For many business founders, selling up and benefitting from the value amassed over the years is the long-term goal. However, failing to spot legal and practical risks can reduce value and potentially put the sale at risk.
Ensuring everything is in line to entice and reassure potential buyers is an important step to a sale, and it starts with examining risk. Kate Westbrook, Thrings’ Head of Commercial, considers a hypothetical example of where things can go wrong.
Setting the scene
Joanne is a director in a £10million turnover software business that she founded and funded herself.
She didn’t have the cash to pay for lawyers, so she found some legal documents on the internet and used them when she needed to take on some contractors, when she took on her first employee and when she started to sell her software products to customers.
There’s absolutely no shame in this – it’s not recommended to ‘borrow’ a document found on the internet (not least because it is likely to amount to copyright infringement), but it’s what Joanne needed to do to get up and running in the first place.
Fast forward to 2028. Joanne is now in a position where she is looking to sell her business and has buyers lined up. During the sale process, their lawyers discover that:
- She doesn’t own the intellectual property in the software that was developed by her contractors, because the contract they signed was the two-pager she found on the internet.
- Her customer licence agreements have a major flaw in them in that they have not capped her liability for any defects in the software which her buyer views as a significant risk.
- Her employment contracts don’t contain enforceable restrictive covenants in relation to her now key members of the team, without whom she would be really stuck.
Because of the risk that these three issues represent to the business, the buyer pulls out of the deal.
Pretty depressing, right? And entirely possible. These kinds of issues can cause deals to fall over or, at the very least, gives the buyer a reason to renegotiate the deal and reduce the purchase price.
How to avoid putting your business sale at risk
A legal Business Health Check can be carried out at any stage of a business’ lifecycle. The aim of this process is to identify and then act upon key legal issues which are highlighted. In an alternate reality to the fictional case study above, the legal health check would have identified the issues and recommended actions to improve the position.
The health check report would have highlighted the following:
- The contractor agreement does not contain an appropriately worded assignment of all types of intellectual property created by the contractor. It recommended that a formal IPR assignment is entered into by Joanne’s contractors, which they were happy to do.
- It was noted that the customer licence agreement had several drafting errors and several areas which are a risk to the business. Her directors took up the recommendation that this document be re-drafted so that this could be agreed with customers at the time of their next licence renewal.
- The report highlighted that key employees were not incentivised to stay with the business and did not have enforceable restrictive covenants. New employment contracts were introduced alongside an employee share option incentive plan, so everyone was happy with the changes.
In this reality, the business sale goes ahead with no issues, due to the action taken ahead of the business sale.
Thrings’ Commercial lawyers are experienced in supporting businesses of all sizes through the complicated changing worlds of contracts, intellectual property and technology, helping clients to stay on top of new laws and ensure best practice.
To find out more about the Business Health Check and how it can help your organisation achieve its goals, get in touch today.
