Over the last two weeks this series has focussed on forward-thinking sellers preparing their business for a sale and structuring their exit to achieve their goals. This week, we will consider the sale process as a whole. The Thomson Snell & Passmore online guide to selling your business provides an excellent overview of the main 8 stages of a sale. This article will drill into a bit more detail setting out ten tips for a successful sale based on our experience in this area.
The Negotiation (Step 4 of our online guide)
(1) Get tax advice before commencing negotiations
We strongly recommend tax advice on the sale structure is obtained before a seller starts agreeing terms with a buyer. Failure to do so could affect your ability to properly prepare your business for sale and take advantage of tax reliefs which could increase the amount of money you receive for your business.
(2) Don't limit your room for manoeuvre
Heads of terms are a useful means of focusing negotiations and setting out the terms agreed in principle. However, they should be reserved for headline points (e.g. structure, price, timetable, conditions) with the fine print reserved for the core legal documents. This will allow a seller room to negotiate as the transaction progresses.
(3) Beware of inadvertently creating legal relations
Whilst heads of terms evidence intent and are often said to be 'morally binding' on the parties, they are generally not meant to be legally binding. Where they do contain provisions that are intended to be legally binding (provisions on exclusivity or confidentiality for example), then the document should explicitly say which terms are and which are not to have legal effect.
Sellers should be aware that statements made in poorly prepared heads of terms or during negotiations could create liability for misrepresentation or negligent misstatement; therefore, we recommend instructing a solicitor as early in the negotiations as possible.
Due Diligence (Step 5 of our online guide)
(4) Involve your advisors in due diligence early on
We have seen sellers start to pass information (some of which sensitive) to prospective buyers before advisors are involved. However, this can be risky especially if the buyer pulls out. It is really important that information passing between seller and buyer is tracked and documented to ensure your solicitor can maximise your protection.
(5) Inform your solicitor about known issues as soon as possible
This may seem obvious, but the earlier you tell your solicitor about a potential issue or problem in your business, the more time they will have to help you resolve it. It will also give your solicitor the opportunity to negotiate and prevent a buyer requiring a disproportionate level of protection under the sale agreement.
We will discuss surviving due diligence in more detail next week.
Legal Documentation (Step 6 of our online guide)
(6) Consider your legal advice carefully
The agreement governing the sale will probably be a long document and can often be well in excess of 100 pages. Your solicitor should be sensitive to the fact that you won't necessarily be able to read and understand the whole document. Their job is to draw your attention to key issues and advise you how they can impact on risk. Legal negotiations usually require compromise and concessions on both sides, so you should consider your solicitor's advice carefully so you can decide what's important to you and what's not.
(7) Understand the difference between a warranty and an indemnity
These are key protections sought by a buyer under the sale agreement. Often sellers will not understand what these terms mean and how these provisions affect them. We will explain these terms in next week's article.
(8) Get tax advice on the sale agreement
Where a buyer is acquiring the risk of tax liabilities, you will be required to give warranties and indemnities in relation to tax. It is really important your tax advisor reviews these provisions as they will be best placed to understand the tax position of the company.
(9) Disclose with detail
Sellers can face legal claims from a buyer after completion of a sale if they have given any warranties that turn out to be untrue. The best way to ensure no claim will arise is if the facts which give rise to the breach were disclosed to the buyer before completion. However, in order for the disclosure to properly protect the seller, the matter needs to be disclosed fairly. This means that a sufficient level of detail needs to be provided to the buyer so they can understand the matter properly and assess any potential liability.
Read next week's article for further discussion on disclosure.
Completion (Step 7 of our online guide)
(10) Be prepared
Formal completion meetings with buyer, seller, other stakeholders and advisors all present can be costly and difficult to organise if parties aren't local. Fortunately, it is possible to complete a sale remotely. To ensure a remote completion goes smoothly the seller needs to be available and well-prepared. When documents are ready for signature, we suggest having an independent witness on hand to witness any deeds you are required to sign. You will also need a printer and scanner to hand so you can print, sign and scan documents to your lawyers.