Sonya Bassett, Partner and Head of Corporate and Commercial at Coodes Solicitors, shares the key questions business owners will need to answer when preparing for a share sale.
If you are selling a business, you will need to decide whether to do so by way of an asset sale or a share sale. An asset sale involves selling some or all of the company’s assets, such as the business (or elements of it), land, buildings and equipment. In a share sale, the buyer purchases the limited company, as a separate legal entity, while the assets generally remain within the company. In other words, a share sale changes the ownership of the company.
So, if you are preparing for a share sale, what are the key questions you will need to consider?
At the earliest stage, you will need to put together a team to work on the sale. As every business is different, the make-up of the team can vary considerably from one sale to another.
However, the typical team will include:
There are two different ways you could approach a share sale. The approach you take is likely to depend on a number of factors, including the target timescale for the share sale, the level of interest from potential buyers and the structure of the business.
This transaction involves negotiating directly with a single buyer, who you have already identified. It will require an early confidentiality agreement between buyer and seller and may also involve other preliminary agreements, such as heads of terms. The buyer will need to follow a due diligence process, submitting enquiries about the company for the seller to respond to. The next stage will be to draft, negotiate and agree the share purchase agreement before completing the transfer of shares to the buyer.
Some share sales involve holding an auction to invite bids from a range of prospective buyers. In an auction sale, the seller drives the transaction, including carrying out due diligence and distributing information to potential buyers. An auction sale can complete more quickly because the seller retains more control over the process.
There is typically a first round of bidding, with interested parties being invited to submit their indicative offers by a deadline. The seller will then select a shortlist of bidders, who will be provided with access to the data room, which is a physical or virtual space containing information about the company. The shortlisted bidders will also usually be given the opportunity to raise issues with the company.
Whichever format the sale takes, you will need to carry out due diligence before a share sale. This is an important way of carrying out checks on the potential buyer. Your lawyer should advise you on what due diligence you should carry out.
The buyer is also likely to carry out detailed due diligence prior to a share sale. This can be time-consuming for the seller, so the company needs to be prepared for this by having the right team in place to handle these enquiries.
When I advise a business through the process of a share purchase, dealing with the seller’s warranties and limitations on liability is often time-consuming and sometimes contentious. Warranties and indemnities relate to the condition of the business and arrangements to compensate a buyer if issues occur. If you are planning a share sale, it is vital that you seek legal advice to ensure that the right warranties and indemnities are in place. My previous blog explains more about the importance of understanding warranties and indemnities if you are preparing for a share sale.
A share sale can take months to complete and is often a complex, and sometimes difficult, process. Having the right team of people to support you through the sale is the best way of ensuring you get the best result.