Posted: Thursday, 27 October 2011 @ 10:19
What are your plans for the future? At the present time it might be simply to hang on in there and stay in business. Despite that most business plans will include future expansion and/or exit strategies at some stage. In either case, those plans should include making sure the business is legally prepared for the expansion or exit process and all it entails.
At an early stage the process is likely to involve an investigation by any potential investor or purchaser into the business, often referred to as due diligence. This is because, unlike consumer purchases where there is considerable statutory protection for the buyer, the opposite is the case for investors in, or buyers of, a business where the principle of ‘buyer beware’ applies. As a result you are likely to be faced with detailed requests for information and documents about all aspects of the business. The investment or sale agreement will then include statements which you will be asked to confirm or ‘warrant’. If any of those warranties should not be true there are likely to be financial consequences to compensate the investor or buyer.
I have heard business owners involved in this process say that they have rarely had such a complete picture of their business as when they have been through such a due diligence disclosure exercise. The downside is that it could be rather on the late side to remedy any flaws that it might reveal in time to complete your intended sale or investment on satisfactory terms.
One aspect that I would suggest you would be prudent to attend to now, not only so that you will be ready for any of these future eventualities, but so that your business will be on a much more solid footing immediately, is to check your contracts are sound. Many businesses start off with informal arrangements with both customers and suppliers. As time goes by and the business grows you become more dependent on these links. The more important they become, the more difficult it is likely to be to put a formal agreement in place.
The downside of this situation is that if you want to bring in an outside investor or to sell your business, they will not be happy to proceed without clear contracts with key suppliers and customers. At such time, if you suddenly try to put contracts in place, those suppliers or customers will realise that you are in a weak position and may drive a hard bargain to do that. The worst case scenario is that you may lose the potential investor or buyer if you cannot secure satisfactory terms.
What I would therefore urge you to do is:
- carry out an audit of all your customers and suppliers identifying those that are key to the success of your business
- make sure you know all the relevant terms on which you trade with them
- check to what extent your trading terms are actually agreed and documented
If any of your trading arrangements are less than properly agreed and documented, the best time to remedy that is now. Don’t wait until you want to move on to the next stage, whatever that may be. The sooner you start, the easier it is likely to be. You can carry out proper negotiations on a more equal footing without the time pressure. The added bonus is that your business will benefit immediately rather than waiting until prompted by an investor or purchaser when you might lose out financially.
So don’t delay – bring your expansion or retirement plans one step closer and make your business more likely to succeed.
Commercial Solicitor Birmingham
0845 003 5639
Blog by Sue Mann
Sue is an experienced commercial solicitor based in Birmingham from where she helps businesses all over the country advising on, drafting, and reviewing business contracts and commercial agreements. View profile
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