LEGAL
Surrey’s Premier Lifestyle Magazine
Selling a business – top tips
Fiona Moss, corporate and commercial solicitor at Mundays LLP, offers tips and advice about what to expect and plan for when selling a business and how to achieve a smooth sale.
How much is my business worth?
• Before a buyer is identified, consider getting an independent valuation of your business as knowing what price to expect for the business can be of assistance during price negotiations.
• A valuation may also help identify key issues that need to be addressed before a sale can proceed.
• Bear in mind that there are a number of ways to value a business and usually the value comes down to what a prospective buyer is willing to pay.
Preparation
Preparing well in advance is key to achieving a successful and more profitable outcome. Sound accounting information, key employees locked in, intellectual property protected, customers and suppliers contracted with on clear and beneficial terms will go a long way to enhancing the value of your business and achieving a smoother transaction. Consider asking your accountants to provide you with a financial audit and your solicitors to carry out a legal audit in each case in contemplation of a possible sale.
Shares or assets?
A share sale involves the shareholders selling their shares in their company to the buyer. The company being sold will carry on business as usual and it is the ownership of that company that changes. For employees, customers and suppliers of the business nothing on the face of it changes. The buyer acquires all the assets and liabilities, whether or not it knows about them.
With an asset sale, however, it is the company itself which sells its assets to the buyer. This will include physical assets such as land and equipment, but also the business name and intellectual property. To the outside world they will deal with a new entity, the buyer. A buyer can pick and choose the assets it acquires and any liabilities it will and will not assume.
Often the decision on whether to structure the sale as a share sale or asset sale will be driven by tax considerations and advisers will need to be involved to ensure the most efficient position is achieved. Entrepreneur’s relief can reduce your capital gains tax rate from 20% to 10% on the first £10 million of qualifying capital gains made in your lifetime. This is very valuable to sellers if available and will require a sale of shares not assets.
Heads of terms
Heads of terms can be a useful tool as they set out the intentions of the parties at an early stage and avoid misunderstanding. They will generally not be binding under English law and are intended to have ‘moral’ force only, save for certain provisions such as exclusivity, costs and confidentiality which are expressed to have legal effect.
• Keep them short and direct.
• Assess the likely level of interest before granting a period of exclusivity to any one prospective buyer.
• Confidentiality provisions may be brief and a separate agreement may be required to properly protect the business.
• Before a buyer is identified, consider getting an independent valuation of your business as knowing what price to expect for the business can be of assistance during price negotiations.
• A valuation may also help identify key issues that need to be addressed before a sale can proceed.
• Bear in mind that there are a number of ways to value a business and usually the value comes down to what a prospective buyer is willing to pay.
Preparation
Preparing well in advance is key to achieving a successful and more profitable outcome. Sound accounting information, key employees locked in, intellectual property protected, customers and suppliers contracted with on clear and beneficial terms will go a long way to enhancing the value of your business and achieving a smoother transaction. Consider asking your accountants to provide you with a financial audit and your solicitors to carry out a legal audit in each case in contemplation of a possible sale.
Shares or assets?
A share sale involves the shareholders selling their shares in their company to the buyer. The company being sold will carry on business as usual and it is the ownership of that company that changes. For employees, customers and suppliers of the business nothing on the face of it changes. The buyer acquires all the assets and liabilities, whether or not it knows about them.
With an asset sale, however, it is the company itself which sells its assets to the buyer. This will include physical assets such as land and equipment, but also the business name and intellectual property. To the outside world they will deal with a new entity, the buyer. A buyer can pick and choose the assets it acquires and any liabilities it will and will not assume.
Often the decision on whether to structure the sale as a share sale or asset sale will be driven by tax considerations and advisers will need to be involved to ensure the most efficient position is achieved. Entrepreneur’s relief can reduce your capital gains tax rate from 20% to 10% on the first £10 million of qualifying capital gains made in your lifetime. This is very valuable to sellers if available and will require a sale of shares not assets.
Heads of terms
Heads of terms can be a useful tool as they set out the intentions of the parties at an early stage and avoid misunderstanding. They will generally not be binding under English law and are intended to have ‘moral’ force only, save for certain provisions such as exclusivity, costs and confidentiality which are expressed to have legal effect.
