How to Get your Contracts in Order Before you Sell a Business
Our popular eBook SELL – The 30-Minute Guide to Preparing Your Business for Sale highlights the scrutiny your contractual agreements will be subject to when you’re approached by potential acquirers. So, in the second of our blog series on the obstacles that could prevent you from achieving maximum value when you sell a business, we’re taking a closer look at contracts.
Take a moment to consider your contracts with clients, suppliers and employees…
Do they exist? When was the last time you reviewed them? During the due diligence phase of any business sale, your buyer’s lawyers will review every contractual document with a fine-tooth comb, so it’s critical to a successful exit that you evaluate them thoroughly before you decide to sell a business.
If you can’t show potential acquirers up to date contracts – especially in areas upon which your business is heavily reliant – it could sound a warning bell for them that buying your company is a risky endeavour. Buyer fatigue could also set in and exacerbate a case of cold feet if you take too long to locate or correct contractual documents that have been requested.
Recent contracts that are fit for purpose and easy to access will give interested parties confidence that they are buying a company that is as robust behind the scenes as it appears on the surface.
Here are some tips for getting your contacts exit-ready…
Client contracts
Every smart business owner knows it’s foolish to enter into an arrangement with a client without a written contract. In the initial stages of working together, the contract is most likely set out and signed with every ‘t’ crossed and every ‘i’ dotted. But then years pass… and because of ‘a loyal working relationship’ and ‘a strong sense of trust’ – there seems little need to review and update the contract…
The problem when you come to sell a business is that this trust – though meaningful to you – is just thin air to a potential buyer and their lawyers. It doesn’t translate. An out of date contract may even be seen as worthless. How does the acquirer know they can depend on continued business from this client? They may even be worried that the client will jump ship when you exit.
Get an expert review of all your client contracts, especially the longstanding ones that may not have been objectively scrutinised for some time. If a contract is coming to an end, incentivise that client to renew early or increase the contract term. Incentives don’t have to be discounts – they could include a new service or simply more of your time. Remember, happy clients carry immense value in your buyer’s eyes!
Supplier contracts
Your supply chain is the engine that drives your business; a finely tuned configuration of cogs that must work together for ultimate success. All it takes if for one of those cogs to stop working and your key business deliverables will be at risk.
Whilst acquirers will appreciate that interruptions to the supply chain are a fact of life sometimes (due to unforeseen bad weather, natural disasters, or political and economic factors), they will be looking for assurance that there is a clear contingency plan in place if the worst happens and key components, ingredients, relationships or cashflow are impacted.
So, not only do you need to regularly update all your supplier contracts, you need to map out your entire supply chain as you prepare to sell a business. Include the physical location of key customers and suppliers – as well as your suppliers’ suppliers and customers’ customers. Stand back and evaluate any potential weak spots in the overall chain and have alternative suppliers lined up where you can.
Another important element of supply chain risk management is keeping all your suppliers happy! Make sure you can demonstrate to your acquirer that all invoices are paid on time and that you have strong, responsive lines of communication with key supplier contacts.
Employee contracts
Your workforce is a major selling point, yet staff are one of the most fluid elements of a business. In our blog How to identify your S.P.O.F.s (single points of failure) we gave you some tips of keeping hold of valuable employees and all the talent, skills, experience and relationships they bring to your company.
However, despite your best efforts, staff will come and go for a wide variety of reasons and it can be very hard to control that. What you can do is make sure that up to date employment contracts are in place for every member of staff. Are they signed? Do probation and notice periods dovetail with the requirements of the business? Do they take into account the latest legislation and regulations?
In addition, you should create an employee handbook if you don’t have one already. Timekeeping, holiday, health and safety, sickness, and maternity leave policies are just a few of the areas it should cover. What this demonstrates to acquirers is that you have a business where everyone is ‘on the same page’ – staff are clear what’s expected of them and what they can expect in return.
Other contracts that you may need to get professionally evaluated to ensure that they are fit for exit before you sell a business include shareholders’ agreements, memorandum and articles of association, service contracts, and leases on buildings and equipment.
Stay tuned to our blog for more guidance on navigating the pitfalls of selling a business.
Contact Entrepreneurs Hub in confidence to find out how exit-ready your contracts are – and how saleable your business is. We’re a friendly corporate finance company helping business owners prepare for sale, overcome challenges and barriers to exit – and achieve maximum value.
Other articles you may find useful:
Similar Insights
FAQs – Selling Your Company
How do I sell my business in the UK?
Selling a business in the UK typically involves preparing financial information, obtaining a valuation, identifying suitable buyers and negotiating the terms of a sale. Most owners work with an M&A adviser to manage the process confidentially, approach qualified buyers and maximise the value achieved.
At Entrepreneurs Hub, we talk about five key areas that make the difference between success and failure when selling your business. Read more…
What is my business worth?
A business is typically valued using a multiple of its profit, usually EBITDA or adjusted net profit. The multiple depends on factors such as growth potential, recurring revenue, customer diversification and management strength. Professional valuation provides a realistic price range and helps position the business effectively for buyers.
Determining your business’s value is more than just calculating a number it’s complex with key factors, that said the basic equation is actually quite simple. Read more…
How long does it take to sell a business?
Selling a business in the UK typically takes between six and nine months from preparation to completion. The timeline depends on business readiness, buyer demand and the complexity of due diligence. Early preparation and clear financial reporting can help shorten the process.
When is the best time to sell a business?
The best time to sell a business is when it is performing strongly, growth prospects are clear and you are not under pressure to sell.
Business owners often achieve the strongest outcomes when:
-
Profits and revenue are growing
-
Financial records are clear and well prepared
-
There is visible future growth for buyers
-
The owner has planned the sale 12–18 months in advance
Market conditions can also influence valuations. Strong buyer demand, sector growth and favourable economic conditions can increase acquisition activity, but a well-prepared business can attract interest in most markets.
Deal activity often increases during spring and autumn, although transactions complete throughout the year. In practice, preparation and business performance usually matter more than trying to perfectly time the market.
Ultimately, the best time to sell is when both the business and the owner are ready, with the company positioned to demonstrate strong value to potential buyers.
Do I need an adviser to sell my business?
Many business owners choose to work with an M&A adviser to manage the sale process. Advisers help value the business, approach qualified buyers confidentially and negotiate terms. This structured approach can increase the likelihood of achieving a higher value and a successful transaction.
How is confidentiality protected during a sale?
Confidentiality is protected through controlled information sharing, anonymous buyer approaches and strict non-disclosure agreements. Potential buyers receive limited information initially and must sign an NDA before any sensitive details are released. Business owners approve prospective buyers and maintain visibility over all documentation throughout the process.
How do I value my business before selling?
Valuing a business before selling usually involves analysing profitability, identifying valuation multiples and assessing key value drivers such as recurring revenue and customer concentration.
What’s the quickest way to sell a company?
Selling a business quickly is possible, but speed shouldn’t come at the expense of value or deal security Read more…
What’s the best way to sell a business online?
Yes, you absolutely can sell a business online. Many platforms specialise in connecting business sellers with buyers. Read more…