Investment readiness checklist: is the company ready for new ownership?

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1. Is the company an attractive investment object?

This naturally involves financial assessments, such as income and profit trajectory. However, factors like strategic market positioning, innovative advantage, and future growth opportunities will be very important for whether the company is considered an interesting object. As a business owner, one should have an active approach to this and have a credible plan for ensuring value development under changing market conditions. A focused business model makes the analysis easier for investors.

2. Can the company attract the right key employees?

Competence is in demand in today's market. The question that should be asked is not only whether today’s needs are met, but also what will be tomorrow's needs, assuming an ambitious growth strategy. Therefore, the business must have a credible plan for how future staffing will be managed; incentive models and the possibility of co-ownership will often be central elements in this picture.

3. Does the company have a sustainable business model?

Customers, shareholders, authorities, and employees will require a sustainable business model in the future. The company must have an active approach towards tomorrow's market and how it intends to meet these challenges. Sustainability may have an investment cost.

4. Is the company’s business intermingled with related parties?

Many small and mid-sized businesses have agreements with owners or are part of "group agreements". This can apply to rent, licenses, or customer relationships. Such related party relationships can create uncertainty in connection with the transaction, for instance, if costs will increase if an owner no longer has an incentive to continue a favorable rental agreement. Such agreements should therefore withstand comparison with independent agreements in the market.

5. Is the company compliant?

It should be an obvious point that the activity of the business has the necessary permits, that it does not violate competition law, working environment law, etc., and that it is up to date with tax and accounting reporting. A critical review of the company's use of customer data and marketing methods should also be conducted. However, compliance routines come with a cost. The company should therefore endeavor to establish routines that also provide business intelligence value back to the organization.

6. Are the existing owners aligned?

A clear and unified ownership structure is attractive to investors. Few wish to enter a company where the shareholders consist of factions with different ideas about the way forward. Existing shareholders should speak with one voice, and conflicts of interest should be clarified in advance.

7. Does the company have organizational flexibility?

To achieve any synergies in connection with a transaction, flexibility regarding the workforce will be of importance. Flexibility will depend on how the company is organized today. For example, the use of contracted labor or consultants creates greater flexibility but can also involve legal risk. Organizational flexibility can also be viewed in relation to consolidation opportunities ahead of a transaction. Even if the company is small in itself, it may be well-positioned for consolidation in the industry. The company could benefit from its assessment of opportunities to establish larger structures.

8. Does the company have a solid customer base?

Solid customers and ongoing payment are desired by all. However, a large dependence on a few individual customers can be risky. It can be challenging to make significant interventions in the short term, but this should be a strategic consideration when envisioning a transaction a bit into the future.

9. Is the company building an "economic moat"?

Warren Buffet made "economic moat" a financial term, referring to whether the company has something to protect against competition over time. Size and efficiency can be factors, but there are also other elements such as network effects and intellectual property rights. More recently, the term "ecosystem" has entered the vocabulary, and the most fortunate are companies that manage to create self-reinforcing value creation around their business model.

10. Is the documentation ready for a critical review (due diligence)?

In a due diligence, the company will be expected to provide documentation of its contractual relationships and other aspects. Good systems and documentation are essential during a transaction. All contractual matters must be well-documented and accessible. All dependencies on the company’s suppliers must be clarified, and if it relies on, for instance, a distribution platform, the ongoing costs associated with this should be critically examined, with alternatives in mind.

Finally, consider steps like:

• Quality assurance and improvement of contracts and contract management
• Restructuring into more appropriate business units by corporate merger or demerger
• Outsourcing of replaceable functions
• Consolidation through partnerships or acquisition of complementary businesses

Such processes have commercial and organizational sides that may precede the legal aspects. But in order to draw a good "roadmap" for the company, it is crucial that all layers of the map are activated, including the legal layer.

Do you have questions about buying and selling companies?

We assist a range of different sectors with M&A, equity transactions, restructurings, and tax advice.

Feel free to contact Erlend Balsvik, head of the department for corporate law and transactions, for a chat.