For many owners of a manufacturing business, the sale of their business is a one-off lifetime event. It is an opportunity to realise value built up over many years of dedication and hard work. With this in mind, the sale of a business will often be a lengthy and complex exercise for a seller. It, therefore, makes sense for a seller to prepare in advance.
As a prerequisite to any sale, a buyer will conduct a detailed due diligence investigation of the target business. Therefore, before initiating the process of engaging with prospective buyers, you should undertake your own internal due diligence exercise. This involves reviewing the business and its operations from the perspective of a potential buyer.
With a manufacturing business in mind, our top tips are:
Your terms of business, customer and supplier contracts, distribution arrangements, commercial agency agreements, and insurance policies should all be considered for any anomalies or uncertainties and to identify whether there are any outstanding issues with the same.
Also, important contracts should be documented.
Prepare a detailed list of equipment and keep this up to date. Also, ensure machinery and other vital equipment have up to date maintenance records (this will support any valuation of these assets). In each case, a buyer will typically request this documentation.
Prepare a list of stock (with ageing analysis) and keep this up to date. This information will typically be required by a buyer. Conduct a review of stock and, where appropriate, dispose of old and redundant stock. Any attempt to bolster value by including obsolete stock is likely to discourage a buyer.
Conduct an audit of all the intellectual property owned and used by the business. Consider any intellectual property (e.g. trademarks, patents, design rights) that needs registering and whether any existing registrations are up to date. If the business uses intellectual property belonging to a third party, ensure written licence terms are in place (e.g. software licences for accounting and engineering) and that any business sale won’t place you in breach of your licence or allow the rights holder the option to terminate your licence.
You should ensure written employment contracts are in place with all your employees and that you have employment policies (e.g. disciplinary, grievance and shift patterns) in place which are up to date.
Review the legal status/tenure of the business premises and ensure it is physically tidy/ordered and creates a good impression for a potential buyer. Locate any applicable environmental documentation (e.g. relating to noise, waste discharge and other licences required for the operation of the business). Also, where the business premises are held under a lease, due to the types of activities typically conducted by a manufacturing business, a review should be undertaken regarding any exposure to dilapidation claims.
Review any existing disputes, complaints, insurance claims, issues relating to defective products or litigation and consider actions to mitigate any adverse consequences on the sale.
Internal systems and procedures should be reviewed to ensure they are effective and, where relevant, legally compliant (e.g. levels of stock, data protection, IT systems, health and safety policies, complaints handling procedure, making sure the business uses a streamlined modern invoicing process and credit control).
Make sure accounts, and accounting and tax records are organised, clear and accurate.
Be aware that a buyer will want an explanation if there are any discrepancies or anomalies in the accounts. It would be best if you also had to hand realistic and detailed projections of future trade and profits.
Consider whether any cost inefficiencies can be removed and review major expenses to ensure, as far as possible, that profitability of the business will increase, leading to higher returns in the sale.
Review business records generally to ensure they are complete and up to date (e.g. statutory records, minutes of director and shareholder meetings, filings at Companies House).
Review the shareholder structure and address/consider any issues in this respect (e.g. outstanding share options, shares held in trust or difficult/uncooperative shareholders).
Consider eligibility for Business Asset Disposal Relief, Inheritance Tax exposure on/following the sale, and financial planning post-exit. Also, consider the impact on the management structure where the current owners and shareholders are no longer part of the team. A potential buyer will be concerned that the transition to new ownership is seamless.
If the business is part of a larger group of companies, identify and consider how to deal with any assets, contracts, systems and services that are shared across the group.
A seller should consult professional advisors at an early stage to ensure the process outlined above is organised and that issues are identified and dealt with. This has the added benefit of ensuring that you can concentrate on running your business. The involvement of professional advisers will also mean the process is tailored holistically by taking into account the next steps of the sale process. These would include valuation, identifying types of potential buyers and marketing the business for sale.