Updated April 2019
Kirsty Davey, Partner and Head of Corporate and Commercial at Coodes Solicitors, outlines the six stages of selling a business.
Whether you are selling a small business or a multi-national firm, the process is much the same. Here are the six key stages of selling a business.
1. Structuring the sale
There are, essentially, two ways to sell a limited company. One is to sell shares of the company that owns the business, the other is to sell the assets that make up the business. The two are fundamentally different. If you sell the shares of the company then all its assets, liabilities and obligations are also acquired by the buyer. If you sell the assets, then it is just the assets together with any liabilities that the buyer agrees to take on.
If you are selling a sole trader or partnership business this will be an asset sale.
There are important tax considerations to be taken into account when structuring a sale. A share purchase or an asset purchase will come with different tax considerations for the seller. You will need to discuss the various tax implications of each type of sale with an accountant. This will help you decide how the sale should be structured.
It is also important to be prepared for any sale of your business as much as two years before the sale. Is your share structure clear and do you know how any sale may be progressed under the terms of your shareholders’ agreement? Is it clear how your assets are held? Is your Intellectual Property registered? Have you settled any bad debts or outstanding claims?
You need to agree whether there will be a cash payment at completion or cash in stages or whether payment is by way of shares. You may also wish for the current management team to work for a certain period to hand over or even run the business for a period of time. Therefore you may want to incorporate earn out provisions such that the team only receive some of the consideration on achieving certain target.
2. Establishing a confidentiality agreement and heads of terms
Before the seller and buyer can start negotiations, a variety of agreements should be signed. These can include a confidentiality agreement, exclusivity agreement, and heads of terms. Sometimes called ‘letters of intent’ or a ‘memorandum of understanding’, a heads of terms sets out the terms of a commercial transaction agreed in principle between both parties.
At this stage it is advisable to seek a lawyer’s help with drafting these agreements. In particular it is not sensible to try and agree heads of terms without legal input. You could agree in principle to something that you may later regret and which in turn causes you to lose your bargaining power.
3. The process of due diligence
Once the preliminary agreements are settled, the detailed and complex process of due diligence can begin. This is a business, legal and financial investigation of the company in preparation for a sale.
It may be the case that this was started very early on in the process so as to ascertain whether or not the business is worth acquiring. The potential buyer will start gathering information to build as complete a picture as possible. This information may impact on the negotiations and the price the buyer is prepared to pay. The due diligence process will usually establish any warranties and indemnities, which may be requested by the buyer, which a lawyer can advise you on.
4. Securing key issues for the transaction
There will be a number of issues to consider as part of the transaction, from arrangements for employees and their pensions, to property, environmental issues, IT and IP. The buyer and seller will also need to secure a number of consents and approvals, including from regulatory bodies and from their Board and shareholders if it is a limited company.
5. Signing the key documents
There will be a number of official documents required to secure a business sale. The asset or share purchase agreement is the key document for transferring the business from one owner to the next. There are a number of considerations when drafting or signing an asset or share purchase agreement so good legal advice is essential.
6. Completion and post completion
When the sale is completed, the business is now owned by the buyer. Practically there will be a huge amount for both the buyer and the seller to do, from making the necessary filings and returns to contacting customer, clients and suppliers to ensure that the goodwill in the business is maintained. Having good advisors is key here as by this stage both parties should have absolute clarity as to their ongoing obligations under the agreement as well as any post completion matters that must be addressed. Should any changes need to be made to any contracts it is a good idea to speak to a lawyer especially if it involves changes to employees’ terms.
If the buyer has purchased a limited company there will be a fair few amendments and filings to be made at Companies House and in the company books.
For advice on selling a business, or any of these issues, please contact Kirsty Davey at Coodes Solicitors on 0800 328 3282 or email email@example.com