• Keep them short and direct.
• Assess the likely level of interest before granting a period of exclusivity to any one prospective buyer.
• Confidentiality provisions may be brief and a separate agreement may be required to properly protect the business.
Confidentiality
Confidentiality is always key. The potential buyer may be a competitor or commercially you may simply need to maintain secrecy until completion.
• A confidentiality letter or non-disclosure agreement (‘NDA’) should be put in place.
• The NDA should cover the fact negotiations are taking place and the provision of information as part of the proposed sale.
• Even with an NDA in place, consider withholding particularly sensitive information until much later in the sale process.
Due diligence
Due diligence is the term used for the investigations a prospective buyer will undertake on the company and its business – to check its assets, liabilities and state of ‘health’. Sellers should expect to receive a long list of enquiries and requests to provide accompanying documentation. This is where your earlier preparation will more than pay for itself.
• Establish who is responsible for providing information in advance and where necessary involve a small team with individual responsibilities. Balance this against the need to keep the proposed sale confidential.
• Provide all information clearly and in good time following the numbering used by the buyer.
• Ad hoc questions are generally to be avoided. In some circumstances though a Q&A section of the data room may be appropriate where the other party can ask you commercial questions.
• Be upfront with any issues, but ensure you provide this information in the clearest way with appropriate legal advice and explanations.
Disclosure
The sale and purchase agreement will inevitably contain warranties that are factual statements or promises about the company such as “there is no litigation” or “the list of employees is up to date” for example. If any of these statements are not accurate, a seller will have to disclose against any warranties as to why they are not completely accurate (and usually provide further documentation in order to avoid a warranty claim). In this way the buyer gets comfort that it knows about any possible ‘skeletons’.
• The disclosure letter is extremely important as it will qualify any warranties that the seller is required to make. It can help protect the seller in the event a claim is made by the buyer against the seller for breach of warranty.
• A full disclosure exercise should always take place so as to flush out any issues.
• It is best to meet with your lawyer and run through each of the warranties contained in the sale and purchase agreement with a view to prompting specific disclosures. This can be a fairly lengthy process, but, because fair disclosures will act as a shield to any warranty claim, should not be avoided or rushed.
Completion and post completion
When all the documents are agreed and are ready to be signed, they will be signed and dated and the purchase price paid. On a share sale, the legal title to the shares will not actually transfer until the stamp duty is paid and the share transfers registered.
• Completion can take place in person or remotely by scanning over copies of signed documents without the need to meet.
• Unless there is a need to achieve a certain deadline, the proposed date set for completion should give the parties enough time to carry out the investigations whilst maintaining impetus.
• Following completion, there may be a number of registrations (share transfers, resignation of directors, releases of security). On an asset sale some of the assets being transferred will need to have a change of ownership registered or approved, for example, leases, trademarks, domain names and patents.
When will I be paid?
Whilst it is usual for a sum of monies to be paid at completion, we commonly see sellers waiting for up to two years for staged payments (known as retentions). Such payments may even be conditional or weighted depending on future revenues or profits (known as earn-outs).
In these cases the sellers may have to remain working in the business to ensure the profit and/or growth forecasts are met. If the performance targets are not, then the full sale price may not be achieved.
• Ensure that discussions take place early on about the structure of payments and what security measures or guarantees might be available in the case of payments which take place after the deal completes.
• If a seller is retiring or selling due to personal reasons, which means he can no longer continue in the business, he should be clear as to these expectations.
• If a seller will remain involved this should be either through a negotiated service contract or new consultancy agreement.
What happens after the sale?
For many people the sale of their business involves the release of capital and it is sensible to have a clear plan as to how such capital can be used or invested, taking account of future needs. This will include decisions such as what assets to invest in and what level of risk is acceptable. Sellers may need to consider updating their Wills to take account of the increased capital and should also ensure appropriate tax planning allowing wealth to be distributed to relatives in the most tax efficient manner.
Confidentiality is always key. The potential buyer may be a competitor or commercially you may simply need to maintain secrecy until completion.
