During the sale process, the buyer’s lawyers and financial / tax advisers will conduct due diligence on the business. This is essentially a process whereby the buyer’s advisers will raise a series of financial, legal and tax enquiries to allow them to “kick the tyres” of the business. They will then report to the buyer on their findings.
To enable the sales process to run smoothly, it is advisable that any areas which could raise potential red flags are dealt with as far in advance as possible. We’ve summarised some commonly difficult areas below:
a. Change of control clauses
Your key supplier and customer contracts, including any contracts with the Local Authority or your leases, may contain change of control clauses. Such clauses will require the other party to the contract to be notified if there is a change of control in your business. Identifying any such clauses in advance of the due diligence process, and being prepared with a strategy to deal with them, can be helpful and allow the transaction timetable to remain on track.
b. Property leases
If your children’s services business relies on leasehold properties, the buyer’s advisers will inevitably want to review each of these leases. If they are not happy with the terms of such leases (e.g. if you have entered into an assured shorthold tenancy with a nominal notice period), the buyer may require these leases to be renegotiated prior to completion. Being on good terms with your landlord(s) can really help. If your business owns any freehold property, having any property documents and deeds to hand will be helpful.
c. Ownership of assets
The buyer will want reassurance that they are buying everything they deem necessary to run the business post-completion. If any assets, including the ownership of the business’s domain names or any supplier contracts, aren’t in the business’s name (e.g. they are instead in the seller’s personal name), they’ll most likely need to be moved into the business’s name prior to completion. Again, identifying any potential issues and dealing with them before taking your business to market can help reduce any complexities and assist from a timing perspective.
d. Protection of intellectual property (“IP”)
The buyer’s advisers will raise enquiries regarding the ownership of any IP used by the business, so it will need to be clear who owns this IP. It is also generally advisable for any IP that is capable of registration, including your business name and any logos used in the context of the business, to be protected via registration prior to sale.
e. Employment issues
The buyer’s advisers will pay close attention to your employment documents, namely the employment contracts. They will also raise enquiries regarding the immigration status of the business’s employees and whether any sponsorship licences are held and/or needed. The due diligence request will include enquiries on the right to work process and the monitoring / checks conducted by the business. If they are not satisfied with the relevant processes, the buyer will likely seek protection via specific indemnities for any identified employment issues. As such, it is good to get ahead of any issues and deal with them pre-sale.