What are the steps involved in selling a business?

For most people, selling their business is a once in a lifetime event, unless of course you are a serial entrepreneur! Regardless of whether you have been through the process before, selling your business is not a decision that you take lightly and the process can seem daunting.  Therefore, when the opportunity to sell arises, it is important to get the right legal advice from commercially thinking lawyers who carry out these types of transactions regularly.

Business sales or ‘deals’ can be structured in various ways and the steps involved vary depending on the type of business being sold, the type, or ‘method’, of sale that has been adopted and the industry in which the business sits. Collaboration between corporate lawyers and accountants can be helpful in determining the appropriate structure and method of sale.

In this article, we explain the five steps in two of the most common types of business sale:

• Share Sales – where a company’s shares are sold; and
• Asset Sales – where the assets of a company or business are sold.

Step One: Preparing your business for sale

Before your business is marketed, it’s sensible to consider the following points which can help you and your advisers secure the best deal:

• What is the current value of your business? It may be prudent to engage an accountant to conduct a share or asset valuation, depending on which type of sale/purchase is being proposed.
• Are there any disputes that could be resolved or settled in order to make your business more attractive to a buyer?
• Do you have reliable and up-to-date accounts and financial information that is readily available?
• How appealing is your business to buyers? Do you have a growing, loyal customer base and reliable income stream? What are your unique selling points and does the business have the ability to expand and/or grow?
• What will the tax implications of the sale be for you and/or your business?
• Have you maximised the value of any intellectual property in your business?
• Are there legal matters concerning freehold or leasehold properties that could be addressed before selling?
• If your business is seasonal, are you selling at the right time of year?

Step Two: Marketing your business and agreeing Heads of Terms with potential buyers

Once you have prepared your business for sale, the next step will be to find a buyer, either by marketing the business yourself or using an agent.

A potential buyer will likely request information about your business before committing, in particular its financial health and prospects. Before sharing such commercially sensitive information, you should consider what steps to take to protect the information. This could include requiring the potential buyer to enter into a non-disclosure agreement (NDA) and restricting how the information is shared and with how many people.

Once the preliminary information has been exchanged and a potential buyer is secured, it often makes for a smoother transaction if “Heads of Terms” are negotiated and agreed. This is not required on all transactions, and is essentially a document which sets out the principal terms on which the buyer proposes to purchase the business.

Although as a transaction progresses it is not uncommon for there to be deviations from the agreed terms, agreeing Heads of Terms at the outset of a transaction sets out expectations from both sides, which usually translates into a smoother transaction.

Agreed Head of Terms will typically set out the following information:

• The purchase price and whether such a purchase price is to be paid in full on the date of completion or whether part of it is to be paid by the buyer on a date after the date of completion of the sale, typically referred to as “Deferred Consideration”.
• Whether exchange and completion of the sale and purchase will happen simultaneously or whether they will be split.
• A timescale for the transaction.
• Confidentiality obligations on the buyer in relation to information.
• Whether the seller has granted the buyer an exclusivity period.
• Whether the buyer requires the seller to provide transitional support post-completion, perhaps under the terms of a consultancy agreement.

Generally, most of the provisions contained in Heads of Terms are not legally binding, except for terms relating to confidentiality and any exclusivity.

Step Three: Buyer Due Diligence & Disclosure

The term “Buyer Due Diligence” means an evaluation of a business, typically undertaken by a potential buyer to establish the assets, liabilities and commercial potential of the business itself.

There are usually two forms of due diligence performed by a potential buyer:

1. Financial Due Diligence. These are enquiries relating to the target business’s tax and accounting matters, often involving both the seller’s and the buyer’s accountants liaising with each other directly.
2. Legal Due Diligence. These are enquiries relating to other aspects of the business including, but not limited to, its assets, employees, pension scheme(s), properties and share capital.

Although most of the enquiries are raised by the buyer in relation to your business, it may also be prudent for you as the seller to perform some due diligence too, mainly in respect of the buyer’s solvency status and financial health.

If, during the due diligence exercise, problems are identified, the parties could re-negotiate the previously agreed terms, agree methods of resolving the issues or either party could choose to withdraw from the process.

Step Four: The Purchase Contract & Disclosure Letter

The purchase contract is the primary document in a sale transaction. It is typically drafted by the buyer’s solicitors and the terms of it are negotiated between the parties, through their respective advisers.

Typically, a purchase contract contains the following provisions:

• The purchase price amount, when it is payable and to who. This will vary depending on whether this is a share sale or an asset sale.
• Contractual protections for the benefit of the seller against claims by the buyer after completion of the sale.

The buyer will seek to minimise its risk in purchasing the business and it will use the information it has gained from the due diligence exercise to assist it in doing so. As a seller, you should be most concerned with minimising the risk of claims that may be brought against you by the buyer after completion of the sale and it is with specific matters such as this that expert advice from corporate lawyers can be invaluable.

A disclosure letter is a specific example of how you can seek to mitigate the risk of claims by the buyer. It is a letter that is sent from the seller to the buyer limiting the buyer’s ability to bring a claim for a breach of the contractual promises that the seller provides the buyer with under the terms of a purchase contract.

The purchase contract and disclosure letter are not the only documents required in a sale transaction. A number of separate documents, referred to as ‘ancillary’ documents, will also be required, for example, director & employee resignation letters, board minutes, resolutions and share transfer documents, if necessary.

Step Five: Completion and Post-completion

Once all of the documents are agreed and both parties are ready to proceed, the sale can be completed on a mutually agreed date.

Following completion, a number of administrative and practical matters will need to be attended to, including a handover of keys to the business premises, an exchange of business information from the seller to the buyer, and if either the seller or buyer are companies the filing of any necessary forms and notifications at Companies House, plus the updating of the company’s statutory registers.

If you have any questions regarding selling a business or you are seeking advice in relation to a current or potential business sale or purchase, you can contact the Corporate & Commercial team on 01722 412000 or email info@parkerbullen.com.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.