• A confidentiality letter or non-disclosure agreement (‘NDA’) should be put in place.
• The NDA should cover the fact negotiations are taking place and the provision of information as part of the proposed sale.
• Even with an NDA in place, consider withholding particularly sensitive information until much later in the sale process.
Due diligence
Due diligence is the term used for the investigations a prospective buyer will undertake on the company and its business – to check its assets, liabilities and state of ‘health’. Sellers should expect to receive a long list of enquiries and requests to provide accompanying documentation. This is where your earlier preparation will more than pay for itself.
• Establish who is responsible for providing information in advance and where necessary involve a small team with individual responsibilities. Balance this against the need to keep the proposed sale confidential.
• Provide all information clearly and in good time following the numbering used by the buyer.
• Ad hoc questions are generally to be avoided. In some circumstances though a Q&A section of the data room may be appropriate where the other party can ask you commercial questions.
• Be upfront with any issues, but ensure you provide this information in the clearest way with appropriate legal advice and explanations.
Disclosure
The sale and purchase agreement will inevitably contain warranties that are factual statements or promises about the company such as “there is no litigation” or “the list of employees is up to date” for example. If any of these statements are not accurate, a seller will have to disclose against any warranties as to why they are not completely accurate (and usually provide further documentation in order to avoid a warranty claim). In this way the buyer gets comfort that it knows about any possible ‘skeletons’.
• The disclosure letter is extremely important as it will qualify any warranties that the seller is required to make. It can help protect the seller in the event a claim is made by the buyer against the seller for breach of warranty.
• A full disclosure exercise should always take place so as to flush out any issues.
• It is best to meet with your lawyer and run through each of the warranties contained in the sale and purchase agreement with a view to prompting specific disclosures. This can be a fairly lengthy process, but, because fair disclosures will act as a shield to any warranty claim, should not be avoided or rushed.
Completion and post completion
When all the documents are agreed and are ready to be signed, they will be signed and dated and the purchase price paid. On a share sale, the legal title to the shares will not actually transfer until the stamp duty is paid and the share transfers registered.
• Completion can take place in person or remotely by scanning over copies of signed documents without the need to meet.
• Unless there is a need to achieve a certain deadline, the proposed date set for completion should give the parties enough time to carry out the investigations whilst maintaining impetus.
• Following completion, there may be a number of registrations (share transfers, resignation of directors, releases of security). On an asset sale some of the assets being transferred will need to have a change of ownership registered or approved, for example, leases, trademarks, domain names and patents.
When will I be paid?
Whilst it is usual for a sum of monies to be paid at completion, we commonly see sellers waiting for up to two years for staged payments (known as retentions). Such payments may even be conditional or weighted depending on future revenues or profits (known as earn-outs).
In these cases the sellers may have to remain working in the business to ensure the profit and/or growth forecasts are met. If the performance targets are not, then the full sale price may not be achieved.
• Ensure that discussions take place early on about the structure of payments and what security measures or guarantees might be available in the case of payments which take place after the deal completes.
• If a seller is retiring or selling due to personal reasons, which means he can no longer continue in the business, he should be clear as to these expectations.
• If a seller will remain involved this should be either through a negotiated service contract or new consultancy agreement.
What happens after the sale?
For many people the sale of their business involves the release of capital and it is sensible to have a clear plan as to how such capital can be used or invested, taking account of future needs. This will include decisions such as what assets to invest in and what level of risk is acceptable. Sellers may need to consider updating their Wills to take account of the increased capital and should also ensure appropriate tax planning allowing wealth to be distributed to relatives in the most tax efficient manner.
Fiona Moss
is a solicitor at Mundays LLP. Fiona specialises in corporate and commercial law and deals with acquisitions and disposals, joint venture/shareholder arrangements and investment as well as general corporate governance and compliance and procedural issues. On the commercial side, Fiona covers general commercial agreements, distribution, licensing, consultancy and is a franchise specialist acting for franchisors and franchisees alike.Fiona can be contacted on 01932 590611 or fiona.moss@mundays.co.uk
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The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update. © Mundays LLP 2018.