In Brief
This article provides a high-level overview on what current business owners, who are thinking of selling their business, should consider from a UAE law perspective, namely:
- Undertaking proactive legal preparation is essential to maximise valuation and ensure a smooth business exit;
- Addressing key legal, structural, and compliance issues early can prevent price reductions and deal delays; and
- Implementing simple steps to position their business for a successful sale.
For many entrepreneurs, building a successful business is only half the journey; the ultimate goal is a successful and profitable exit. While you may be years away from selling, the preparations you make now can have a significant impact on your company’s future valuation and the efficiency and the simplicity of the sale process.
Getting your company in order is a critical, yet often underestimated, part of this preparation. A potential buyer and their advisors will conduct a rigorous due diligence exercise, and any legal, regulatory or structural issues they uncover can lead to a reduction in the purchase price, delays, or even the collapse of the deal.
Based on our experience advising clients on M&A transactions, here are 10 key preparatory steps you can take now to de-risk your business and assist in positioning it for a premium valuation when the time comes to sell.
1. Solidify Your Key Contracts
A buyer is purchasing your company's future cash flows. Ensure you have legally enforceable contracts in place with your key customers and suppliers. Verbal agreements or unsigned proposals are red flags, as they fail to demonstrate committed revenue streams or a stable supply chain
2. Implement a Contract Management System
Once signed, where are your contracts stored? A well-organized digital repository for all key agreements is essential. This not only streamlines day-to-day operations but also demonstrates professionalism to a buyer. During due diligence, being able to produce any requested contract promptly inspires confidence and signals that the business is well-managed.
3. Optimize Your Structure
The corporate structure of your business is a critical point for any business with exit ambitions. If your business comprises multiple entities, consider structuring them under a holding company in a common law jurisdiction like the Abu Dhabi Global Market (ADGM) or the Dubai International Financial Centre (DIFC). These jurisdictions are familiar and well-known to potential buyers, both local and international. Effecting the acquisition of shares at the level of a holding company incorporated in such a jurisdiction assists in ensuring that key documents, like the shareholders' agreement, are readily enforceable and can significantly simplify the completion process.
4. Protect Your Intellectual Property (IP)
Your brand name, logos, and other IP can be among your most valuable assets – they are key traits that distinguish your business from its competitors. Make sure your trademarks are properly registered with the UAE Ministry of Economy. The UAE operates on a "first to file" basis, meaning the person who registers a trademark first has the upper hand, placing the burden of proof on any challenger. Failing to protect your IP means a buyer may question the value of what they are acquiring.
5. Keep All Licenses Up to Date
Ensuring all your trade licenses and other regulatory permits are current is fundamental. Beyond avoiding fines, it provides evidence to a buyer that the business is well-managed, compliant and not exposed to operational disruptions. Any non-compliance can be used by a buyer as leverage to negotiate the price down.
6. Ensure Full Corporate Compliance
Beyond licensing, ensure all your legal entities are fully compliant with local regulations, including economic substance (ESR) and ultimate beneficial ownership (UBO) filings. This prevents a buyer from using compliance lapses (even those of a minor nature) as a basis for a price chip and reinforces the message that the business is run to a high standard.
7. Secure Your Personal Visa Status
If your UAE residency visa is sponsored by the company you intend to sell (as an employee or investor), it will likely need to be cancelled as part of the sale process. This can create personal administrative hurdles at a critical moment. To de-link your residency from the business, consider obtaining a Golden Visa in advance.
8. “Streamline” Shareholder Base
The presence of minority or nominee shareholders can complicate a sale. They may have pre-emption rights that can block the transaction, or they may simply refuse to sell. While drag-along provisions in a shareholders' agreement can help, they can be challenging to enforce. Where possible, it is often prudent to buy out any non-essential shareholders well in advance of a sale process.
9. Review "Change of Control" Provisions
Scrutinise your key contracts with customers, suppliers, and landlords for "change of control" clauses. In the event of a sale, these provisions may entitle a counterparty to terminate the contract, or result in a breach, if they are not notified of or do not consent to the transaction. Commercially, the potential loss of a key customer, supplier, or lease can severely impact valuation. Consequently, obtaining such consents is often a condition precedent to completion; a failure or delay in doing so can jeopardise the entire transaction, in addition to exposing the company to contractual liability. Where possible, seek to negotiate these clauses out of new agreements to pre-emptively neutralize this risk.
10. Maintain Up-to-Date Statutory Registers
Keeping your statutory registers (such as the register of shareholders and register of directors) meticulously up to date is crucial. It is a simple act of good corporate hygiene that inspires confidence in a buyer and their advisors, assuring them that the company's governance is in order.
Conclusion
Ultimately, preparing your business for sale is about shifting your mindset from that of an operator to that of a seller. By taking these proactive steps, you are not just ticking boxes for a future due diligence process; you are fundamentally de-risking the business, demonstrating its quality, and putting yourself in the strongest possible negotiating position to achieve a successful exit.
If you would like further advice on preparing your UAE business for a successful exit, please contact Paul Wynne (p.wynne@hadefpartners.com), Partner, Corporate M&A at Hadef & Partners to discuss how we can support your objectives.