Exiting an investment - how Single Family Offices can prepare a company for sale

A Single Family Office (SFO), an organisation managing the wealth of a high-net-worth family, typically would invest across various asset classes, and in some instances take majority or full stakes in private companies. Depending on the family’s objectives, SFOs can take long-term views on their investments, particularly if the investment is in a business founded by the family, but equally may take the decision to partially or fully exit an investment (whether integrated into a broader strategy or pursued when opportunities present themselves).

In this article, we set out some initial steps to consider in anticipation of a sale, whether actively sought or following an unexpected approach.  

Corporate Housekeeping

One area that could delay or even hinder a future exit is corporate housekeeping. Whilst it may seem simple enough, it is important to check whether corporate record keeping, filings and general corporate compliance are up to date, and records available for when purchaser due diligence commences. In particular, the company’s statutory registers will be carefully reviewed by a purchaser’s legal team, and any material discrepancies are likely to need rectification as part of the sale process (if not already addressed). This could lead to the purchaser holding back some of sale proceeds and/or the vendor(s) having to indemnify the purchaser in respect of any related liabilities. Where there are fixed plans for how it is going to use sale proceeds, having to provide an indemnity or forego some of the proceeds for a set period after completion are unlikely to be palatable options.

One particular issue that can cause problems during a sale process is when a company has completed a buyback of its own shares which, if not carried out properly, can be difficult to unwind or rectify. It is advisable that prior transactions involving the company’s share capital are properly documented and any issues identified and rectified as part of this ‘corporate housekeeping’ review. Similarly, where share transfers have not been properly recorded in the statutory registers, a purchaser will most likely insist this is rectified prior to completion of a share sale.

Vendor Due Diligence

Although in almost all sale processes a prospective purchaser will undertake their own due diligence – typically instructing lawyers, accountants, tax advisors and/or (depending on the business) specialist property advisors to assist them – an appropriate level of vendor’s own due diligence prior to marketing the business can greatly help identify possible future problem areas. The benefits of identifying possible problem areas at this stage include:

• rectifying them before the purchaser’s own due diligence process starts, so that process can be completed more quickly;
• avoiding distractions during the sale process (arising from unexpected risks / issues);
• avoiding the need for more costly and time-consuming solutions during the sale process (which can often be the subject of negotiation with a purchaser); and
• in the most extreme circumstances, avoiding the risk of a transaction aborting, the purchaser losing confidence in the deal or seeking to renegotiate the price.

The vendor due diligence report can also be made available to potential purchasers to give them a head start and hopefully minimise the questions they have for management.

At the same time, the vendor due diligence process need not be disproportionate, and is often focussed on some of the following key areas.

Commercial contracts

Considering whether arrangements with important customers, suppliers or other partners are adequate, properly documented and whether potentially disruptive provisions (such as termination or change of control provisions) could be triggered by a sale event.

Other company records

In addition to corporate records mentioned above, are employee contracts, policies and handbooks in order and compliant with current employment law requirements? Are the company’s pension records properly maintained? Are all title deeds and leases relating to company’s real estate easily available? This last item can particularly cause issues in relation to businesses with a significant real estate asset base.

Disputes

In the event that there are any ongoing disputes or litigation, or even known events that are likely to lead to the commencement of formal dispute resolution procedures, where possible it can be advantageous to try to settle in advance, so that the prospect of that litigation does not loom over any sale process.

Regulation & Compliance

Where purchasers are undertaking due diligence on businesses in a regulated sector, there can be a specific focus on ensuring the company has complied with their regulatory obligations (usually also the subject of specific warranty protection in the sale documentation). It is therefore important to be able to evidence compliance by maintaining up to date records. This can include hot topic areas such as data protection or holiday pay and minimum wage compliance, as well as other potential risk areas such as environmental and anti-bribery compliance.

Intellectual Property

Where there is key IP within the business, it is important to ensure that such IP sits within the correct entity, is properly registered and any renewals or new applications are submitted and up to date. It is also important to consider whether there are any specific gaps in the company’s IP coverage, or if the company is reliant on third parties (e.g. developers) to prove ownership of their IP.

IT, payroll & other systems

As a practical consideration when selling either a business division, or a subsidiary within a group, are there any systems or services that the subsidiary or division relies upon that will need to be addressed as part of the sale process (e.g. through the provision of transitional services)? 

Final Thoughts

Of course, it is difficult to cater for every eventuality that may occur during a sale process, and there are often ‘unknown unknowns’ that can crop up even in the most well-prepared sale processes. Similarly, depending on the structure of the SFO’s original investment, tax planning and structuring is also likely to be a consideration upon exit.

Whilst not possible to identify all possible risks for an SFO exiting a business, we have sought to highlight some of the key planning and action points for an SFO considering a sale. We understand the unique a challenges faced by SFOs and invite you to contact Mike Barrington, Hamish Perry or your usual contact at Charles Russell Speechlys to discuss how we can assist you.