Selling your business? Why a pre-sale restructure could add value and reduce risk

Founder takeaway

Before taking your business to market, it is worth asking:

• Are all business assets owned by the right entities?
• Are all shareholders aligned on a future sale?
• Are there tax, governance or ownership issues that could concern a buyer?
• Would a buyer view your business as 'sale ready'?

Addressing these issues early can help maximise value, reduce transaction friction and improve your negotiating position.

Why structure matters when selling a business

As businesses grow, their structure often evolves organically. Assets, liabilities, employees and key commercial arrangements may end up spread across multiple entities, while ownership can become more complex through the involvement of family members, early investors or employee shareholders.

While this may not create issues during day-to-day operations, it can become a significant challenge when preparing for a sale. Buyers typically want all of the assets, people, contracts and liabilities required to operate the business to sit within a clearly defined transaction perimeter, usually under a single holding company structure. They also want confidence that all shareholders are aligned and willing to support the transaction.

A well-considered structure can make a business more attractive to buyers, reduce execution risk and help avoid delays during a sale process.

What is a pre-sale restructure?

A pre-sale restructure is the process of reorganising a business and its ownership before commencing a sale process. Its purpose is to ensure that the business is presented to potential buyers in a way that is clear, efficient and capable of being sold.

Depending on the circumstances, a pre-sale restructure may involve consolidating assets and operating entities into a single group structure, transferring contracts or employees to the appropriate entity, or simplifying ownership arrangements to ensure shareholders are aligned on an exit strategy.

Because these changes can take time to implement and may have tax, legal and commercial implications, businesses should consider sale readiness well before a transaction opportunity arises.

The objective is simple:

• Ensure all relevant assets sit within the transaction perimeter.
• Consolidate ownership structures.
• Align shareholders.
• Resolve legal and tax issues before buyer due diligence begins.

What are the two most common types of pre-sale restructures?

1. Asset, business and entity transfers and carveouts.

These restructures are designed to ensure all assets relevant to the business sit within the group being sold. Examples include:

• transferring intellectual property into the sale group;
• moving operational assets into the target company;
• removing personal assets from the sale group;
• transferring associated entities into the group through share exchanges or rollover arrangements.

2. Equity and management restructures

A successful sale requires more than having the right assets and entities within the transaction perimeter. Sellers also need to consider whether their ownership structure and management team are aligned to support a transaction.

Equity restructuring

Over time, businesses often accumulate shareholders who are no longer actively involved in the business. These may include early investors, friends and family members, former employees or other passive shareholders. While these shareholders may have had little involvement in the business for years, their consent may still be required to complete a sale.

This can create risk if shareholders cannot be located, are unwilling to support the transaction or have expectations that differ from those of the majority owners. As part of a pre-sale restructure, businesses should assess whether their shareholder base is aligned and whether existing shareholder agreements contain mechanisms, such as drag-along rights, that enable a majority of shareholders to require minority shareholders to participate in a sale.

Where alignment is uncertain, it may be appropriate to engage with those shareholders well before a transaction process begins or consider alternative arrangements, such as a share buy-back or transfer of shares, to simplify ownership ahead of a sale.

Management and governance restructuring

Buyers are not only acquiring a business; they are also acquiring the capability to operate it after completion.

Where founders are expected to exit as part of a transaction, buyers will want confidence that an experienced management team is in place to continue running the business. Businesses should therefore consider whether key personnel have clearly defined roles, whether governance arrangements are appropriate and whether management is sufficiently incentivised to support the transaction and remain with the business afterwards.

In some cases, this may involve implementing retention arrangements, transaction bonuses or other incentive structures designed to promote continuity and support a smooth transition to new ownership.

Special considerations for high-growth companies

For high growth companies (particularly venture backed or scaling businesses), a pre sale restructure raises a distinct set of issues that go beyond "tidying up" the corporate group. These businesses often carry legacy complexity from rapid scaling including multiple funding rounds, evolving employee equity arrangements, trust as the holding entity and cross border elements all of which can create friction on exit.

In practice, pre-sale work frequently focuses on simplifying the cap table, ensuring employee equity incentive plans are properly documented and aligned with change of control outcomes, unwinding or restructuring the holding entity where it is a trust (buyers will usually insist on acquiring shares in a company), and addressing historic governance or compliance gaps that arise from informal early stage decisions.

