By Iain Mackintosh, Owner, Simply Docs

Business owners whether they are selling based on a pre-planned sale strategy, retirement, or in response to buyers’ expansion and investment opportunities are always seeking to maximise the value of their business.

The overriding criteria in valuing a business is generally historical financial performance, with buyers analysing the risks associated with the business and its’ sustainability, and judging the likelihood of future projections and scalability.

Due Diligence

Selling a business is both an exciting and often daunting prospect. Any prospective sale – which is in itself a complex process – needs to be supported by key documents containing vital information on the business and its operation.

The list of legal documents required for due diligence is extensive and all documents should be kept up to date with records retained of prior versions. The accounts and financial statements will be expected to be supported by contracts, agreements, forms and other documents ranging, inter alia, from company formation; shares and shareholders; statutory records, registers, filings and Board minutes, finance and security, insurance and licences, taxation and pensions and intellectual and real property. Company and employment contracts are also vital and health & safety documents could also be highly significant.

Whilst it is natural to focus on the analysis of the financial statements for example profitability, assets and liabilities, a clear presentation of documents, and evidence of consistent management of the documents will help to show that the business has solid systems and safeguards in place. Both the clauses within the individual documents and immediate availability of them will help minimise a buyer’s perception of risk.

It is important to get all aspects of the company/business documented as soon as possible and then kept up to date as such continuity will prove a strong indication of the organisational strength and good practices of the business and, therefore, its sustainability.

The Human Side

Employment contracts and all documents relating to staff processes, such as sickness and absence policy, grievance procedures and disciplinary policy etc., employee appraisals and all other records should be up to date, clearly organised and formatted. Buyers will want to assess the terms and conditions of employment and directors service agreements from start dates to salaries, bonuses, contractual increases, and benefits.

Properly drafted and managed HR documents will enable a buyer to assess operational continuity in respect of roles and responsibility, and therefore reduce perceived risk and/or identify additional opportunities for improvement.

In addition to employed staff, it is vital that relationships with any contractors and freelancers are formally documented. Such documents will mitigate risks and are essential where such parties are working with intellectual property. For instance, where intellectual property is developed by a contractor on behalf a client this intellectual property will be owned by the contractor if there is no agreement that expressly states that such intellectual property is owned by the client. This could seriously damage a business valuation.

Could you imagine a buyer paying “top dollar” for a construction or manufacturing business where the absence of documents means they cannot be sure that health and safety has been managed, monitored and recorded properly?

Agreement all round

A business’s wealth is assessed very much on the value of its services and products to clients and customers, and as such client contracts and customer agreements are extremely valuable, especially when they provide evidence of steady and/or recurring income which can be easily and accurately forecast. A business owner wanting to improve the appeal of their business to prospective buyers would be wise to review all sales related contracts and agreements, making sure they are current, clear and concise, and complete.

Equally, supplier contracts and agreements; everything from property leases to internet service provider contracts should up to date and be readily accessible. These legally binding documents will be assessed and reviewed and often financial commitments reviewed by prospective buyers as part of the whole business package.

Presentation is everything

Every business, from the single entrepreneur to a much larger company with multiple sites and hundreds of staff, needs a clear policy when it comes to document drafting, presentation and management.

If a sale or even gauging interest in a possible sale is on the horizon, this becomes even more important. Where a business grows and document processes become haphazard and inconsistent, this should be reviewed at the earliest opportunity to employ consistent presentation, storage and accessibility. This will not only improve the business as a whole, but help to make it far more appealing to prospective buyers who will perceive it as forward thinking, organised, and in control of each aspect of the operation.