As a business grows, it is not uncommon for new companies to be added to the 'group' in a piecemeal fashion:
- expansion opportunity interstate? Set up a new company
- joint-venture opportunity in a new business area? Set up a new company
- incentivising a key employee with part-ownership of a division? Set up a new company
- in the running for a major new client contract? Set up a new company (sometimes even before the work comes in).
This can lead to a needlessly complex corporate structure without proper regard for the long-term goals of the group or its majority owners. In many instances what the owners consider to be a corporate 'group' is not a clean group for corporate structuring or M&A purposes (it could just be a collection of companies with some level of common ownership but without an ultimate holding company). When the time comes to sell the group, a complex structure can delay the sale process, increase transaction costs and even potentially – kill the deal.
In the third of our four-week series on selling a business without losing business, we look at how implementing a pre-sale restructure as early as possible can help avoid the above issues and move the business towards a successful sale.
Deregistering unused entities is one of the easiest wins you get in a pre-sale restructure. No matter how many times you emphasise to a prospective buyer that a stray group entity has never traded or had its operations transferred to another group entity well in the past, buyers will almost always continue to ask questions about the entity and its history and insist on including it as part of its due diligence. Deregistration can be a relatively inexpensive process and will likely save considerable time and money in the future.
The tax consequences, including stamp duty, will play a major part not only in determining the right structure for a group but also the ideal time for completing the restructure. When contemplating a future sale it is crucial to get tax advice as early as possible on the existing group structure and when the different steps involved in a potential restructure should be carried out for maximum effect. Depending on the financial circumstances of the shareholders and the different group entities, it may be desirable to carry out the restructure before, after or straddling a tax year-end or to carry it out in a number of stages.
Minority shareholders in subsidiaries
The more shareholders there are across the group, the lengthier and more complex the sale negotiations with the buyer are likely to be. This is particularly the case where the majority shareholders do not have sufficient drag-along rights. All it takes is one minority shareholder to hold out for a better deal for the proposed timeline to blow out.
For a group with minority shareholders sitting at a subsidiary level, such as a division manager with an equity interest in their division or the previous owner of a bolt-on that has retained an interest, cleaning out these minority shareholders in advance of a potential group sale can be highly advantageous.
Options include swapping out shares in the subsidiary for shares up the chain (with appropriate drag-along rights attached), optioning up the subsidiary shares in favour of the group holding company (to force a sale as part of a future group sale) or simply agreeing a price with the minority shareholder for an immediate exit.
Minimising the impact on operations
Another reason for implementing a restructure in advance of a sale is that it can be scheduled to occur at a time when it will have the least impact on the business's trading activities. If business is traditionally slow in January, the restructure could be carried out then when the management and staff have some spare time available to action the steps involved, including notifying customers and suppliers, updating invoicing and correspondence templates, training staff on the new arrangements, etc.
There might never be the 'perfect' time to implement a restructure to minimise disruption to the business, but it makes sense to try to avoid having to do it on top of the multitude of work required towards the end of a sale process.
Pre-sale restructures do not have to be complicated. They are often made more difficult than they need to be simply by being left until late in a sale transaction when the owners and staff have other important matters to deal with at the same time. By following the pre-sale restructure tips above, you can avoid unnecessary complications and help put the group on the path towards a smooth and successful sale.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.