Many entrepreneurs are not aware of it, but to maximise the value of their company, several other factors play a decisive role besides the accounting value of the company. Among other things, it is crucial for a potential purchaser that all legal obligations are always respected and that the contractual obligations resting on the company are sufficiently (and correctly) documented.
Needless to say, successful entrepreneurs are focused on their core business which regularly results in insufficient attention being paid to corporate housekeeping, documenting certain transactions, protecting intellectual property, GDPR or documenting commercial relationships in writing.
It is no secret that a potential purchaser wishes to get confirmation as soon as possible about the value of the target , which are also substantially influenced by compliance with applicable regulations and the durability of commercial relationships.
In other words, with a view to maximise the value, the target should be scrutinized in terms of legal and commercial aspects prior to the start of the exit process, whereby weaknesses can be identified and, if necessary, resolved.
1. Self-knowledge is the beginning of wisdom
To find out what the potential pitfalls of the target are, the most efficient thing to do is, to carry out a vendor due diligence. Specialists you hire will then carry out an analysis of all obligations of the company and can detect certain gaps or imperfections, after which a concrete solution will be proposed to rectify these gaps or imperfections.
2. The lack of (correctly drafted) commercial contracts as a textbook example
A typical example is the lack of contracts reflecting the company’s commercial relations in a long(er) sustainable(er) manner. Understandable of course, in the enthusiasm of entrepreneurship, a gentlemen’s agreement is the quickest way to execute a commercial transaction. However, this is a red flag for a potential purchaser, because of the uncertainty it brings to the future, in terms of the duration of this relationship as well as the conditions attached to it.
Commercial contracts that have been drawn up correctly and have a certain duration immediately inspire more confidence in a potential purchaser. If no contracts have been drawn up, there is no certainty that this relationship, which also determines the value, will be maintained and under which conditions it will be maintained.
3. A first impression is only made once
If, during a first review of the data room, the purchaser gets the impression that the business is not properly legally and commercially underpinned, this will have a negative impact on the valuation of your company. Thus, the importance of this in the context of an exit process cannot be stressed enough (nor too early).
Are you facing a business acquisition and wondering about the exit process?