If you're considering selling your business, it's important to understand the process from start to finish. Selling a business is a significant decision that can have long-lasting financial and personal implications. At Shoredons & Co Legal, we help clients buy and sell businesses every day.
This guide outlines the key steps involved in selling a business. It also offers expert guidance on how to maximise your returns while minimising risk.
Understanding the Value of Your Business
The first step in selling your business is understanding its true value. A thorough business valuation will consider several factors, including:
Profitability: Your business’s current and projected profits.
Market Position: Your business’s competitive advantage in its industry.
Assets: Tangible and intangible assets, including intellectual property.
Growth Potential: Opportunities for future expansion.
Solicitors don’t generally provide business valuations, but other service providers do. Speak to your accountant or your tax advisor. They may be able to provide you with a valuation. If not, consider speaking with an M&A advisor or a business broker. Business brokers may provide you with a free valuation (particularly if you instruct them to list your business for sale).
Structuring the Transaction: Share Sale vs. Asset Sale
One of the most important decisions you’ll need to make is whether to structure the transaction as a share sale or an asset sale. This choice can have significant tax, legal, and financial implications for both the seller and the buyer.
Here’s a brief explanation:
Share Sale: In a share sale, the buyer purchases the shares of the company, effectively taking over ownership of the entire business, including its assets, liabilities, and contracts. This option is often more straightforward for the seller, as it involves the transfer of the company as a whole. However, it also means that the buyer inherits all existing liabilities. That may create additional risk for the buyer, and lead to more extensive due diligence.
Asset Sale: In an asset sale, the buyer purchases specific assets of the business, such as property, equipment, intellectual property, and customer contracts. This structure allows the buyer to cherry-pick the assets it wants, while leaving behind any unwanted liabilities (a potential risk for the seller). This structure can lead to a more complicated transaction, as it may involve negotiating the transfer of individual contracts and licenses.
Your decision as to whether you structure your transaction as a share sale or an asset sale will usually come down to two main factors:
Which structure is best for tax purposes (in other words, which of these two structures will require you to pay the least amount of tax).
Which structure is best from a legal perspective (in other words, which of these two structures will provide you with the best legal protection after completion).
You should speak with your accountant or tax advisor to understand the best structure from a tax perspective.
If you’d like to understand the best structure from a legal perspective, call us on 0203 7292 388.
Preparing Your Business for Sale
A buyer will always be looking for a clean business, so preparation is key to a smooth and successful transaction. Before listing your business for sale, consider the following steps:
Form your Team: Dealing with a business sale will require time and effort. Consider whether you’ll need support from your colleagues. If you will, form your team.
Consider Confidentiality: Consider whether details of the sale must be kept confidential from any colleagues not involved in the transaction. If you need to keep your sale confidential, communicate that to your team.
Financial Records: Ensure all financial statements are up to date and accurately reflect your business’s performance.
Legal Compliance: Address any outstanding legal issues. Make sure that you have employment contracts in place with your employees, that any customer disputes and complaints are resolved, and that your business owns (or has a right to use) any necessary intellectual property rights.
Strengthen your business: Consider forming long-term contractual relationships with your customers, clients and suppliers. Buyers want stability. Minimum purchase commitments from your customers and clients will be extremely attractive to potential buyers.
Operational Efficiency: Streamline operations to make your business more attractive to potential buyers.
Larger businesses may decide to carry out pre-sale internal due diligence before engaging with buyers – in the hope that any issues are addressed before (rather than during) the sale process.
If you’d like assistance preparing your business for sale, call our corporate team on 0203 7292 388. We’ll help you ensure that your business is in prime condition for sale.
Finding the Right Buyer
Identifying the right buyer is crucial for achieving a successful sale. Potential buyers could include:
Competitors: Businesses in the same industry looking to expand.
Investors: Individuals or entities seeking a profitable investment.
Employees or Management: Internal parties interested in taking over the business.
You may decide to instruct a business broker to assist with the sale of your business. This can speed up the process, but it will usually come with a fee.
We work with a number of business brokers. If you’d like an introduction, call us on 0203 7292 388.
Negotiating the Sale
Once you have a potential buyer, you’ll need to begin negotiations. This is where the key terms of the sale are agreed.
Your buyer will ask you a range of questions about your business to understand its value and any obvious risks. Before disclosing anything, protect your confidential and business information by entering into a non-disclosure agreement.
