3 reasons why you need to get your commercial contracts in order before investment
Think back to the time when you decided to sell your house. I’m guessing that before you got the estate agent around, you did some work on your property. If you were lucky it was no more than a de-clutter! Regardless of how much work you did before the house went on the market, I’m guessing that you had one big plea… let this house sale go through quickly and with a minimum of stress.
It is pretty much the same if you are thinking about getting in another round of investment or getting your company ready to sell so you can exit. Effectively, you want the exercise, whether selling or getting in outside investment, to go through quickly and with a minimum of stress.
Just as any potential buyer of your house will do their due diligence on your property, any outside investor or buyer will do their due diligence on your business. When large sums of money are involved, any buyer or investor wants to minimise their risk or exposure to risk. After all, the principle of ‘Caveat Emptor’ (Buyer beware) exists regardless of what you are buying. Part of the due diligence, just like the searches a conveyancing solicitor will do, will always involve carefully checking the commercial contracts a business has in place. (In addition any due diligence will carefully look at your intellectual property rights. We will look at these in detail in another blog post.)
1. Avoiding delay
Think back to when you have sold or bought a house. Maybe you have been fortunate and not had this situation, but in my experience if the right paper work, such as the building regulations certificate for an extension, is not in place, this can add sizeable time and angst to the conveyancing process.
The same happens if you are seeking funding or trying to sell your business. Any potential buyer or investor will want to minimise their risk, and will potentially delay any transaction taking place until these commercial contracts are in position.
What would be an example of a commercial contract that could hold up a round of funding? Let’s say you are a reseller of software, and your website is one of your main routes to market. As a result your contracts with suppliers to ensure that your website is up and running at all times become business critical. For your business, these are the sorts of contracts that any investor or buyer will want to make sure you have in place, and they are enforceable and as watertight as you can get them.
2. Losing value
When we bought our last place we discovered after the surveyor had been that there were some nasties awaiting us. The roof needed some work doing to it and the boiler had not been serviced for at least five years. As anyone who has bought a house will testify, this is not an unusual situation. There is always something that crops up in the survey. Therefore, we sat down with the sellers and renegotiated the price of our house down to compensate for the money we knew we would need to spend on the house.
It’s the same with your commercial contracts. Any investor or potential buyer will want to make sure that your contracts are valid, binding and still in force (and will continue to be so for an appropriate period of time).
They will also want to check the termination rights for both sides and any potentially unusual liabilities. One of the big areas that they will check is whether there any “change of control” clause. The last thing that a buyer or investor wants to have is big contracts being renegotiated or cancelled as a result of a sale or round of funding. In fact, the “change of control” clause can become a deal breaker, which is why I will be talking through this in a separate blog.
Similar to the price renegotiation we did with the people we bought our house off, it pays to get all your contracts in place, otherwise you could find that your business gets devalued and you lose money in the selling or funding process.
3. Adding in stress
Selling a house is pretty much one of the most stressful things you can do. In my experience getting in much needed funding or finding a buyer for your business is right up there with selling or buying a house. The last thing you want to do is add in complexity or stress to the process.
A great way to reduce the stress is to make sure your commercial contracts, particularly the business critical contracts, are all properly in place. Any delay in getting these in place can crank up the stress – particularly if your cash flow is being squeezed.
As well as potential delay adding in stress, holes in commercial contracts can lead to any deal becoming conditional. Sometimes you can’t sort out the holes in your contracts before the deal is done as this would adversely impact your business. After all some customers and suppliers don’t take kindly to being told, “I’m about to get a round of funding in, can we look at our contract with you”. It does rather weaken your negotiation position! As a consequence, many deals are made conditional on you managing to secure your commercial contracts.
If you had got these contracts sorted out well before you even approached any investors or buyers, you would significantly reduce the chance of the deal becoming conditional.
To reduce your stress, maintain your business’s worth and reduce any delays when seeking additional funding or a buyer for your business, make sure your commercial contracts are in a fit state and sufficiently robust before starting any due diligence process.