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Greater formality in corporate governance can pay off at
sale time for privately-owned businesses.
In some privately-owned businesses, increasing the level of
formal governance can assist in reducing risk, identifying issues
that might emerge upon a sale and generally enhancing the
credibility with which the business presents itself to potential
buyers.
Perhaps even more powerfully, governance is a means by which,
both in fact and in perception, a business can present as less
dependent on the involvement of its founders than it would without
governance. This can add very significantly to value.
Often, formal governance policies and procedures are not
required and may not be of much value when running a
privately-owned business. Many private business owners think that
the absence of governance procedures makes them more flexible, more
adaptable and more opportunistic. That may be so, but the benefits
of that should be weighed against the benefits of formal governance
when planning a sale.
Achieving greater formality in governance
There are a range of ways to adopt some greater formality in
governance:
without changing the make up of the board of a company, the
company could implement a more structured system of monthly
meetings. These may or may not be formal board meetings, but should
nonetheless involve the directors and those who report into the
CEO;
a company can set up one or more committees. These can be
formal board committees or more informal, but they are set up to
address areas of need, to bring in expertise and focus on how risk
management can be improved and issues for the business addressed.
Examples are an audit and risk committee, a brand development
committee and an employee policies committee, to assist in
developing those aspects of the business in readiness for sale.
These committees might have outsiders on them and they might not,
depending upon the need and the expertise available in the
business;
an advisory board could be established. Properly structured,
members of an advisory board will not carry director duties and
liabilities and this can be a sensible stepping stone towards a
more fully independent board;
one or more outsiders can be brought onto the board. This can
be very beneficial, but it needs to be right for the business;
and
governance can also be improved by developing appropriate
governance policies and procedures.
Corporate buyers and private equity see many poorly organised
privately-owned businesses. They will take the opportunity to
highlight the possible risks to them in undertaking an acquisition
of a poorly organised or more risky business. Some investment in
governance can dispel most of these apprehensions, and allow
private business owners to defend the level of risk in the business
and so achieve higher value for a seller. Nonetheless, formal
governance should be introduced carefully, to ensure the
owner's ability to drive and control the business is not unduly
impeded.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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