COVID-19: Getting ready for sale during the pandemic
The pandemic will undoubtedly brew uncertainty in M&A transactions. Many potential sellers who had hoped to sell their business will be reconsidering whether this is the right time. Likewise buyers, may find funding difficult and question whether such an investment is wise during this time. In either scenario, the negotiation process is likely to be drawn out. In order to therefore maintain the momentum of the sale process, prospective sellers should utilise this time to get their ‘house in order’. This will allow sellers to package the business to be sold so that it can continue to operate on a day-to-day basis, but also give them flexibility to move to a sale process at short notice at the optimal time.
Without any certainty that a buyer will be forthcoming or that the transaction will complete, sellers may be reluctant to invest the time or incur the costs which would be involved in implementing a pre-sale review of its business. However, in the long term, reviewing the business pre-sale and undertaking a reorganisation of its business can deliver a number of benefits for both the potential seller and the prospective buyer:
Undertaking an internal review into the company, its business and operations from the perspective of a potential buyer, will allow a seller to identify and address any potential issues or areas requiring improvement before a buyer discovers them during its due diligence process. If a serious issue is revealed, the seller can solve the problem or make changes before it engages with prospective buyers. This can improve marketability and increase prospects of a successful sale. If such issue cannot be resolved, then the seller’s advisers can manage the disclosure of such issue to any prospective buyers, and develop negotiating strategies from the outset as to how to deal with them.
Create certainty in the business
- Certainty as to sale assets - the seller should assess and identify the assets and liabilities that comprise the business to be sold. If the assets being sold are mixed with assets which are going to be retained by the seller going forward, consider conducting a pre-sale reorganisation (see previous article here). Such a reorganisation, will ensure that the seller has all the assets its needs going forward in the retained business and also provide a prospective buyer with a greater degree of certainty as to what assets and liabilities are included in the business.
- Certainty as to contractual arrangements - a pre-sale review can be used to ensure that:
- Oral contracts are documented;
- Key contracts are placed onto standardised terms; and
- Any contractual arrangements which will be needed between the sale group and any retained business post-sale can be put in place before starting a sale process (it will be helpful to a buyer if it can see that the target group and the retained business have been operating independently before the sale).
It is in the seller’s interests to ensure that they can provide greater certainty to a buyer. That way, the seller will not have to price any potential liabilities into the offer, and will be able to undertake focussed due diligence, thereby making the transaction process smoother and reducing costs.
Reducing any potential issues with third parties
Consent from third parties may sometimes be needed as part of the sale process e.g. a party to a key contract who will need to confirm that they will not seek to terminate a contract on a change of control etc. Obtaining consent when completion is imminent can often mean that such third parties think they have the upper hand and try to extract better terms for giving such consent. It may therefore be possible, at this time, to obtain third party consents or restructure existing contracts so as to remove change of control provisions before third parties learn of any impending sale thereby ensuring that they have a weaker negotiating position.
The issues identified above if not conducted pre-sale, are likely to delay completion whilst they are being sorted. Dealing with them pre–sale may minimise delay during the transaction process.
The above does not constitute legal advice nor is it complete list of issues to consider pre-sale. Should you wish to discuss how we can help get your business ready for sale, please do not hesitate to call or email Theresa Grech on 07849 834082 or TheresaGrech@incegd.com or your usual contact at Ince.