Many business owners underestimate the time and effort involved in getting their business ready for sale. An even more difficult challenge is finding a buyer who is prepared to pay the price you need on the terms you want.
If you’ve overcome these hurdles and an offer has been made for your business don’t think it will be smooth sailing from hereon in! Understanding the process at an early stage should ensure you can plan more effectively so you can continue to run your business whilst you sell it (it is often more complex and time consuming than people first think).
Even on a “simple” deal the documents can be extensive and intimidating. To help you stay one step ahead of the game we have set out the key steps in the process:
- So, you have an indicative offer from your buyer. Make sure you have a confidentiality undertaking signed before you allow them to dig into the dealings of your business further. Often a buyer of a business will be a customer, supplier, or, more typically, a competitor looking to consolidate the market so this will be important in protecting your business if the deal doesn’t make it over the line. (But do not place too much reliance on that undertaking. You will be wise to hold back the most sensitive commercial material until you are very confident the deal will go through).
- One of the initial questions, which will be highly relevant from both a legal and tax perspective is whether the buyer will be buying the shares in the company itself or just the business assets. A buyer may prefer the latter as this means they won’t acquire all the liabilities that come with buying a company. You, as the seller, will likely want them to purchase the shares so that you don’t have a potentially significant amount of cash locked into your company (which would be subject to corporation tax and then tax when you take the cash out personally). Although it could be that the price is negotiated to cover your additional tax cost if a business asset purchase is to be the route chosen.
- Once your buyer has satisfied themselves that they have enough information they will be in a position to make a more formal offer (subject to a full due diligence exercise (see below)). Our recommendation would always be to draw up Heads of Agreement setting out the key terms of the deal at this stage. This will help focus everyone’s attention early on (even though this document will not be legally binding). Substantive negotiations can take place in a headline document and before an extensive Share or Asset Purchase Agreement is issued.
- The next step will then be due diligence. This will be more extensive if the buyer is purchasing the shares in your company rather than the assets. Being prepared in advance can make this part of the process much less time consuming. The buyer will want to fully investigate the commercial, tax, legal and financial affairs of the business which will typically take the form of a series of questions and requests for copies of key documentation. Your external advisers can assist you with this exercise which is particularly useful on larger transactions.
- The due diligence exercise can take some time. Whilst this is ongoing the lawyers working on the deal will have drafted and be negotiating the Share or Asset Purchase Agreement. This will be the document that governs the terms of the deal including how the purchase price will be paid and post-sale restrictions on you as seller. It will also protect the buyer from risks relating to your period of ownership such as customer claims or unexpected tax liabilities. These are dealt with through warranties (and indemnities). Warranties are statements of fact and if they are not reflective of the true position in the business the seller must disclose the true facts in a disclosure letter. This is another legal document that can attract significant negotiations and if there is anything which the buyer particularly dislikes they may ask for an indemnity or even a reduction in price.
- A disclosure may lead to an attempt by the buyer to reduce the price or claim a £ for £ indemnity. The buyer might possibly withdraw from the deal. If no disclosures are made and the warranties turn out to be untrue the buyer, if they suffer a loss as a result, may attempt to claim compensation from the seller. Negotiations over warranties can be extensive and can often be the biggest delay in getting a deal through to completion. Limitations on damages available for the buyer for a breach of any warranty can also give rise to lengthy negotiations.
- Once these key documents are in agreed form and the due diligence has been tied up the deal can proceed to completion! Completion of the deal will typically involve a number of ancillary documents being signed (which will be agreed in advance). The buyer will hold a board meeting so minutes must be signed and delivered to the sellers to evidence approval of the purchase. In an asset purchase there may be deeds of novation of key contracts and any property (lease or freehold) will also need to be dealt with. In a share purchase transaction you will also have board minutes of the selling company, resignations of directors and company secretaries, appointments, forms to change the registered office and perhaps even the name. Finally, with a share purchase, there will be a Stock Transfer Form to sign which performs the task of legally transferring the ownership of the shares.
With the legal process complete the buyer still needs to ensure a proper handover of the business. The business owner selling may well be employed by the buyer to assist with this or perhaps be engaged as a consultant.
So – there’s a lot to think about! Getting your trusted advisers involved in the process at an early stage will help you take control and make things run more smoothly, giving you time to get on with the important things like running your business!
Sign up to our newsletter to stay up to date with all of our news, blogs and events