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  • Overview

    Selling a business

    We have prepared this guide from the seller’s perspective to provide an overview of the main 8 stages involved in selling a business. The key is to seek professional advice at the earliest possible stage. This will enable the seller and advisers to plan the sale process fully and identify any issues well in advance. This proactive approach should be rewarded in terms of both a smooth sale process and a better deal for you as the seller.


    Step 1: Decision to sell a business

    Why sell your business?
    A seller’s motives for selling a business or planning an exit are likely to be financial or commercial reasons or, more usually in owner managed business, entirely non-commercial ones such as retirement, ill health or even simply a desire to do something different. The financial or commercial reasons for a business sale can be voluntary or involuntary. The underlying reason for a sale can have a significant impact on the negotiation process.

    What should a seller do next?
    Appoint experienced professional advisers to help with the sale of your business, to undertake a review of the business to assess whether a sale is feasible. It is important for the advisers to understand the seller’s rationale for wishing to sell the business, and to identify the seller’s key commercial objectives.

    Establish marketability
    Establish the marketability of the business and the likely sale price: 
    Part of that review process is to highlight areas of the business which may prevent a sale or prove to be unattractive to a buyer. Remedial action can then be taken pre-sale to ensure that the business is marketed in its most attractive form.

    Likely sale price of a business
    In assessing the potential sale price of the business, the lead adviser will usually base the price on a multiple of the earnings of the business or a net asset valuation. The lead adviser will then use their experience and knowledge of the market to adjust the base price upwards or downwards to reflect various matters from potential cost savings to the benefits available through market customer synergies.

    The role of a lead adviser
    The lead adviser needs to be experienced in the disposal of companies and have an understanding of all aspects of the transaction. The lead adviser must not only be in possession of a wide range of corporate finance skills, but they must also have the necessary experience and management skills to ensure the smooth running of a deal.

    Pick the right team
    If the preliminary review is favourable and the assessment of the likely sales price acceptable to the seller, the next phase of the process is to gather the right team of professional advisers - to listen to their advice to help guide the seller through the process. The team will typically comprise of corporate finance advisers, lawyers, accountants and tax advisers.


    Step 2: Sale strategy for selling a business

    Key elements
    The next step in the process is the formulation of a sales strategy. The key elements of the sales strategy are the method of sale (whether by auction or by private negotiation), the structure of the sale (i.e. sale of shares or sale of assets) and the timing of the sale.

    Structure
    The main issues that tend to influence the structure chosen in practice (that is, whether the business is acquired by way of a share sale or an asset sale) are liabilities, tax consents and third party approvals. There are two main structures for selling a business.

    Share sale
    This involves the buyer acquiring the shares of the company that owns the target business or assets. The company continues to operate the target business and it is only the owners of the shares that will change. 

    Business or asset sale
    The alternative approach is to sell each of the individual assets that make up the target business.

    What's the difference?
    The two disposal structures are fundamentally different. If shares in a company are sold, all its assets, liabilities and obligations are acquired. If assets are sold, only the identified assets and liabilities that the buyer agrees to purchase are acquired. 

    A share sale is more likely to be tax advantageous to the seller than a buyer. Conversely, an asset sale will often be more tax efficient for a buyer than a seller.

    Is consent required to sell a business?
    The sale of a business may need the approval of third parties (for example, industry regulators or require approval from competition authorities or shareholder consent). Consideration needs to be given as to when to approach for approval and whether the transaction is likely to be challenged. If the buyer is acquiring all the shares in the target company, it is vital to check that no material contracts can be terminated on a change of control.

    Timing
    Timing and planning ahead for the sale of a business is an important consideration - for the seller to maximise benefits and to improve the attractiveness of the target business.


    Step 3: Finding a business buyer

    Information memorandum
    Assuming the seller has initiated the sale process with no specific buyer in mind, one of the first steps is usually for the seller and its advisers to prepare an information memorandum about the target company or business. The format and content of the information memorandum will be a matter for the seller and the lead adviser to decide. The memorandum is a selling document and should summarise for a prospective buyer all of the key investment considerations.

    Buyers
    The seller will need to consider the types of buyer to be targeted: direct competitors, customers or a company operating in the same market (but not in direct competition), foreign companies, private equity etc. In the absence of a really identifiable buyer from trade contracts, a first-time seller is likely to rely heavily on the support of the lead adviser to help identify prospective buyers and achieve the best deal structure and price for the business.