Timing is critical: many of these steps can trigger tax consequences or require shareholder approvals, and attempting to implement them in parallel with a live sale process can delay or derail a transaction. The key is to shift from a founder optimised structure to a "buyer ready" structure well in advance of exit, balancing tax efficiency against deal certainty.

Why timing matters

The timing of a pre-sale restructure is an essential part of the sale process and an event which requires some tax planning and legal documentation which can delay the sale of a Target Group.

Generally, a pre-sale restructure can be implemented either:

• before a sale process begins; or
• during a transaction as a condition precedent to completion.

The reality is that many sellers prefer not to entertain a pre-sale restructure until a buyer is engaged in a sale process. In all cases, a seller needs to weigh up the benefits of restructuring early (see below) against the time and cost of planning and implementing a restructure where a sale is not yet certain.

The benefits of a pre-sale restructure

We recommend that sellers implement and complete a pre-sale restructure as early as possible so that they can take advantage of the following benefits:

Increase buyer appeal

A sale price can be maximised if the business is 'sale-ready' This can include:

• correcting ownership records;
• resolving ASIC discrepancies;
• ensuring assets are owned by the correct entities;
• repaying related-party debt;
• addressing PPSR registrations and Division 7A issues;
• obtaining necessary third-party consents.

Reduce indemnity exposure

Rectify any issues that a potential buyer would otherwise identify during due diligence:

• buyer claims;
• specific indemnities;
• purchase price holdbacks; and
• post-completion liability. Resolving those issues before the sale reduces the likelihood of having to give such indemnities or tie up some of your purchase price.

Improve tax outcomes

Early planning provides time to: • obtain ATO rulings; • consider CGT concessions; • access available stamp duty exemptions; and • structure transactions more efficiently.

Produce cleaner financial reporting

A completed restructure allows businesses to establish consolidated financial reporting before sale, making valuation discussions easier and reducing reliance on pro forma accounts.

Maximise value

Reducing legal, commercial and tax risk can minimise purchase price adjustments and strengthen negotiating leverage.

When a restructure forms part of the sale process

A typical transaction may involve:

1. negotiating the sale transaction
2. negotiating the restructure documents
3. signing both sets of documents
4. implementing the restructure
5. completing the sale once restructure conditions are satisfied.

Early planning pays dividends

A poorly planned restructure can create tax, legal and commercial issues that delay a transaction or reduce value. By addressing these issues before engaging with buyers, founders can:

• reduce transaction friction;
• improve buyer confidence;
• preserve negotiating leverage; and
• maximise sale proceeds.

How we can help

Our M&A legal team has extensive experience advising sellers through every stage of the sale process, from early restructure planning through to completion. We understand the unique commercial and structural challenges that sellers face when preparing their business for sale. We work closely with your tax advisers to optimise how the transaction terms deal with any restructure tax implications. If you are considering a sale of your business or simply want to understand whether your current structure is sale-ready, get in touch with one of our experts.

Recent examples of restructure transactions our team has advised on include:

• Advising AxFlow, a member of the Axel Johnson International group, on its acquisition of Dowdens Group - AxFlow acquired an industrial water equipment business housed across two entities and a family trust, requiring restructure as a condition precedent to completion of the transaction.
• Advising Assurant, an international insurance group, on its acquisition of TIC Group acquisition of Omega - Assurant acquired a reverse logistics business housed across three entities and two partnerships, requiring restructure as a condition precedent to completion of the transaction.
• Advising the founders of Wynstan, one of Australia's largest manufacturers, wholesalers and retailers of blinds, doors, shutters and awnings, on the sale of their business to Hunter Douglas, a Dutch headquartered multi-national (backed by global private equity firm 3G Capital).
• Advising InSkin Cosmedics, a leading skincare group, and its shareholders on the sell-down of their interests to, and platform arrangements with, the Australian Business Growth Fund (and associated partnership arrangements).
• Advising Altano, a German-headquartered international group of equine veterinary clinics (with private equity sponsor, Ufenau Capital Partners), on its acquisition of the Scone Equine Group - acted for the seller and negotiated the restructure of the acquired group to exit entities outside the transaction perimeter and the roll up shareholders into the target 'top co' as a condition precedent to the sale.