Back

Selling a Business? Hot Topics in 2015

The recent economic upturn in the UK has seen a marked rise in business sales and merger activity and now may be the opportune time for those wishing to sell their business to take the plunge. This article is aimed at potential sellers and focuses on the trends and issues arising so far this year and how they may affect a business sale. As with most things, identifying and addressing potential issues at the earliest opportunity can avoid unnecessary headaches further down the line.

IMG_6289-Edit.jpg

Business Accounts

Although sometimes a useful guide, accounts cannot be relied upon to predict the future prospects of a business. They are more properly used to look at a business’s past performance and a buyer will generally draw very little comfort from them when negotiating a price with a seller. Therefore a buyer will usually require the seller to provide forecasts estimating how the business will perform up to and after completion of the sale. It is commonplace for a buyer to negotiate down the agreed purchase price, if during its financial due diligence it finds reason to believe the forecasts are inaccurate or overly optimistic. A seller’s failure to provide realistic financial information throughout the transaction can have significant repercussions and this may even include the buyer backing out of the deal. Ensuring financial information is in order and up to date can help to reduce this risk.

Customer Base

Many businesses benefit from strong relationships with a concentrated and loyal customer base. Often a small number of these “crown jewel” customers will generate a significant proportion of a business’s turnover and whilst this may not cause a seller any concern, it can make a potential buyer nervous for a number of reasons. The most significant issue for a buyer will be that it has little to no control over the customer base after completion and although a buyer can endeavour to maintain the existing relationships, it is ultimately each customer’s decision as to whether they continue to deal with the business. Apart from contractual assurances (e.g. non-solicitation of existing customers), a buyer can do very little to put a buyer’s mind at rest other than broadening its customer base.

Data Protection Act 1998

A seller will have many obligations under the Data Protection Act 1998 when selling its business and buyers often seek assurances from a seller that these obligations have been and will continue to be complied with. During the due diligence process a seller will be required to supply the buyer with various personal data relating to its employees, customers and suppliers. A seller should seek legal advice in relation to these obligations at the earliest opportunity to avoid potential criminal and civil sanctions for non-compliance with the Data Protection Act 1998.

Holiday Pay

A recent decision by the Employment Appeal Tribunal concerning the calculation of holiday pay may, in certain circumstances, expose employers to large underlying claims for unpaid holiday pay (please see our blog at http://blog.lblaw.co.uk/holiday-pay/ for more details). This decision has had a significant impact on business sales and many buyers are now being advised to obtain indemnities from sellers to cover off the risk of such employment claims being made. Sellers, that have employees, would be advised to obtain advice from a specialist employment solicitor as to how they can mitigate the risk posed by this decision.

Management Retention

All businesses depend on the continuing leadership and direction of their management to succeed and this is most apparent with owner managed businesses. Potential buyers of this type of business will be concerned that, as with concentrated customer bases, the business may suffer from the seller’s absence post-completion. Many buyers will want assurances that key employees will remain with the business for a certain length of time after completion. Alternatively, the buyer may request that the seller enters into a consultancy agreement to provide interim management assistance whilst the buyer becomes more accustomed with the business. If possible, potential sellers should ensure they have management structures in place and people with sufficient experience to keep the business moving forward after it is sold and they have left.

If you are thinking of selling your business and would like more advice on any of the issues covered above, please contact a member of the Corporate and Commercial team at Lanyon Bowdler.