This article was written by Michael Buckworth, a partner in Buckworth Solicitors. Buckworth Solicitors is a London based law firm specializing in assisting start-ups on a range of matters. The firm works solely on the basis of affordable fixed fees and was set up at the beginning of 2011.
For most entrepreneurs, the priority when getting started with a business is to get it up and running, make some money and build a brand. Planning for the eventual sale of the business is likely to be at best a low priority and more likely totally irrelevant. But spare a moment to peer into a (metaphorical) crystal ball as a bit of thought at the start could save you time and money later.
Pick the right business structure
At the outset, decide whether your business is going to be for-profit or social enterprise. If the latter, consider where your funding will come from – the terms of grants often require an entrenched social enterprise purpose and/or an “asset lock” that prevents profits from being paid out to shareholders. If you are going to rely on grants for funding, a CIC (Community Interest Company
) may well be the best option.
Alternatively if you are intending to attract investment for your social enterprise, an IPS (Industrial and Providential Society
) might be a better option as this allows members of the community to fund your business’s activities. Remember that if you choose a CIC or charitable structure, you can’t subsequently change your mind.
If your business is a for-profit business, often a limited company is the best option. A limited company is a separate legal person with limited liability meaning that (absent personal guarantees, fraud, various insolvency-related offences and/or gross negligence) you won’t be liable for its debts and losses. In addition, a limited company presents you with the broadest range of options for exit: sale of some or all of the shares, listing of the shares, sale of the business as a going concern and sale of the assets.
Ensure you own your assets
A buyer looking to purchase your business (or an investor looking to invest) will want to see that you own or control the assets used in your business. Where your business is IP-dependent, make certain that you have in place arrangements to ensure that all intellectual property created by employees and consultants vests in your business. Discovering as part of a pre-sale diligence process that a third party owns your valuable IP is not ideal!
In addition, be sure to have contracts in writing with your key suppliers and customers. Lawyers diligencing a company want to see written evidence of contractual commitments from suppliers and customers. Where there are no written contracts, the purchaser’s lawyers will automatically raise a red flag. This may reduce the perceived value of your business.
Key man risk
Think up front about how to minimize key man risk. Many start-ups are dependent on their founders to take the business forward. However, a business that is too dependent on a small number of people may be discounted at the point of sale.
Where possible, try to transfer the knowledge and ideas of the founders into a product or something tangible. Where your business is premised upon giving advice, think about creating a discernable product distinct from the founders.
The hardest businesses to sell are those where crucial knowledge needed to operate the business is solely in the founder’s head. A buyer will require the founder to stay on after sale, will probably want an earn-out instead of up-front payment and may well discount the purchase price to take account of the risk that the founder dies or is otherwise incapacitated.
Keep it simple
Buying a business is like buying any other asset. The most saleable business concepts are those that are simple and easy to understand. The same goes for business structures.
Try to keep share structures straight forward and vanilla. Try to avoid creating needless complexities in your accounts. Try to use standard forms for your customer contracts. Try to keep good, clear and coherent records. Try to keep a narrative in your head that is straightforward and attractive. Keep it simple.