19 Jul 2012

Selling a privately-owned business: getting the governance right

by Nick Miller

Greater formality in corporate governance can pay off at sale time for privately-owned businesses.

In some privately-owned businesses, increasing the level of formal governance can assist in reducing risk, identifying issues that might emerge upon a sale and generally enhancing the credibility with which the business presents itself to potential buyers.

Perhaps even more powerfully, governance is a means by which, both in fact and in perception, a business can present as less dependent on the involvement of its founders than it would without governance. This can add very significantly to value.

Often, formal governance policies and procedures are not required and may not be of much value when running a privately-owned business. Many private business owners think that the absence of governance procedures makes them more flexible, more adaptable and more opportunistic. That may be so, but the benefits of that should be weighed against the benefits of formal governance when planning a sale.

Achieving greater formality in governance

There are a range of ways to adopt some greater formality in governance:

  • without changing the make up of the board of a company, the company could implement a more structured system of monthly meetings. These may or may not be formal board meetings, but should nonetheless involve the directors and those who report into the CEO;
  • a company can set up one or more committees. These can be formal board committees or more informal, but they are set up to address areas of need, to bring in expertise and focus on how risk management can be improved and issues for the business addressed. Examples are an audit and risk committee, a brand development committee and an employee policies committee, to assist in developing those aspects of the business in readiness for sale. These committees might have outsiders on them and they might not, depending upon the need and the expertise available in the business;
  • an advisory board could be established. Properly structured, members of an advisory board will not carry director duties and liabilities and this can be a sensible stepping stone towards a more fully independent board;
  • one or more outsiders can be brought onto the board. This can be very beneficial, but it needs to be right for the business; and
  • governance can also be improved by developing appropriate governance policies and procedures.

Corporate buyers and private equity see many poorly organised privately‑owned businesses. They will take the opportunity to highlight the possible risks to them in undertaking an acquisition of a poorly organised or more risky business. Some investment in governance can dispel most of these apprehensions, and allow private business owners to defend the level of risk in the business and so achieve higher value for a seller. Nonetheless, formal governance should be introduced carefully, to ensure the owner's ability to drive and control the business is not unduly impeded.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.