    Confidentiality agreement for selling a business
    Potential business buyers will be required to sign a confidentiality agreement before receiving the information memorandum. This imposes a duty of confidentiality on the buyer in respect of confidential information concerning the target company (and any subsidiaries) pending the formal conclusion of the acquisition agreement.

    Offers
    The interested buyers will then be asked to submit any indicative offers and terms they may wish to make.


    Step 4: Negotiation 

    Negotiation process
    The next step in the sale process for the seller is the negotiation of the sale. Having received various indicative offers, the seller will, through the lead adviser, negotiate with the prospective buyers to obtain the preferred offer in terms of price and deal structure.

    Preliminary agreements
    A prospective buyer may enter into a number of preliminary agreements with the seller before the partiers begin detailed negotiations relating to the legal documentation.

    Heads of terms for selling a business
    As well as the seller requiring the buyer to sign a confidentiality agreement, it is common for the key terms of a transaction to be set out in a heads of terms document or letter of intent. Heads of terms are usually signed at an early stage of a deal before detailed due diligence is undertaken by the buyer. A lot of time is often spent negotiating at the heads of terms stage when decisions need to be made as to whether the deal stacks up and makes commercial and financial sense.

    It is common for the key terms of a transaction to be set out in a heads of terms document or letter of intent. Heads are usually signed at an early stage of a deal after the confidentiality agreement and before detailed due diligence is undertaken by the buyer. A lot of time is often spent negotiating at the heads of terms stage when decisions need to be made if the deal stacks up and makes commercial and financial sense.


    Step 5: Due diligence for selling a business

    What is due diligence?
    Due diligence is the information gathering process carried out by a prospective buyer to find out as much information as possible about the target company early in the transaction negotiations. Through this process, the buyer aims to gain a complete picture of the target and its critical success factors, strengths and weaknesses. It is an essential part of the process of selling a business.

    Legal due diligence involves responding to a detailed questionnaire from the buyer's lawyers requesting information and sight of supporting documents from the seller via the seller’s lawyers.

    Importance of legal due diligence
    It is important that the seller of a business is aware of the importance of this exercise to the buyer will place reliance on the information supplied to it, supported by contractual warranties in the sale and purchase agreement. The due diligence information flow should be carefully controlled by the seller’s lawyers.

    Due diligence report
    The buyer's lawyers will usually prepare a legal due diligence report for the buyer, highlighting any potential legal issues. The buyer will be particularly interested in issues that may affect the value of the target company, for example, large potential pension or environmental liabilities.

    What is the impact of due diligence?
    If the due diligence reveals liabilities, problems or information that were not known at the time of negotiating the deal, it provides the buyer with an opportunity to renegotiate terms or seek an indemnity from the seller to cover specific identified risks.


    Step 6: Legal documentation for the sale of a business

    As the due diligence process progresses, the parties will begin negotiation of the material supporting legal documentation. The range of legal documentation required varies for each deal.

    Acquisition agreement
    This is traditionally prepared by the buyer’s lawyers. A typical acquisition agreement (share purchase agreements and business transfer/asset purchase agreements) will be between forty and a hundred pages. 

    Typical provisions

    • What is to be sold
    • Details and terms of the purchase price
    • Conditions to be fulfilled (if any)
    • Completion requirements
    • Warranties and indemnities
    • Seller limitations on claims
    • Restrictive covenants
    • Pension arrangements (if applicable)
    • The terms of any ongoing relationships between the parties.


    Tax covenant
    Tax is a key consideration for both parties when structuring a transaction. A buyer will require protection against potential tax liabilities. Such protection usually takes the form of a tax covenant and tax warranties in the acquisition agreement. The tax covenant is relevant only when shares are being acquired. On a business purchase, the buyer will not be taking on the tax liabilities of the selling entity.

    Disclosure letter
    The seller will through their lawyers prepare a disclosure letter that contains both general and specific disclosures against the warranties contained in the acquisition agreement. If a warranty turns out to be untrue, the buyer has a claim for breach of contract. However, no claim will arise if the facts which give rise to the breach were disclosed. The disclosure letter is a key transaction document to protect the seller from a claim for breach of warranty.

