A Guide To The Legal Process Involved In Selling Your Business

Selling your business is a big decision, representing the culmination of decades of hard work and laying the foundations for the next phase of your life. For some business owners, selling was always their ultimate goal. For others, selling may be necessary to pursue another opportunity, or to raise capital. Whatever your reason, it’s crucial that you get the sale right to maximise your profit and ensure a smooth transition.

Whilst most business owners are sophisticated businesspeople, few possess the knowhow required to devise and implement an effective exit strategy. The process involves a deep appreciation not only of the business itself, but also of the complex legal requirements and procedures. In this guide, our specialist corporate solicitors talk you through the legal process involved in selling your business, and the issues you need to consider.

What steps are involved in selling your business?

Every business sale is different and will follow its own course. However, as a very general guide, most business sales involve the following steps:

1. Prepare your business

The key to any successful business sale is preparation. Getting your business ‘sale ready’ will help you attract buyers, achieve the best possible price, and ensure a smooth transaction.

Examples of the types of issues you may need to consider when planning a sale include the following:

• Are all records, contracts and other documentation organised and up to date?
• Are your accounts in order?
• Are all of your business assets organised and owned by the correct entity? For example, is any freehold property owned by the business registered in its name? Have you registered your intellectual property, such as trade marks and patents, so they are protected?
• Do you have any ongoing disagreements or disputes with suppliers or customers? If so, you should try to settle them before the sale.
• Are you up to date with all liabilities, such as tax?

Your buyer’s solicitor will conduct due diligence on your business before their client proceeds with the sale. By taking proactive steps to carry out all required housekeeping before the sale process begins, you can minimise the chances of them discovering anything that might allow them to argue for a price reduction or even derail the deal

2. Value your business

Valuing your business can be a complicated task. There is no universally accepted formula you can apply; essentially, your business is worth what a buyer is willing to pay for it, and even apparently similar businesses may sell for wildly different prices. Determining your business’s market value involves considering a number of factors, including its profit, assets, liabilities, reputation and market conditions. It is a subjective exercise that requires professional input.

3. Structure the sale

 How you sell your business will depend on whether you operate as a sole trader, partnership or limited company.

• Sole traders and partnerships

 If you operate your business as a sole trader or partnership, you will sell your business by disposing of its assets, including the property, stock and goodwill.  Selling a partnership is more complicated than selling the business of a sole trader, since you will need to consider issues such as which individual partners own which assets and how you will decide how much each partner earns from the sale.

• Limited companies

If you operate your business as a limited company, the sale can be structured in one of two ways: a share sale or an asset sale.

• Share sale

In a share sale, the buyer purchases the shares in the company and so acquires the entire entity, including any liabilities. Whilst the ownership changes, the day-to-day running of the company continues as normal. A share sale is the most commonly used sale structure for limited companies.

• Asset sale

In an asset sale, the buyer does not purchase the entire company but, rather, specific assets. Examples of the types of assets a buyer might acquire include property, stock, intellectual property, goodwill and customer contracts. When the asset sale is complete, the company will be closed down.

The process involved in both types of sales is broadly the same. Each structure has advantages and disadvantages, and you should take legal advice to help you decide the best route for you.

4. Agree Heads of Terms

When you have identified a prospective buyer for your business and decided on the appropriate sale structure, you need to agree a basic framework for the deal. The key terms will be recorded in a document called the ‘Heads of Terms’. Examples of the types of matters usually included in Heads of Terms for share sales include the headline price, payment schedule, what will happen to the business’s employees and any conditions of sale, such as obtaining regulatory consent.

Subject to the exceptions described below, Heads of Terms are not legally binding. However, they are much more than a mere brainstorming exercise. Well-prepared Heads of Terms lay the foundations for the deal and provide an outline from which the buyer’s solicitors will prepare the detailed sale and purchase documentation. Further, despite Heads of Terms not being legally binding, it can be incredibly difficult to seek to renegotiate the terms without risking derailing the deal.

As mentioned above, some elements of Heads of Terms are legally binding. These do not relate to the terms of the deal itself but to ancillary issues and are as follows:

• The exclusivity clause.

 This clause, if present, prevents you from entering into sale discussions with any third parties for a specified period.

• The confidentiality clause.

 The sale process necessitates you disclosing commercially sensitive documentation to the buyer to allow them to carry out their due diligence. A confidentiality clause obliges the buyer to keep your business information secret. Sometimes, this issue is addressed in a separate non-disclosure agreement, so may not be included in the Heads of Terns. It does not matter how the buyer assumes the confidentiality obligations, but it is crucial they do.

• The costs clause.

The legal work required in a business sale can be extensive, so Heads of Terms usually include a term stating that the parties will be responsible for their own legal costs regardless of whether or not the deal is completed.

5. Due diligence

Due diligence is the buyer’s responsibility, but you are responsible for answering all of the buyer’s questions and providing all relevant documentation for review.

During the due diligence process, the buyer’s legal team and other business advisors will thoroughly evaluate your business’s records and documentation to verify that all information you have provided concerning your finances and commercial operations is true and accurate. Examples of the types of issues your buyer is likely to be concerned with in the context of a share sale include share ownership, financing and security, ongoing disputes, and employee matters. If the investigations identify any potential defects, the buyer may seek to renegotiate the deal or, in worst case scenarios, pull out.

