So you want to sell your business and there has been some indication of interest. What now?
Selling or buying a business is a major decision that, for most of us, has significant long-term implications. And, unless it is a very straight-forward transaction, you can expect it to take anywhere between 3 to 9 months. Although it might initially appear daunting, if you break it down to clear and distinct phases it is very much manageable.
Phase 1: Pre-sale
During this phase the buyer and seller attempt to build rapport and, on occasion, form the relationship dynamics that will be prevalent during the entire transaction. From a legal stand point, this is rather light – we advise that a confidentiality agreement, or non-disclosure agreement, is signed so any confidential or sensitive information is better protected during the negotiations or should the transaction fall through.
Phase 2: Agreement in principle
Following the discussions in the first phase, the parties have now reached a basic understanding. This understanding is documented in what is called the Heads of Terms (or Heads of Agreement). This usually includes the agreed price (subject to change following the Due Diligence phase), payment terms, structuring of the proposed sale, assets to be included, cash or debt assumption, and other conditions. In reality, this represents a broad understanding and is not legally binding, except of the exclusivity period. The exclusivity period precludes the seller from engaging with other potential buyers while the buyer is incurring considerable costs in exploring the purchase of the business.
Phase 3: Due Diligence
We often see sellers who think their business is sold after the Heads of Terms is signed. However, in reality that is just the beginning. The most critical phase of the entire transaction is just starting. During this phase the prospective buyer conducts their due diligence on the company they are looking to buy. Previously a price was agreed based on external info and some verbal representations, but, now the buyer gets to verify all that by having access to privileged information.
From a legal perspective, during this phase we are often asked to review supplier and customer contracts. Especially, when a few customers represent a large part of the company’s revenue the buyer wants to make sure that these customers will stay with the business once this is sold. Likewise, if a supplier is critical to the business the buyer would want to ensure that there are no break clauses or consent provisions that can affect the security and consistency of the supply.
Another key agreement we look at relates to commercial leases which might have to be transferred over. If the transaction is structured as an asset sale, the commercial lease will usually require the consent of the landlord before it can be transferred over. Sometimes landlords use this as a way to renegotiate some terms; they might also require personal guarantees from the incoming buyer before agreeing to consent.
In certain businesses it also crucial to review how well protected is the intellectual property. If the company’s IP is not adequately protected remediation steps should be taken or the acquisition price should be adjusted to reflect that.
The above are just an example, and, indeed, the list can run much longer: employment contracts of key individuals, licencing or franchise agreements, regulatory approvals, financing arrangements, ongoing or potential disputes.
This is a key stage and legal representation is very important. As a seller you do not want to provide more information than it is necessary as you might be giving away trade secrets or bargaining tools which the buyer can use to reduce the agreed upon price. As a buyer you want to obtain as much information as possible and make sure that for things where information was not sufficiently clear adequate protection is provided to you through the warranties and indemnities section of the purchase agreement.
Finally, for slightly bigger transactions much of this information will need to be provided to an insurer as a Warranties & Indemnities insurance will likely be taken out. Engaging legal help will reduce the duplication of this exercise.
Phase 4: Sale and Purchase Agreement negotiation
In this phase the contracts documenting the sale of the business are negotiated. The main agreement is the Sale and Purchase Agreement (often referred as SPA). This is a lengthy contract and is usually drafted by the buyer’s lawyers. Each SPA is different, whether it is for an asset or share sale, a Management Buy Out (MBO) or Management Buy In (MBI), or a joint venture (JV).
Some of the main provisions deal with the following issues:
- payment mechanics,
- completion mechanics,
- conditions precedent before completion can take place,
- locked box clauses to prevent any value leakage between exchange and completion,
- any restrictions imposed on the seller (especially against setting up a competitor),
- any consents to be obtained, and
- the warranties and indemnities section.
The latter is the most heavily negotiated part of the Sale and Purchase Agreement as the seller tries to limit their potential liability and the buyer tries to maximise their protection.
Sometimes the Sale and Purchase Agreement is signed by the parties before the business transfers to the buyer which means there is interim period when the seller still manages the business. The most common reason for that is that there are certain consents and approvals required before the business can safely change hands. During the interim period the seller will try to obtain the required consents but the buyer will need comfort that the business will not be negatively impacted. It is very important to negotiate appropriate warranties specifically dealing with this, and request the seller to provide a disclosure letter which, effectively, activates the protection afforded by the warranties in, the now signed, SPA.
Phase 5: Completion and post-completion
There are certain practical issues that need to be dealt with at completion and post-completion. Some of these are:
- board minutes,
- shareholder approvals (if needed),
- resignation of old directors and the appointment of the ones chosen by the buyer,
- release of any security or charge that the seller might have against the business or, if the business is being bought debt-free, that the debtors might have for debt that is to be repaid by the seller.
Finally, any stamp duty payable would have to be settled with HMRC and forms required by the Companies House would have to be filed.
Phase 6: Seller’s perspective
From a seller’s perspective there will usually be some tax liability arising following the sale of a business. In a share sale, Capital Gains Tax (CGT) will be due at 20%, unless the seller can claim Entrepreneurs’ relief (or Business Asset Disposal Relief as it is called now) which will lower the rate to 10%. In an asset sale, there will usually be corporation tax due if the seller takes the proceeds of the sale as dividends. There are a number of further reliefs and deferrals that a seller can claim, but, that will be very much dependent on
If you want to discuss further with us please feel free to contact us.