.
- identifying the contractual length, in particular:
- Whether the contract automatically “rolls forward” on expiry (or if not, is there an option to renew / extend the contract); and
- Particularly whether either party to a contract has the right to terminate “without cause” (i.e. neither party is in breach, but a party can simply give notice to terminate) which would again put revenue at risk.
Liability caps
A prospective buyer is likely to be concerned by any contract where the liability cap is out of kilter with the contract value. Each key contract should therefore be reviewed to assess this exposure and (if necessary and possible) renegotiated to a position which is more in proportion with its value.
Thinking ahead to the situation post-acquisition
Business owners should put themselves ‘in the potential buyer’s shoes’ - following an acquisition, a new owner may consider that some of the terms contained within the acquired contracts may no longer be suitable – i.e. certain terms or contracts may no longer be appropriate where a large company acquires a small company. It may therefore be necessary to try, if possible, to think ahead and to renegotiate such terms so that any new owner can operate the business in a manner which appropriately meets the business’ needs. For example, when the contract was originally entered into, the business may have subcontracted some of the services out to a third party because at the time it did not have the capability to perform those services itself – is this still the case? An acquiring business may have an in-house team providing a range of support services, these may be more appropriate – this could therefore potentially give rise to an additional income stream (or a cost saving by way of consolidation or synergies).
Data Protection
Processing personal data
Most businesses are likely to store and use personal information which will subsequently give rise for a business to comply with its data protection obligations. Therefore, during an acquisition, any potential buyer will assess whether such obligations are being adhered to. Businesses should therefore consider carrying out a general audit into the types of personal data it collects, how such data is being used and whether the business is acting in compliance with its obligations under Data Protection legislation (where applicable) which will include its data processing duties.
Processing personal data – Customer v. Employee data
The main types of personal data to be reviewed during any acquisition will be employee and customer personal data.
Prospective buyers will need to:
- be informed of the flow of employee data within the business which will identify the areas of the business (such as an outsourced function) which specifically process employee data and therefore the extent to which obligations under Data Protection Regulation legislation will apply to the business.
- be informed of the extent to which customer personal data is collected by the business. The data protection compliance of a business can be seen as a form of investment, as compliance with data protection laws avoids the cost and time in dealing with formal complaints and/or personal data breaches (and subject access requests).
Policies and procedures
Ideally, a review of the business’ existing policies should be carried out to ensure that it is meeting its legal obligations (particularly those which require businesses to put in place data protection policies where appropriate). Further, a review of its existing data protection policies and procedures will determine the level of protection that is afforded to the personal data that it processes.
Intellectual Property (“IP”)
The intellectual property that is held within a business can often be its most valuable– in effect, its ‘crown jewels’. When assessing the IP related matters during an acquisition, buyers will need identify (where applicable):
- the types of IP held within the business;
- if the IP has been registered;
- if there is a website and any domain names; and
- IP ownership. This issue will be of particular importance to a buyer as they would need to establish the owner(s) of the IP (which often is not the business itself but the individual founders of the business).
The due diligence process may reveal the need for IP assignments to be entered into between the relevant parties, in order to affect the legal transfer of any IP rights (i.e. from a founder to the business).
Further, a review of the business’ IP licences should be carried out to identify (and potentially mitigate) any restrictions that may apply to them in respect of the IP assets.
The sale of a business can be something of a minefield – we are here to help guide you through the process to enable you to maximise opportunities whilst minimising risk. If you are a business owner seeking assistance with any of the matters discussed above, then please get in touch with one of the members of our Commercial team today.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
