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Delivering Package

Pre Sale Legal Due Diligence

Legal due diligence is generally something that is left to the latter part of the due diligence process during the actual business sale. Often issues can come up a few weeks before the expected closing date that can take weeks or months to clear. 

 

An example would be a charge at Companies House by a bank for an old loan that was cleared 15 years ago. The bank division or even the bank may not even exist any longer. Even if they can be contacted, it may take them weeks to locate the records related to the loan and then provide the necessary documentation to clear the loan.

 

There are many such examples that can delay closing by months and can even affect the valuation if there are financial implications for the company.  Therefore, it is often prudent to engage a professional to do legal due diligence to make sure the company has a clean bill of health 2-3 years before a business sale is being considered.

Pre Sale Legal Due Diligence - Things to Consider
 

As part of a sale process, potential buyers will normally undertake due diligence on your business. This will involve responding to questions about your business and presenting it to the buyer so that it can verify the value of your business and identify any potential risks. The buyer will likely request information on all aspects your business, including client / supplier contracts, accounting and trading history, employees, property and any potential disputes. 

 

It is always advisable to obtain legal advice in relation to the due diligence exercise, since giving misleading information can sometimes constitute a misrepresentation, or create problems during the later stages of the transaction or after completion.

 

  1. Start early

The most successful sales are planned 2-5 years in advance. Selling your business is likely one of the most important decisions you will make, which means that planning is key, especially in relation to the commercial aspects of the business, for example, securing key contracts, ensuring there are robust terms with employee and considering compliance with laws.

 

  1. Compliant company filing history

UK companies are required to make annual filings and maintain records for a set period of time. Your company’s record on Companies House (the UK’s registrar of companies) is a public record and therefore the first place any potential buyer will go to carry out an initial check on your company. The key areas to focus on are:

 

  • Shareholdings – ensure the shareholding position is clear and consistent with the actual position;

  • Directors – ensure the appropriate directors are appointed to the board (or removed from it);

  • Controllers – the ‘PSC’ (Person of Significant Control) register shows the outside world the overall owner of the company, ensure it is up to date; and

  • Share charges – often charges granted by the company over its shares are left unsatisfied for long periods of time, even once the charge is, ensure that if the company has been subject to any charges, they are removed.

 

  1. Be impartial

Make sure you look at your business from a third party’s perspective; would a third party be able to interpret all of the company’s records? If they would not be clear to a third party, you will not be able to display the value of the business during the due diligence exercise, which would negatively impact the sale value. It is crucial to maintain accurate, compliant and accessible records.

 

Pre-sale bill of health check

Carrying out a pre-sale bill of health check will address all three of the key considerations listed above:

 

  • Starting early will allow not only retrospective issues to be addressed but will also plot a course forward to show how compliance with the company’s filing obligations can be achieved.

  • Identifying any deficiencies in the company’s filing history allows for those issues to be rectified before they are flagged by a potential buyer during the due diligence phase. If rectified properly, you will be able to explain the issue, highlight the action taken and ease any concerns the buyer may have regarding the filing history of the company.

  • Instructing a lawyer to review your company’s filing history will allow a specialist company lawyer to assess the company’s compliance with its filing obligations against the relevant statutory requirements and provide an outside view of whether any rectification work is required.

 

Joel Gocool is a corporate lawyer who specialises in advising on the sale of businesses. If you require advice on due diligence process or the sale process generally (from a legal perspective), please contact Joel Gocool on 01276 686 222 or at Joel.Gocool@Herrington-Carmichael.com.

Resources - Legal and Due Diligence for Business Sellers

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Joel Gocool a Solicitor at Herrington Carmichael outlines legal and due diligence challenges facing business sellers. Buyers will want to review records that demonstrate compliance with laws and that your supplier and customer contracts are in order.

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