Selling your business is one of the most valuable commercial transactions you will ever enter into, not only in terms of sterling, but in terms of letting go of an enterprise that you may have built from the ground up.
There are a number of considerations to bear in mind when preparing to sell a business and this blog is designed to help put them in order for you, so you don’t miss any steps and lose potential money in the process.
Much of the profit you make when selling your business will depend on the preparation time you put into the sale, the timing of the transfer and the scale and operation of your business. Planning is key to success; preparation for the sale should begin a year or two in advance of putting your business on the market. Engaging experienced professionals such as a business broker, financial advisor and a good legal team will help ensure the process runs smoothly and you can move on to your next venture or relish in early retirement.
Follow these four tips to get you going:
Tip 1 – Make Sure You Are Certain About Terms and Valuation
The first thing to establish is whether you plan to sell your business via an asset sale or a share sale. The key difference between the two types of sales are:
- If shares in a company are being sold, all of its assets, liabilities and obligations are also sold as a result (even those that a prospective buyer may not know about unless they complete proper due diligence in advance).
- If only certain assets are to be sold then only the assets which the buyer agrees to purchase and which are identified in the sale agreement will be sold. Everything else will remain.
A share sale allows you, as owner, to make a clean break from the business. If you are planning to complete an asset sale, you will need to decide if there are any assets which you want to hold back from the sale and ensure these are excluded from the sale agreement.
Establishing the purchase price
Calculating a purchase price can be complex and it is likely you and/or your in-house team would benefit from external financial advice in order to do so. Most sectors of business have a formula for valuing the business based on a multiple of net profit of the business. However, things can get interesting, but complicated when you put in an equity building strategy to increase the multiplier. Hence the need for financial advice.
The purchase price should be determined by the state of accounts before completion of the sale – if your business is trading well this will allow you to increase the purchase price .
Separately, once you have found a buyer for your business, you will need to agree on a non-refundable holding deposit and decide whether you wish to remain in an exclusive arrangement with the prospective buyer while due diligence performed and whilst finance is arranged. Bear in mind that this will prohibit you from selling your business to a third party for the term of the exclusivity arrangement. These points should be included in a document called the ‘Heads of Terms;, which your solicitor can draw up and negotiate on your behalf.
Tip 2 – Don’t get Caught out on Disclosure
You’re now at the stage where he purchaser’s solicitor and accountant will be required to perform extensive due diligence on your business. To move the sale along quickly, it is imperative that you can provide the relevant information and documents quickly and that they are in good order. This is where your 12 to 24 months preparation will pay off!
The Disclosure Letter
The disclosure letter is a key document in any business sale or purchase. It is the seller’s opportunity to make ‘disclosures’ against the warranties which the buyer will require the seller to give about the affairs of the business in the sale agreement. If a seller makes inadequate disclosures, it may face breach of warranty claims, which could allow a buyer to recoup some or even all of the purchase price.
A disclosure letter will be prepared by your legal team and is generally split into two parts; general disclosures and specific disclosure.
General disclosures cover certain matters that appear in public records and/or of which the buyer ought to be aware on the basis of pre-contract enquiries or searches actually made, or which a buyer would normally make.
Specific disclosures are the seller’s opportunity to specifically disclose actual matters which, if not disclosed, would constitute a breach of warranty. Examples of specific disclosures include details of pending litigation or the consequences of a key employee leaving the business.
It is prudent to wrap-up all pending administrative matters that could later be left lagging when the new buyer comes in. This decreases the risk of the buyer contacting you regarding any loss that may result from a project that was underway at the time of your ownership.
Tip 3 – Get the Contract and Warranties Right
In most circumstances, the sale agreement will be prepared by your solicitor.
The buyer will ask you to give an extensive list of warranties covering a range of financial, legal and commercial information. By virtue of you signing the sale agreement, you will be warranting that the information you have provided is true, and may be held liable if this is not the case. Warranties usually cover information that the buyer could not be expected to be aware of unless you inform them, such as pending litigation or a major change in the supply chain.
Indemnities tend to relate to more specific items. For example, if the business is currently being sued, you might be required to indemnify the purchaser against any damages which might be awarded against the business as a result of that litigation. Typically you will also be required to give an indemnity for any tax liability relating to the period prior to the sale.
Both warranties and indemnities are matters for negotiation. They can help increase the price of the business, but you must take care to limit your future liability.
It is common for your warranties to be qualified by saying that they are true “so far as the seller is aware”. However, the buyer will likely want to make sure the sale agreement states that you are deemed to have made proper enquiries. Don’t rely on your memory, check everything diligently.
The best way to limit your future liability is to give as few warranties as possible.
You should also ensure to negotiate a cut-off date for when your liability regarding tax, customer and supplier claims and costs (up to the point of completion of the sale) ends. Your liability to a buyer should never be unlimited.
Tip 4 – Prepare for Completion
Time to address the formalities.
To complete the sale of your business the following will be required:
- the buyer’s solicitors must register the change of ownership and directors at Companies House
- in asset and goodwill deals, the seller must deregister and the buyer must register for VAT
- the seller – and the buyer if necessary – must have informed and consulted affected employees and be compliant under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2006.
Typically, there is a detailed task list for completion, which has been negotiated between the buyer and the seller.
For the sale of larger business, completion may involve a formal completion meeting attended by the buyer, seller, their lawyers and other advisers. It can often be a lengthy meeting as the lawyers check that all the formalities are in place, the purchase monies are available and all the ancillary documents needed to finalise the sale are ready for signature.
By following these four tips, (and by having the right legal team leading the way) you can be confident that the sale of your business will go through efficiently and you will be left with no greater worry than how to spend the proceeds of your success.
Saracens Solicitors has years of experience advising company directors and shareholders on both share and asset business sales. To find out more about our services, please phone our office on 020 3588 3500 to discuss.