A buyer has little legal protection if it transpires after completion that they have made a bad deal, so their advisors are likely to take some time to review the relevant documentation. Furthermore, their questions will likely be extensive, and you may not have all the answers immediately to hand. As a result, the due diligence process can take a number of weeks or even months to complete.

6. Prepare the sale documentation

The parties’ solicitors will probably begin preparing the sale documentation while the due diligence process is still ongoing. The type of documentation required will depend on the sale structure. For ease, we have focused our discussion on a share sale of a limited company, being the most common type of business sale.

The main document governing the sale of a private limited company is known as a Share Purchase Agreement, or ‘SPA’. The SPA will be based on your Heads of Terms but far more comprehensive. It will contain full details of the sale and set out the parties’ rights and responsibilities. SPAs tend to be fiercely negotiated and lengthy, often running to in excess of 100 pages.

Your SPA will contain both bespoke terms negotiated between you and the buyer, and so-called ‘boilerplate clauses’ common to most SPAs. Boilerplate clauses deal with issues such as the law that will govern the agreement and how any disputes between the parties should be handled.

Examples of the types of matters you will need to negotiate with the buyer and include in the SPA are as follows:

• Consideration, meaning how much the buyer will pay for your business.
• Payment terms, meaning how and when the buyer will pay the consideration. Sellers usually prefer to receive payment in one lump sum, whereas a buyer may require staged payments. The parties will need to reach a mutually acceptable compromise.
• Warranties and indemnities. The law provides a buyer with minimal protection post-completion. As a result, buyers seek to protect themselves against any nasty surprises by insisting that the seller provides a series of warranties and indemnities.

A warranty is a promise relating to specific issues. For example, you may warrant that there is no litigation pending against the company, and that the company has complied with all of its legal duties. If you breach a warranty, the buyer may be entitled to damages. However, you can seek to limit your liability by providing a ‘disclosure letter’ detailing any issues you are aware of that may render a warranty untrue. If you adequately disclose a matter in the disclosure letter, the buyer cannot subsequently sue you for breach of warranty.

The buyer may insist that you agree to indemnify them for any losses they sustain as a result of you breaching specific warranties. If you breach a warranty you gave on an indemnity basis, your potential liability is greater than if you breach a straightforward warranty. You have to reimburse the buyer for all losses arising from your breach on a pound for pound basis. The usual rules regarding breach of contract claims, such as that the buyer must mitigate their loss, generally do not apply.

7. Exchange

Once you and the buyer are happy with the terms of the SPA (or other sale document if your sale is not of a limited company’s shares), you will proceed to exchange. At this point, you will both sign the document, and it becomes legally binding. If either party pulls out, the other may have a claim against them for breach of contract.

8. Completion

At completion, ownership of your business, or the assets in an asset sale, is transferred to the buyer, and you receive the agreed consideration. This may seem like a straightforward exercise, but in reality it takes significant preparatory work to facilitate a smooth completion, including ensuring all the documentation is agreed and ready for signature.

The completion process itself can take some time, although lengthy in-person completion meetings are generally a thing of the past. Instead, the completion processes are typically undertaken virtually, and the documents are signed electronically. When everything is in order, the parties’ respective solicitors will formally complete the deal over the telephone.

9. Post-completion matters

Whilst the buyer will own your company or the relevant assets following completion, that isn’t quite the end of the matter. Once the sale is completed, several further issues must be addressed, the nature of which varies depending on the structure of the sale structure.

On a practical level, you will need to deliver key items to the buyer. In an asset sale, this involves delivering the assets themselves where necessary, or, in the case of property, the keys. In a share sale, the buyer will need the stock transfer form confirming the transfer of the shares to enable them to pay the requisite stamp duty within 30 days. Other items, such as bank cards, may also need to be passed to the buyer. Various administrative tasks must also be taken care of. For example, following a share sale, multiple filings may need to be made at Companies House to notify them of any changes in directors, secretaries and auditors.

In share sales, the parties often agree to prepare completion accounts to cover the period from the last set of accounts to the completion date. The SPA will detail a method of adjustment for the purchase price to reflect any change in the company’s financial position, and the parties’ legal advisors and accountants will use that method to calculate the final consideration amount. The completion accounts process can take many months to finalise.

Key takeaways

Selling your business is a complex and lengthy process. To achieve the best possible sale price and facilitate a seamless handover, you need to start planning for a sale long before you put the business on the market. Your exit plan should include considering the timing of the sale to maximise your profit and getting your business ‘sale ready’ so it is as attractive as possible to buyers.

The sale process itself is labour intensive and document heavy. While your solicitors will handle the legal aspects, they will need your input on issues relating to your commercial operations, and you will need to collate and provide all relevant documentation required by the buyer’s solicitor for due diligence. It is a time-consuming exercise, but one that is crucial to get right. By working closely with experienced corporate solicitors, you can achieve the best possible price, ensure a smooth transaction, and minimise your liabilities post-completion.

Image by Mohamed Hassan from Pixabay

 

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.