Some key points you’ll need to agree are:
Sale Price: The price the buyer will pay for your business.
Transaction Structure: Whether the sale will be structured as a share sale or an asset sale.
Payment Terms: Options include lump-sum payments on completion, deferred payments (i.e. instalments made after completion), and earn-outs.
Security over Deferred Payments: Consider whether the buyer will be providing security over any deferred payments. Personal guarantees, company guarantees, and charges over property or shares are common options.
Warranties: Warranties are statements of fact about your business that you’ll be required to provide to the buyer on completion. For example, you may be required to warrant that your business is not involved in any employee disputes. Warranties provide assurances to the buyer about your business’s condition and mitigate risk for both sides.
Timeframes: An outline of the expected timeline for due diligence, contract drafting, and completion.
Exclusivity: The buyer may want an exclusivity period, during which you’ll agree not to negotiate with any other potential buyers. This period will allow the potential buyer to conduct due diligence without the risk of the you accepting a better offer from another party.
Non-Compete Provisions: The buyer may require you to sign an agreement preventing you from setting up (or even being involved with) a similar business within a certain timeframe after completion.
Transition Period: Consider whether you’ll be required stay on within the business temporarily after completion, to assist the buyer with a transition period. It’s common for sellers to charge a fee for this support.
If you need help during your negotiations, our specialist solicitors can support you through the entire process. Call us on 0203 7292 388 to ensure you’re securing the best possible deal from the outset.
Heads of Terms: The Groundwork for a Successful Sale
Once you’ve agreed the key terms of the transaction, you should set them out in a Heads of Terms document.
That document, also known as a Letter of Intent or Terms Sheet, is not usually legally binding (except for certain clauses like confidentiality and exclusivity), but it serves as a crucial roadmap for the transaction – allowing all involved (including your solicitors) to understand the transaction in high-level terms. It also helps both parties understand each other’s expectations, and can significantly streamline the negotiation of your final documentation.
If you need help preparing a set of Heads of Terms, call us on 0203 7292 388.
Completing the Sale: Legal and Regulatory Considerations
Once you’ve signed your Heads of Terms, the sale process moves into the legal phase. If you’ve not done so already, it’s time to appoint your solicitors.
This process includes:
Due Diligence: The buyer (and its advisors) will conduct a thorough review of your business’s financial, legal, and operational aspects. Legal due diligence usually starts with a questionnaire prepared by the buyer’s solicitor. You (with the support of your solicitor) will need to complete that questionnaire and collate any documents requested.
Contract Drafting: Your solicitors will need to negotiate a pack of contracts and other documents required for the sale. That pack will consist of some of the following (depending on the structure):
A share purchase agreement or an asset purchase agreement.
A disclosure letter.
Documentation dealing with any commercial leases.
Documentation dealing with any contractual consents needed.
Documentation transferring any existing contracts (such as customer contracts / supply contracts).
Transitional services agreements.
Documentation dealing with any employees, such as employment contracts and settlement agreements.
Director resignations.
Directors’ services agreements.
Documentation dealing with any new security.
Documentation releasing any existing security.
Board resolutions.
Shareholder resolutions.
Stock transfer forms.
Companies House forms.
Regulatory Approvals: Depending on the industry, regulatory approvals may also be required.
Our specialist solicitors are on hand to assist with this process. Call us on 0203 7292 388 to see how we can help.
Post-Sale Considerations
There are a number of post-sale considerations you should address:
Tax Implications: Understanding the tax consequences of the sale is crucial. Proper planning can help minimise your tax liability. Speak to your accountant or tax advisor for advice on this.
Reinvestment Opportunities: You may be looking to retire. You may be looking to reinvest the proceeds for future growth. Whichever route you’re taking, having a clear plan at the outset will help ensure long-term success.
Conclusion
Selling a business is complicated. It requires careful planning and expert advice. Experienced solicitors specialising in business sales can guide you through the process with confidence, ensuring a smooth transaction and protecting your interests (and finances) every step of the way.
Why Choose Shoredons & Co Legal?
At Shoredons & Co Legal, we handle all aspects of the legal process, ensuring business sales are completed smoothly and in compliance with all relevant regulations.
We understand that every business is unique, so we’re committed to helping you achieve the best possible outcome.
If you’d like a free consultation, call us on 0203 7292 388.
Published on 17 October 2024.