Essential Guide to Selling Your Business

Selling your business is a major decision and in this article we provide an overview of what to expect after making that decision, and how this complex process is often structured.

1. Prepare your business for sale

It is, of course, important to make your business look attractive to potential buyers to make sure you get a fair value for your hard work. A buyer will want to see that the business has good housekeeping, so before embarking on the sale, it would be advantageous to liaise with your financial and legal advisers to have the financial matters in an easy format for a buyer to review, and be prepared to present all of the contractual and commercial documentation (contracts, subcontracts, employment related documentation and internal compliance documents) in a logical way.  A review of your legal documents may be helpful in advance of sale – you may be able to amend anything that could impact on value to the business (e.g. putting a verbal contract into writing with the customer/supplier), or at least you may be armed with the responses you will need to give to a potential buyer when they conduct a review of the business.

2. Agreeing the preliminary documents

At the outset of the transaction, the parties need to negotiate the Heads of Terms (HoT) which will outline the principal terms of the deal. Although the HoT are usually not legally binding, the document records the future intentions of the parties wishing to take part in the transaction. The HoT can serve as a useful drafting guide and make it less likely that either party will seek to renegotiate the terms of the transaction substantially. Confidentiality agreements can be implemented to restrict the buyer sharing information acquired during the preliminary stages of the transaction. Finally, parties may enter exclusivity agreements to prevent the seller from exploring other potential buyers.

3. Deciding between a share or asset purchase

If your business is a limited company, you should decide whether to sell the shares or the assets of the target. In a share purchase, the buyer often acquires all the shares in the target company, whereas in an asset purchase, the buyer purchases a specific set of assets and associated rights. An asset sale allows the buyer to select assets to acquire and decide which liabilities to retain or leave behind. In a share sale, the entire company transitions to the buyer.  A buyer might prefer an asset sale if they desire only specific assets from the target and/or wish to avoid certain liabilities.

4. Conducting due diligence (DD) on the target

The buyer will start the DD process which will involve an examination of the target business. Generally, legal and financial advisors assist with the DD process, assessing the target’s financial, legal, and commercial position. The primary objectives of this process are to outline potential issues, assess risks, identify any third-party consents, guide negotiations regarding the warranties and indemnities, and provide key information about the target.

During the DD process, the buyer will undertake an in-depth review of the seller’s business, including any contracts to which the target is a party, the employees’ records, any intellectual property rights owned by the target and (if the target is a limited company) the statutory books. Therefore, it is vital that all the information is up-to-date and made easily accessible to the buyer.

Typically, a questionnaire is sent by the buyer to the seller, who will then respond to the various questions raised and make the information available to the buyer and their solicitors and other advisers to analyse.

Sellers are under no legal obligation to respond to DD enquires. However, the findings assist the buyer’s solicitors in drafting appropriate warranties tailored to address specific situations, and inadequate responses may impact the progression of the transaction.

5. Drafting the necessary documentation for the transaction

In conjunction with the DD process, the solicitors will prepare the Share or Asset Purchase Agreement (SPA/APA) and the ancillary documents. Typically, the buyer’s solicitor will prepare the initial drafts of SPA/APA.

The SPA/APA will include warranties concerning the business being sold – these are promises about the state of the business on the date of the agreement (and if completion takes place on a date after the agreement, those promises may be repeated up to and on the date of completion).  The SPA/APA will then detail what liability the seller would have if any of those promises are found to be untrue.  To address any known issues, the seller’s solicitor will prepare a disclosure letter outlining any warranties the seller cannot provide and the underlying reasons why. By way of example, if the warranty was that there was no ongoing litigation, but the business was in the process of suing a former customer for a debt, the disclosure letter would set out the name of the customer and provide full details of the ongoing litigation.  Any documents that are related to the disclosures must also be provided in order to protect the seller from being in breach of the warranties, so there is usually a bundle of documents (often provided electronically) which are referred to in the disclosure letter.

Depending on the structure of the deal, there may be other documents like loan notes, escrow agreements and security for any deferred or earn out consideration.

The ancillary documents for asset purchases often include:

• board minutes for the buyer and the target (selling) company – these outline and approve the transaction;
• assignments of rights – such as those under leases, contracts, and intellectual property;
• TUPE letters (and potentially consultation) – employees of the business are very likely to transfer to the buyer as a matter of law, but there is a statutory procedure that must be followed to ensure this is done correctly; and
• transitional services agreement – this may be required if there is work to be done after completion to effect the transfer of assets such as databases and IT systems and/or to unbind shared group services from the target to the buyer.

The ancillary documents for share purchases often include:

• stock transfer form(s);
• board minutes – for the buyer and the target company to outline and approve the transaction;
• employment/consultancy agreements – often a buyer will want some or all of the sellers to remain working in the business for a period of handover to the buyer;
• settlement agreements – if any sellers are leaving the business on completion, or entering into new employment/consultancy arrangements, a buyer may want them to terminate all existing employment rights at completion;
• indemnities for lost share certificates – if the original share certificates are lost;
• new share certificate(s);
• letters of resignation and appointment of directors and secretaries; and
• incoming and outgoing relevant legal entity/person with significant control letters.

6. Exchange and completion

Exchange occurs when both parties sign the relevant documents. It may be that completion then happens immediately – known as simultaneous exchange and completion – or it may be that there is a need for a gap between entering into the agreement to sell and completing on the sale.  For example, there may be a need for consent from a regulator because the business is in a regulated sector, or the parties may enter into an agreement to sell the business and assets (rather than shares) and there is a gap before completion in order to inform and consult the employees who are transferring employment to the buyer.