Corporate governance tips for a clean sale & succession

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Entrepreneurs who have built strong businesses see the final step in their journey as the successful sale of their business or the orderly transition of their business to family members. Implementing good corporate governance practices will facilitate a successful outcome from each, whereas poor corporate governance can lead to loss of value, broken relationships and associated complication, delay and cost. An exit or succession will benefit from addressing these 4 key areas.

Get your structure in order

To effect an exit or succession, a neat corporate structure is required. It’s highly preferable to implement the appropriate structure in advance of any transaction, otherwise you will be forced to address the relevant issues as part of your transaction. Having to do so will cause delay, may leave you in a weakened negotiating position and may give rise to issues that cannot be resolved within the required time frame of your counterparty. So make sure your ownership structure is simplified, including that the business assets are owned by the correct entity, that assets to be retained (eg. land) are held in a separate entity and that personal assets are not owned by the business entity.

Invest in a Shareholders’ Agreement

If there is joint ownership of your business, you need to ensure that there is a shareholders’ agreement in place. Shareholders’ agreements set the rules for dealing with a range of business critical events including key decision making, veto rights, admission of new owners, death, illness, resignation, termination, disputes and disposals/exits. The value to business owners in taking the time to negotiate and agree the principles that will govern these scenarios cannot be overstated. A well drafted shareholders agreement will provide a clear path to navigate what will likely otherwise be a fraught path and will minimise the prospect of material dispute, delay and the risk of lost opportunities (eg. a minority shareholder being able to prevent a sale supported by the majority).

Rigorous contract management

Buyers want clarity and certainty about the state of your business. To get that, your contractual arrangements need to be in order, as they encapsulate the value of your business. There are some common issues to focus upon.

Your standard contracts need to be fit for purpose.  Material issues can arise where your standard contractual terms have not been kept up to date with developments in the law and relevant regulation, or where they are used for a different commercial arrangement to the one they were originally prepared for. For example, do your contracts have the appropriate Personal Property Securities Act (PPSA) provisions, have they been updated to reflect the Unfair Contract provisions of the Australian Consumer Law, or do they contain the appropriate disputes provision where you are dealing with international counterparties. Further, an equipment rental agreement is very different to a hire purchase agreement, as is an employment contract to a consultancy contract or a supply agreement to a distribution agreement. A buyer is going to see risk in contracts that are not fit for purpose, which is likely to adversely affect your negotiating position and the value you may be able to extract from the proposed transaction.

Also, a buyer is not going to see the value in and pay for a commercial arrangement it cannot rely upon.  Accordingly, you need to ensure that extensions or variations to your commercial arrangements are formally documented. You should also be mindful that Term Sheets / MoUs / Heads of Agreement are generally expressed to be not binding and need to be formalised in detail to be legally enforceable.   

Poor record keeping and regulatory compliance

Poor record keeping is a double edged sword in the context of an exit transaction. It can mean you don’t know if and where you might have issues within your business that you would otherwise disclose to the buyer (to avoid them having a claim against you) or fix in advance of any transaction. Poor record keeping will likely result in the buyer ascribing a greater level of risk to the proposed transaction, which will be reflected in the terms the buyer is prepared to accept and the value they’re prepared to pay. Similarly, a buyer’s perceived risk of a proposed transaction will be heightened by a poor record of regulatory compliance.

These areas highlight the importance of preparing for a successful business sale or succession. Don’t hesitate to contact me to discuss your exit strategy.

Gary Thomas

PRINCIPAL - Grondal Bruining

Phone: +61 8 6500 4375 | Mobile: +61 414 858 584