Our popular eBook How to Avoid the Pitfalls When Selling a Business highlights the scrutiny your contractual agreements will be subject to when you’re approached by potential acquirers. So, in the second of our blog series on the obstacles that could prevent you from achieving maximum value when you sell a business, we’re taking a closer look at contracts.
Take a moment to consider your contracts with clients, suppliers and employees…
Do they exist? When was the last time you reviewed them? During the due diligence phase of any business sale, your buyer’s lawyers will review every contractual document with a fine-tooth comb, so it’s critical to a successful exit that you evaluate them thoroughly before you decide to sell a business.
If you can’t show potential acquirers up to date contracts – especially in areas upon which your business is heavily reliant – it could sound a warning bell for them that buying your company is a risky endeavor. Buyer fatigue could also set in and exacerbate a case of cold feet if you take too long to locate or correct contractual documents that have been requested.
Recent contracts that are fit for purpose and easy to access will give interested parties confidence that they are buying a company that is as robust behind the scenes as it appears on the surface.
Here are some tips for getting your contacts exit-ready…
Client contracts
Every smart business owner knows it’s foolish to enter into an arrangement with a client without a written contract. In the initial stages of working together, the contract is most likely set out and signed with every ‘t’ crossed and every ‘i’ dotted. But then years pass… and because of ‘a loyal working relationship’ and ‘a strong sense of trust’ – there seems little need to review and update the contract…
The problem when you come to sell a business is that this trust – though meaningful to you – is just thin air to a potential buyer and their lawyers. It doesn’t translate. An out of date contract may even be seen as worthless. How does the acquirer know they can depend on continued business from this client? They may even be worried that the client will jump ship when you exit.
Get an expert review of all your client contracts, especially the longstanding ones that may not have been objectively scrutinised for some time. If a contract is coming to an end, incentivise that client to renew early or increase the contract term. Incentives don’t have to be discounts – they could include a new service or simply more of your time. Remember, happy clients carry immense value in your buyer’s eyes!
Supplier contracts
Your supply chain is the engine that drives your business; a finely tuned configuration of cogs that must work together for ultimate success. All it takes if for one of those cogs to stop working and your key business deliverables will be at risk.
Whilst acquirers will appreciate that interruptions to the supply chain are a fact of life sometimes (due to unforeseen bad weather, natural disasters, or political and economic factors), they will be looking for assurance that there is a clear contingency plan in place if the worst happens and key components, ingredients, relationships or cashflow are impacted.
So, not only do you need to regularly update all your supplier contracts, you need to map out your entire supply chain as you prepare to sell a business. Include the physical location of key customers and suppliers – as well as your suppliers’ suppliers and customers’ customers. Stand back and evaluate any potential weak spots in the overall chain and have alternative suppliers lined up where you can.
Another important element of supply chain risk management is keeping all your suppliers happy! Make sure you can demonstrate to your acquirer that all invoices are paid on time and that you have strong, responsive lines of communication with key supplier contacts.
Employee contracts
Your workforce is a major selling point, yet staff are one of the most fluid elements of a business. In our blog How to identify your S.P.O.F.s (single points of failure) we gave you some tips of keeping hold of valuable employees and all the talent, skills, experience and relationships they bring to your company.
However, despite your best efforts, staff will come and go for a wide variety of reasons and it can be very hard to control that. What you can do is make sure that up to date employment contracts are in place for every member of staff. Are they signed? Do probation and notice periods dovetail with the requirements of the business? Do they take into account the latest legislation and regulations?
In addition, you should create an employee handbook if you don’t have one already. Timekeeping, holiday, health and safety, sickness, and maternity leave policies are just a few of the areas it should cover. What this demonstrates to acquirers is that you have a business where everyone is ‘on the same page’ – staff are clear what’s expected of them and what they can expect in return.
Other contracts that you may need to get professionally evaluated to ensure that they are fit for exit before you sell a business include shareholders’ agreements, memorandum and articles of association, service contracts, and leases on buildings and equipment.
Stay tuned to our blog for more guidance on navigating the pitfalls of selling a business.
Contact Entrepreneurs Hub in confidence to find out how exit-ready your contracts are – and how saleable your business is. We’re a friendly corporate finance company helping business owners prepare for sale, overcome challenges and barriers to exit – and achieve maximum value.
Other blogs you may find useful:
