10 stumbling blocks in a business exit

Every business exit is different and a seller’s requirements will vary depending on the nature of their target business, the parties involved and the wider commercial climate. Even so, we’ve noticed that a number of common issues crop up regularly, meaning it’s best to take a proactive approach to managing them if you can.

Quality of information

No matter what your exit plan is, providing full and accurate information early on is vital. It will save time (potentially shortening the deal timetable), offer buyers/investors the background data they need and limit the number of time-consuming follow up questions. An orderly and comprehensive data room will also give them confidence that the business has been managed responsibly.

Handing over in-depth information early also ensures that your buyer is already aware of any disclosures to be made against the sale warranties. Last minute disclosures can delay a sale as the buyer/investor needs extra time to process them.

On the other hand, if good information has been provided, a buyer needs to rationally consider if they need to make further enquiries. The due diligence process shouldn’t take months (or years!).

If you know issues may crop up, speak to your advisers as early as possible. They may be able to suggest a solution that could be put in place to resolve it, or work out a way to explain its potential impact on the business or structure of the deal.

Tidying up

Often, sellers resolve small issues behind the scenes without telling the buyer. It’s vital to set aside enough time to sort out any problem areas before it’s too late. These could include:

• Remedial work
• Formalising employment or third-party contracts
• Updating Companies House filings
• Updating data protection processes and policies

We often deal with target companies that have failed to buy back shares from former shareholders, in line with UK company law. This mistake can be very time consuming to sort out, so it’s important to identify and resolve it at an early stage.

Third party approvals

Third party consents, deliverables or issues can delay sales significantly. The rights of landlords, lenders, employees, former shareholders and key suppliers or customers can all slow the progress of a proposed sale. You may also need to get clearance from regulators (for example, under national security or merger control laws) if your exit involves a ‘change of control’.

Again, identify and account for potential problems and speak to third parties as soon as you can (unless confidentiality means you need to wait until the deal is all but certain).

Human resources

It can be hard for individuals who work for a target business to carry out their day to day roles while simultaneously managing the exit process. As a result, appointing a specialist legal project manager to support clients in managing the exit process, timetable and resources is becoming popular. At TLT, our LPMs spend one or two days a week with our clients and help to manage documents, costs and expectations on both sides.

Banking

It’s fairly unusual for a third-party bank or other funder not to be involved in an exit in some way. They may simply provide a letter of non-crystallisation of a charge or bank statements confirming the debt and cash position of the target just before completion. In other situations, they’re much more involved. Perhaps the current funder is being replaced on exit day, releasing existing security and replacing it with a new package.

It’s important to engage with funders as early as possible, to clearly outline the deal timeline and talk through the potentially complex banking mechanics. You may need to clarify points like:

• What form of deed of release will they need?
• What are their “know your client” checks?
• Will overseas facilities (and lawyers) be involved?

Financials

Many exits go wrong for financial reasons. The target’s performance can be affected in many ways during the exit process, due to factors like the loss of a major customer or unexpected market changes (both Brexit and the Covid-19 pandemic have had a significant impact over the past 18 months). But it works both ways – a deal may fall through because the target has over-performed and shareholders now want an enhanced purchase price to reflect this.

Don’t leave detailed discussions about pricing structure and calculations until the last minute.  Work them out before the draft legal documents are in play, as revising them to reflect ongoing negotiations can be expensive.

100% buy-in

If not every shareholder and director of the target business buys in to the proposed exit, how are you going to achieve it without their support? Can those who are in support resolve issues to approve the exit? Do they have the knowledge needed to answer a buyer/investor’s due diligence questions? Do they have the customer relationships? Can they give a buyer 100% of what is being sold?

Signatories

Be clear about who needs to sign what, when and how. Will you need to involve witnesses, attorneys, trustees, alternate directors, proxies or overseas parties? Will documents need to be signed in person or electronically? Once again, make sure this is built into the deal timeline and not left as an afterthought.

Warranty and indemnity insurance

Warranty and indemnity insurance (W&I) is an increasingly common insurance product which provides cover for certain losses due to breaches of warranties and/or a claim under the tax covenant in a sale agreement.

Before providing cover, the insurer will need to see a truly commercial transaction. The buyer will need to carry out due diligence as they normally would, the parties will need to negotiate the warranties on an arms' length basis and the sellers must carry out a thorough disclosure exercise. Any last minute disclosures and negotiations aren’t just between the sellers and the buyer; they must be accepted by the insurer and, if not, won’t be included in the policy.

Speaking to W&I insurers as early as possible will make sure the underwriter’s requirements are met in good time.

Deal timeline

Selling a business isn’t usually something that can be done in a couple of weeks. We’d expect a ‘standard’ transaction, with limited third party (e.g. bank and regulatory authority) involvement, to be completed in three to four months from the date that due diligence and agreement preparations begin.

If you want to minimise delays, keep the process on track and avoid costly redrafting of legal documents, it’s best to have a dedicated resource on both sides who manage the process and negotiate issues direct (rather than through legal drafting).