Due Diligence: Guiding you through the mechanics of selling

Due diligence is unfortunately the point when transactions can stall and timetables start to slip as matters that need rectifying pre-completion become apparent. Here are some of the issues which the due diligence process can reveal and which sellers should consider in advance to avoid deals being delayed or aborted:

1. Lack of transparency in the corporate structure of the business, for example where it is unclear who truly holds the sale shares as historic stock transfers have been signed incorrectly or have not been stamped;
2. A lack of authority for certain sellers to sign, for example where a proportion of shares are held by a pension fund. It is important to identify who needs to sign which documents with sufficient time to source all required parties.
3. Where businesses don’t own the intellectual property rights to the design and content of their websites and the domain names;
4. Historic security issues, for example debentures that should have been released but haven’t been and remain registered against the target business at Companies House;
5. Questions over trade mark ownership, for example where the business’s trade marks are owned by a shareholder personally and licenced to the business;
6. The lease of the business’s premises has expired and the business is holding over;
7. Material assets that are used by, but not owned by the business, for example when a company occupies a premises owned by a shareholder’s pension fund;
8. Change of control clauses in commercial contracts that give your key customers a right to terminate their contracts on change of control of the business or, in the case of assets subject to hire-purchase agreements, providing that the balance owed must immediately be paid on a change of control;
9. Employment contracts for key staff containing unenforceable restrictive covenants.

Personal guarantees

One of the things that sellers often forget about are personal guarantees that they have given in relation to the company being sold, often to banks or other lenders to support the company’s facilities.

As a seller, it is crucial that any personal guarantees that you have given are formally released on, or prior to, completion. Otherwise, you will remain liable under the personal guarantee after you have sold, and so ceased to control the target business.

A release of personal guarantees can take time to negotiate with the lender(s), who, if the facilities aren’t being repaid on completion, may want comfort regarding the trading position of the buyer and perhaps new personal guarantees. This is particularly the case where the structure of the transaction involves a new company being used to acquire the target company.

Even where the facilities are being repaid, it is important to liaise with the lender(s) at an early stage to secure a prompt release from personal guarantees.

Many of the issues that cause transactions to delay or become abortive can be dealt with long before a buyer appears on the horizon.

It is well worth spending time as your business grows thinking about the long term implications of decisions. Spending time checking the position, or negotiating particular points in contracts can be a real time-saver when it comes to an exit.