How should I structure my business to make it attractive for a buyer?
Wednesday, February 8, 2012/
I am setting up a business that I hope will be acquired by a major player within the next 18 months. How should I structure the business so that it makes it as easy/attractive as possible for a buyer?
The simpler the structure and the more organised your documentation is, the easier and more attractive it will be for the buyer, all other things being equal.
Most sophisticated buyers or investors see many deals regularly. If your business structure is unnecessarily complicated, or is missing or has inconsistent documentation, the buyer or investor may simply put yours in the “too hard” basket for later (or worse still – never).
From my experience, common problems tend to revolve around the following:
- The appropriate entity.
- Intellectual property ownership.
- Corporate records.
One of the simplest structures is to operate the business through a company. Companies are easily understood and the buyer has a choice of buying the shares in the company or the business.
It is also useful if external funding/capital is required during the business’s life as equity capital can be raised by issuing shares and the company can be partly owned by others such as staff or other founders.
Another structure that is sometimes used is a trust, which some may find useful from a tax perspective.
However, it is usually more difficult to sell a trust or to raise equity capital in a trust. I have seen many investors/buyers turned off by the prospect of having to invest/buy into a trust structure.
Therefore, many start-ups have opted to operate through a company, but ultimately this is probably an area where you should seek professional advice to ensure it is most appropriate for you.
Make sure the ownership of IP is crystal clear and in the correct entity. Common traps are the IP being held by various individuals who have worked in the business rather than the operating entity, or everyone assuming that the entity owned the IP when it did not.
If not clear, these are matters that will make it less attractive for a buyer as you will have to find out who owned the IP and then arrange for the IP to be assigned to the correct entity, at the same time as trying to negotiate a sale with the buyer.
The matter becomes even more complicated if the person who actually owns the IP is no longer involved in the business and is either difficult to locate or reluctant to assign the IP.
Therefore, there should be clear and properly drafted employment or contractor agreements with IP clauses from day one with everyone involved in creating IP, so that it is clear contractually who owns the IP.
These agreements can then form part of the due diligence file that the buyer inspects to satisfy itself that the IP ownership is appropriate.
The more organised the documentation evidencing IP is, the more comfortable the buyer/investor will be in relation to IP.
If you have decided to structure as a company, make sure that the shares in the company have been properly issued in accordance with the Corporations Act and the constitution.
Common traps are improperly issued shares, which in a worst case scenario could mean that dividends paid on those shares are illegal, which then causes all sorts of problems for you and your buyer/investor.
Therefore, all share issues should be properly documented and professional advice sought to ensure the company is properly “owned” by its shareholders.
Similar considerations apply to share transfers and even director/officer appointments.
For example, if the directors have not been properly appointed or acted outside their authorities, there could be an argument that their actions are invalid, which could again cause all sorts of problems for the sale process.
Although having the appropriate entity is important for a buyer, it is equally important that the documentation for that entity is correct and has been well maintained and organised.
If you are expecting to own the company with a number of other founders or shareholders, you should clearly document the shareholders’ respective contributions, equity holdings, compensation and other matters governing the relationship in a shareholders agreement.
I have written about these matters in the past and it is important that these matters are dealt with in the beginning, especially if you are aiming for an exit via trade sale in a relatively short time.
By having the relationship clearly documented in the beginning, you essentially have all the shareholders agreeing to act in a certain way with respect to the sale process and the exit.
This ensures all shareholders are aligned from the beginning and towards the same goals.
This also avoids the difficulties in having to negotiate separately with each of your fellow shareholders at the same time as negotiating a sale with a buyer.
In summary, the key things to remember are:
- Get advice to get it right from the beginning.
- Prepare, keep and maintain proper documentation and records.