For many business owners, especially entrepreneurs, an exit strategy is often a medium-to-long term goal in place from inception of the business. However, the tendency to focus on day-to-day operations can mean critical elements of maximising exit value are overlooked. Nathan Banks, Managing Partner at Banks Legal, a UAE-based law firm operating in the region since 2009, explains some key considerations when preparing a business for sale.
Selling any business requires careful planning and preparation, in much the same way as you would get your house in order before selling it, to ensure you maximise the return on your investment. Your house may look good enough from the outside to attract prospective purchasers, but its foundations need to be sufficiently robust to stand up to due diligence assessments.
Observing the mantra ‘prevention is better than cure’ goes a long way to ensuring the health of your business. Regularly carrying out business ‘health checks’ is essential to ensuring that, when an exit opportunity presents itself, you are in a position to seize it, without encountering delays, having to spend significant money preparing for sale, or taking a cut on the purchase price.
From my experience advising on numerous business disposals in the UAE, here are some top tips to help you prepare your business for sale:
1. Licensing, permits and approvals: As a business evolves, it is often the case the scope of its business activities will also grow. From a compliance perspective, this may require the addition of new activities to an existing license, or where activities are not compatible, an additional entity established to carry-out and service the additional business activities. Further, new rules and regulations may require additional permits and approvals be obtained. It is important to regularly review your business activities against existing licenses and permits to ensure compliance. Failure to do so may result in discounting the valuation prescribed to the business – particularly where the costs of becoming compliant are significant. This oversight could also result in sanctions from government authorities, including fines or temporary suspension of your ability to conduct business, which could attract warranty claims or other liability, were you still able to achieve a successful exit.
2. Corporate governance: Good corporate governance covers a multitude of elements. It is imperative to ensure your business is compliant with the UAE Companies Law, as a starting point. You need to ensure your corporate structure supports the current operations of the business and future expansion, limits liability and protects investments. Revisit the constitutive documents, shareholder and license agreements, for example, whenever there are significant changes in the business. This will ensure shareholder and stakeholder interests are properly protected and there are appropriate agreements and mechanisms in place to govern any potential disputes. Prospective purchasers will ask questions about all of these things during the due diligence process and you should be in a position to demonstrate compliance across all aspects of corporate governance at all stages of this process.
3. Intellectual property: In all cases, particularly if intellectual property is a key asset influencing the value of the business, you need to ensure this is protected. In many cases, this will mean registering intellectual property rights, but unregistered intellectual property can also be protected through contractual arrangements. Furthermore, if data is a key asset of your business, ensure it has been obtained legally and is stored and protected in compliance with relevant laws. You must also have the legal right to use data in the way you need to for your business and with key stakeholders, in the way that a prospective purchaser will attach appropriate value to.
4. Commercial contracts: Review all existing contracts to ensure they remain current and valid and contain key rights and protections to avoid price reduction opportunities following due diligence. This is particularly important where future revenue streams are central to the valuation exercise. Demonstrating secure long-term revenue, protected by robust contract arrangements, will maximise value. Change of control provisions can have a big impact on this, so be aware if your key contracts require counter party consent in an exit scenario and take steps to secure this consent in advance. Generally, contract terms should be revisited regularly to ensure they still meet your business needs and reflect changes to your business and relevant legal developments in your industry.
5. Employee planning: Securing key employees is often a condition of a successful exit. Ensure employment contracts and packages (such as share, bonus or options schemes) reward loyalty, have appropriate notice periods and include reasonable restrictive covenants – preventing competitors from poaching staff and ensuring staff cannot take confidential information or leave and take a client with them. Assess the rules for hiring and firing staff, to ensure the business is not exposed to unnecessary liability. Also, be prepared to offer key employees incentives to stay with the business to effect a sale – this may include offering them a carried interest in a successful sale, or other incentives.
In the context of looking to maximise exit value, early engagement of legal advisors can deliver significant value by ensuring your business’s house is in order and ready for due diligence. At Banks Legal, we regularly deal with SME sales, mergers and acquisitions. We find if businesses engage us early in the sale process, we are able to help them spread legal costs over time, which also helps them to avoid significant last minute legal expenditure when gearing up for sale.
In response to these requirements, we launched a monthly fixed-fee legal services retainer product called LexFlex, a component of which includes a business health check, together with ongoing consistent legal support. Our SME clients have found this a valuable and affordable option when preparing for exit.