Many years ago, whilst working for an international law firm, I trotted along from my offices in central Birmingham to a meeting room in a hotel with a job to do: review all the customer and procurement contracts of a selling business for our client, the prospective buyer.
So what was I looking for?
I was assessing risk. What were the risks to the prospective buyer taking on the commercial contracts, such as the customer and procurement contracts?
Key commercial and legal risks
In both cases, I sought the contracts’ key commercial and legal risks. Did the contracts say what they were supposed to? Could the contracts be assigned to a third party without the permission of the customer/ supplier? Could a change in ownership control of the seller trigger the termination of the contract? And/or did this render a termination fee payable? Were the contracts signed, or was the seller relying on a good old “battle of the forms”?
On the customer side, was there revenue protection? Were potential contractual, statutory, or tortious liabilities adequately limited or excluded? What were the payment terms and rights for late payment?
On the procurement side, were there any service levels? What were the remedies if service levels were breached? What was the impact of late delivery if it was critical to ongoing client supply?
Beware what contracts don’t say!
The one interesting point which sticks in my mind was a box (yes, a real physical cardboard box) full of agency contracts. The selling business sold its goods through a network of agents rewarding them with sales-related commissions. However, due to a then-European set of Regulations known as the Commercial Agents Regulations (now retained in English law), there was and still is a little-known quirk to the untrained eye that can drastically affect the financial profile of the contract for the principal who deploys the agency network. The detail of those Regulations is another blog for another day, but suffice it to say, as per one of our previous blogs, silence was most definitely not golden. The reason it wasn’t was all to do with the rights of the agent on termination of the agency contract. One small clause was required to limit the agent’s rights to a termination payment to 1 year’s commission (calculated using the average over the previous five years). Without it, case law at the time meant potentially a much higher and uncertain amount was payable to the agent linked to the loss of value of the agency. Given that the amount payable had no legal cap on it, it was a particularly unpalatable risk that could’ve been easily avoided.
Commercial contracts are just one aspect of the business. What issues will present themselves will depend on the bespoke characteristics of the business, including how it has grown and what advice it has sought along the way.
Getting your house in order
If you are starting to think about exiting your business, then, if you haven’t already, you will be turning your mind to how to get the best possible price when the time comes. Part of that process will involve getting the legal aspects of the business in order so that you are ready placed to provide answers to prospective buyers, their advisers and even your advisers during the due diligence process. (See 5 Benefits of a Bird’s Eye View of Legal Risk for SMEs).
(For those of you wondering why I was trotting anywhere to physically review contracts without wishing to disclose my somewhat mature years, this was life before virtual data rooms!)
At Lawpoint, we provide a unique pre-exit preparation service for SMEs to help ease businesses into this process.
If you want to learn more about how we can support your plans for shaping up for exit, please call Tracey on 01202 729 444 or e-mail tracey@law-point.co.uk.
