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.
Before your business is marketed, it’s sensible to consider the following points which can help you and your advisers secure the best deal:
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:
Generally, most of the provisions contained in Heads of Terms are not legally binding, except for terms relating to confidentiality and any exclusivity.
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:
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.
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 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.
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 Katen on 01722 412000 or by emailing email@example.com.