    Ancillary documents
    Most ancillary documents are required to perfect the transfer of assets; for example the transfer of legal title to shares to a buyer, property transfers and/or lease assignments, assignments and/or novations of contracts, assignments of intellectual property and so on.

    Other ancillary related documents include board minutes, releases from charges, resignation letters, consultancy agreements, powers of attorney, indemnities for missing share certificates etc.


    Step 7: Completion of a business sale

    Once the parties have reached agreement on the final versions of the legal documentation the deal will then move into the final stage of the process, completion.

    Timing
    In most transactions, the signing of the acquisition agreement and completion of the transaction will take place simultaneously. However, in some cases, it may be necessary for there to be a gap between the exchange of contracts and completion. For example, the buyer may be relying upon bank finance to fund the deal or there may be various conditions that need to be satisfied before completion can take place.

    Board approval
    Where the business buyer and seller are corporate entities, their respective board of directors will hold board meetings to approve the terms of the acquisition and the execution of the transaction documents before the acquisition agreement is signed. 

    A board meeting will be held by the target company (and any subsidiaries) at completion to approve, amongst other things, the transfer of the shares or assets to the buyer.

    Documents for the sale of a business
    The terms of the acquisition agreement will require the seller to deliver a number of documents to the buyer on completion. We will work with you well in advance by preparing a completion agenda to identify items to be handed over to avoid any last minute problems. On completion, the buyer will pay the completion payment for and will become entitled to, the shares or assets in the target company.


    Step 8: Post completion

    Following completion, the business buyer will undertake the post completion tasks involving payment of stamp duty on the purchase price for the shares or assets, making any necessary staff and customer announcements and dealing with various administrative matters.

    Matters for the buyer
    The real work for the business buyer is however at this stage, to ensure the successful integration of the new business into its existing activities. Planning for integration should begin when the acquisition is first considered and the success of the acquisition will depend on a number of factors.

    Seller's involvement post sale
    The seller may have agreed to remain for a period post completion to assist with a smooth transition to the buyer, often in a consultancy capacity or sometimes remaining as a director.

    Depending on the structure of the transaction, the seller may have a vested interest in remaining in the business post completion for a set period of time, to ensure the business continues to perform if there is an element of earn out in the consideration structure.

    Time limits for any claims
    The seller also needs to be aware of any relevant time limits post completion as to whether the buyer has a possible claim for beach of warranty and/or indemnity claims under the acquisition agreement. The acquisition agreement will invariably include strict time limits for bringing warranty claims which are often drafted to expire once the buyer has completed its second audit of the target business (although the time limit will usually be longer for tax claims).

    Further professional advice on selling a business
    We advise that the seller should obtain independent tax and investment advice in relation to the proceeds of the sale, which can be quite significant depending upon the value of the business sold. In addition, we recommend all individual sellers should consider updating or making a new will. Please see our separate information guide on: Making a will.


    Conclusion

    Deciding to sell your business is one of the biggest decisions you will make. The Corporate team at Thomson Snell & Passmore are independently recognised as experts in the field of corporate M&A. We have a proven track record of advising on the sale of private limited companies by owner managers and corporate sellers. We recognise that each business sale is unique and can guide you in the process. Our flexibility in approach and effective project management of the sale process are key to us running a successful transaction. We will advise you of the best course of action at every stage including sale strategy, finding a buyer and exit strategies, negotiations including the heads of terms and the terms of confidentiality, due diligence (as preparation and organisation are key) and completion. 

    This guide to selling your business is written as a general guide and is not a substitute for professional advice. You are recommended to obtain specific professional advice before you take any action. Please contact a member of the Thomson Snell & Passmore Corporate Team if you would like further information. 

    Disclaimer
    This guide to selling your business is written as a general guide and is not a substitute for professional advice. You are recommended to obtain specific professional advice before you take any action. Please contact a member of the Thomson Snell & Passmore Corporate Team if you would like further information.

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    Our award winning team of corporate lawyers provide highly practical advice to help businesses of all sizes develop and grow.    

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    Our advice is practical, straightforward and commercial. The breadth of experience ensures the team can advise all companies irrespective of size. We have specific expertise on small business sales and purchases where the property is the main asset.

Get In Touch

By submitting an enquiry through 'get in touch' your data will only be used to contact you regarding your enquiry. If you would like to receive newsletters from Thomson Snell & Passmore please use the separate form below.

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