How to prepare your hospitality business for sale, maximise value and minimise risks.

In our experience, early-stage preparation is crucial when considering the sale of your business, and there are a number of issues that can be dealt with ahead of a sale to mitigate the risks of complications and/or delays in the sale process.  During the sale process the buyer’s advisers will conduct thorough due diligence of financial, legal and tax matters to “kick the tyres” of the business.  Our experience has shown that accurate and good-quality information provided at the due diligence stage instils confidence in buyers and in turn reduces the opportunity for renegotiation on price or indemnities to cover specific issues. Some common issues are as follows, and we can help to resolve these:

Whether you anticipate a sale of your company or an asset/business sale, it’s important that all your employment contracts are in order as the buyer will want to review them to establish what employee obligations they are taking on.  On an asset/ business sale The Transfer of Undertakings (Protection of Employment Regulations (TUPE) will likely apply and all employees will automatically transfer to the buyer on their existing terms and conditions.  In both cases a buyer will want to see clear and unambiguous employment contracts and this will ease the due diligence process and avoid protracted negotiations.

Having employment contracts in place can also enhance employee morale and trust during the transition to new ownership.  Employees are likely to feel more secure and valued if they know their rights are protected and there are clear contracts in place governing their employment.

The hospitality industry historically has higher rates of overseas employees and if you have overseas staff you need to check you have up to date right to work documents and monitoring processes to ensure compliance with immigration rules.  Any buyer will crawl over your paperwork and may request a price reduction or indemnity if there are areas of non-compliance, as the buyer will not want to bear the risk of potential fines for non-compliance.

It’s good to deal with any employment issues pre-sale if possible.

The buyer will want to see full copies of all contracts with key suppliers to check their commercial terms, for example food and beverages supply or hire purchase agreements for equipment. In addition a buyer will be looking in particular for “change of control” clauses which might entitle a supplier to terminate the agreement early because of a change of owners (on a company sale) and for assignment restrictions (on a business asset sale).  It’s best to plan ahead and gather together all key contracts including suppliers’ full terms of business.

Check you have complied with any leases and, for example, that you have the landlord’s consent/licence for any alterations you have made to the property.  For example if you have installed any electric vehicle charging points on your property, did you need landlord’s consent for that and did you obtain it?

Also be aware that if you operate your business from leasehold premises, a buyer is likely to consider dilapiodations liabilities as a factor in their negotiations on the price for your businesss.

It’s best to review all current share options with your lawyers to check that they have been properly granted in accordance with the legislation to ensure they obtain the intended favourable tax treatment.

To ensure the intended tax treatment there are several requirements which must be complied with. Commonly we find that share options are not fully signed or dated, options have been granted without the recommended HMRC valuation, or notification hasn’t been made to HMRC of the grant of options. This can lead to delays in the sale process and costs while a solution is found, or create unexpected tax liabilities for your company. It’s best to check all the option paperwork in advance.

If you want to grant EMI options to employees so they can participate in a sale you need to plan well in advance.  For option holders to qualify for Business Asset Disposal Relief (previously Entrepreneurs’ Relief) to obtain a lower rate of capital gains tax they will need to have held their options for 2 years prior to the sale.

Even if you are within the 2 year period but still want employees to participate in the sale proceeds, speak to your tax advisers who may be able to find ways for that to be achieved in a tax efficient way.  But definitely speak to them before you have an offer on the table.

These may be relevant if you are selling the shares in your company. Your company may have bought back shares granted to former employees as part of a share incentive, or bought back shares from other former shareholders. If any share buy backs have occurred over the years the buyer will likely investigate to establish whether the correct procedures have been followed and all the paperwork is in place.  You should review these with legal advisers in advance of the sale.

We commonly see issues with past share buy backs, where a company has purchased the shares of former shareholders.  The statutory process is complex and must be complied with for the buy back to be valid.  Rectifying an invalid buy back can be costly to resolve.  It’s best to review this paperwork prior to the sale process.  If it’s discovered in the sale process this will cause delays.

If you’ve protected you brand name with a trade mark, check it’s up to date.

If you have any bespoke IP (e.g. booking system software, websites, other software) that’s been developed for you by external software developers which is key to your business you’ll need to check that the business has clear ownership of it.  A buyer will want to know they can continue to use it.  This is especially the case where you have used external IP developers.  Where external developers are used it’s important to get a full assignment of the IP as this is not automatic.  Paying the developer’s invoice may not be sufficient.  The lack of a full IP assignment can cause issues if the buyer requires an assignment to be put in place and can be expensive if the software developer is aware of an impending sale.

Your hospitality business will have collected a lot of personal data of your customers in your database.  It’s best to check in advance that you’ve complied with all the legal requirements regarding this and have correct policies in place.

This is just a sample of the common legal issues which can arise when we advise sellers on their sale processes.  We have extensive experience providing legal advice to our clients, both sellers and buyers, throughout the M&A process, and help our clients minimise any risks to ensure the transaction proceeds as smoothly as possible.  If you require more detailed advice please feel free to contact us.