Preparing for a sale or just good housekeeping? – the insiders view
24 August 2022
Birketts offers an insight from Tim Humphries, an independent consultant for the Motor Trade and former Finance Director of Motorline and Beadles Group, into the sale of a car dealership from an owner’s perspective.
Having completed the sale of two large dealer groups and assisted in a number of sale transactions as a consultant over the last five years, Tim has first-hand experience of the challenges that come with buyer due diligence. This process is extremely time consuming at a time when both the seller and the buyer typically want to complete the transaction as soon as possible. There are some things you can do in advance of even contemplating a sale that would make this a less challenging process. Even if you are not considering a business sale in the near future, most of the areas below are also good housekeeping.
This article will cover some of the areas that seem to cause the most issues or delays for Motor Retailers. This is by no means a full list of the items typically covered by due diligence, that full list is considerably longer! You should already be talking to your financial and legal advisors about any structural or tax planning actions you can take in advance of a business sale. As some of these can take two or three years to implement, it is good practice to keep this dialogue with your advisors updated regularly.
Corporate structure
You need to ensure all your statutory obligations are up to date and complete. For example, do you have copies of board meetings and are your statutory books and records complete. When was the last time you reviewed and updated your shareholder agreement? If you are in any doubt, speak to your solicitors for further advice.
Accounts/Finance
It is assumed that you prepare monthly management accounts and that these are agreed to the DMS. These accounts will come under much greater scrutiny and you need to be able to explain the reasons for any anomalies or trends. Most businesses produce forecasts and budgets but you should check when these were last updated and whether you have documented the underlying assumptions.
Ideally, you will have a central location for all loan agreements with details of the relevant security and terms. It would be a good idea to summarise this in a single schedule as this would be useful for you to understand what debt you have and what your interest rates are. Consider if there are any cross guarantees with associated companies or security over assets not part of the business being sold. If so, these will need to be unwound and will require negotiation with the lender.
Additional questions to ask yourself include:
- Are you sure you have details of all your finance leases?
- What about loan cars and demos on finance leases?
- Do you have any leased vending machines or finance leases for manufacturer retail corporate identity?
- What loans (or intragroup balances) do you have with associated companies not being sold or other related parties? Are these documented?
Resolving some of these can be difficult whilst you are still trading so you may need to take some additional advice.
You need to check if you have an accounting policies manual (e.g. for stock provisions or debt provisions) and if it is being followed in the current trading environment. If you have adapted your policy, you need to ensure you have a credible reason for this change.
You will probably have a standard set of trading terms and conditions on your website and on your order forms or invoices but have a think about when these were last reviewed. If you have any key customers who are outside of these standard terms (e.g. longer payment terms) these exceptions must be documented.
It is good practice to regularly review your bank mandate and check who your cheque signatories and online bank users are. This should be up to date and adjusted for any starters/leavers.
Contracts and trading
It is common for contracts with key suppliers and customers to have been signed some time ago or they may have been agreed at site level. Any buyer will want to see these contracts to confirm there are no onerous terms or change of control clauses. I would suggest a review of your sales and purchase ledgers to identify these large or key suppliers/customers and then an effort is made to obtain copies of the signed agreements or new contracts are signed. You may even find that these contracts have expired and it is an opportunity to either renegotiate them or to go out to tender for better terms.
Most owner-managed businesses will have arrangements with related parties, Directors or employees (e.g. property leased from a separate property company). Provided these are at market rates there should not be an issue but check that they have been fully documented with all the terms agreed in writing.
Compliance
Compliance is a key area that any due diligence will focus on. It is assumed that you will have the correct FCA authorisations but it is worth checking what is shown on the FCA website. If you have any issues or matters outstanding with the FCA (other than typical customer complaints that are ongoing), then now is the time to get these resolved. Check your requirements under SMCR and ensure you are confident that you meet these requirements.
Trade Effluent licences are issued by local water authorities and would normally be required for medium sized or larger dealerships. You should be aware of this requirement and check if you need a licence.
Check that you have a documented Anti-bribery policy and that it has been issued to your staff and enforced.
When was the last time you reviewed your PPL/PRS licence? If you have changed sites or carried out work in your showrooms/customer waiting areas, then you may need to update your licence. You should also consider whether you have requested a refund of part of your PPL/PRS for when your showrooms were closed due to COVID.
Employees
Your employees are one of your biggest assets and you will need to provide a full list with lots of information. It is assumed you will have a payroll/HR system or some form of database that will enable this to be prepared. Ideally, all your employees will be on the same contract and staff with similar roles will have similar benefits. If you don’t have a standard contract for all staff, now is the time to get this implemented. In our industry we have a high percentage of staff who earn some form of commission or bonus and these schemes should be documented and agreed with employees.
If you have external consultants or workers check that you have a service agreement with them and when it was last reviewed. Have you carried out an IR35 check to confirm they should not be treated as employees, as a potential buyer will want to see this has been checked.
Environment/H&S
Another key area of our businesses. You should have a documented Health & Safety policy but it is worth checking this is up to date and that your risk assessments are still fit for purpose. If you have a list of any hazardous materials you keep on site, you should be clearon how these are treated. A buyer will also want to know about any underground fuel/oil tanks and how these have been decommissioned. You will need to demonstrate you have (and have had) an appropriate policy in place deal with waste on site (e.g. waste oil tanks and certified third party waste oil collection). And, if you have them, when were your interceptors last cleaned?
If you are required to participate in the CRC Energy Efficiency Scheme or Energy Savings Opportunity Scheme (ESOS), ensure that you have the latest reports available.
IT
IT and communications are key for a buyer as they will want to integrate a purchased business into their systems as soon as possible. They will want to know details of domain names owned and/or used by the company and when these expire. You should have an up to date network diagram and hardware list and details of third party software used (including start/end dates, copy contracts, costs etc). Document your back up/disaster recovery policy/plan and when it was last tested. You should also ensure that you have a cyber security policy and have the systems/software you use confirmed within it.
As noted above, there is a lot of information in this article but hopefully you will have most of the points covered or at worst just need to update some of the information you already have.
If you are contemplating a sale, get some advice as early as possible and good luck!
As a full service law firm, Birketts is able to assist with all legal aspects of your sale. Birketts’ motor team would work with your financial advisers to provide expert legal advice and guidance on the topics Tim has outlined. Corporate Partner and our Head of Automotive, Greg Allan Corporate Partner and Head of Automotive, would love to speak to you on any proposed dealership transaction.
About the author
Tim Humphries is an independent consultant to the Motor Trade and former Finance Director of Motorline and Beadles Group. Contact Tim via LinkedIn at www.linkedin.com/in/tim-humphries
Sectors
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at August 2022.