Thinking of Selling your Business?
Selling your business is a big decision and it is important that you ensure that you get the right deal for you.
- Milton Keynes 01908 660966
- Northampton 01604 828282
Every transaction is unique and will be driven by many factors from the nature of the business and its assets, through to your future plans and tax implications for the parties involved. The process can be daunting – especially as most owner-managed business won’t have encountered the sales process until they come to sell. We thought it would be useful to put together some initial guidance for you on what you can expect from the sales process.
Stages of Selling your Business
Selling your business doesn’t happen overnight. It can take a couple of years to plan a successful sales process and there is a lot that you need to consider and there are various stages involved:
1)    Preparation – This is fundamental to the sales process as you need to ensure both yourself and your business are ready for the sale. From a commercial perspective, it may sound harsh but the business needs to be able to run successfully without you for it to be viable for a buyer. From a legal perspective, you need to ensure that you are also ready for the due diligence enquiries and that any skeletons in the closet have been dealt with to maximise on your sales value. From a tax perspective, you need to consider the sale structure and ensure that you understand the implications of the sale and that it is the right structure for you. This stage of the process therefore may take some time as you need to ensure that you have your house in order and know what you want before you let in a prospective buyer.
2)    Value your business and find a Buyer – Once your house is in order, you need to ascertain what the value of your business is and find a prospective buyer. At the end of the day, a business, like any other asset, is only worth what someone is willing to pay for it. Of course, valuing a business is complex and you should speak with a Corporate Finance advisor who has the necessary industry expertise to appraise and market your business. Once you have a prospective buyer that you would consider selling to you need a comprehensive Non-Disclosure Agreement and Heads of Terms before proceeding to legal due diligence enquiries.
3)    Due Diligence Enquiries – Once you have a buyer lined up and Heads of Terms signed, your buyer will look to undertake legal due diligence enquiries. This is a series of questions about your business, its assets and historic trading position. It is important to answer these honestly and carefully to ensure that you are not exposed whilst ensuring the Buyer has sufficiently detailed information to assess the purchase – of course if you have prepared comprehensively for your sale then this process need not be burdensome – especially as you do still have a business to run!
4)    Legal Documents – Once your buyer has a comprehensive understanding of your business the paperwork to govern your transaction can be prepared. This will consist of a series of legal documents from your sales contract (which may take the form of a Share Purchase Agreement or Business Sale Agreement depending on your structure) through to a Disclosure Letter and ancillary documents required to effect your transaction itself. These need to be carefully drafted and negotiated to ensure that they comprehensively reflect your deal and minimise the risk to you in the future.
5)    Completion – Once the legal documents are in agreed form, the final stage in your transaction is completion itself – this is where all of your hard work pays off! Exchange and Completion is often simultaneous in these deals, so the point where you are legally bound is also the point where you hand over the keys to your business. Of course, in most transaction you usually receive the proceeds of sale (or part of it) and you can begin planning your next endeavours.
Contact the Franklins team about selling your business
Structural Considerations
When planning a sale, there are several different factors that you will need to consider:-
1)Â Â Â Â Asset Sale vs Share Sale – If you own your own limited company, then there are two different ways that you can structure the sale.
You can sell the shares you own in the company. This means that you receive the proceeds of sale directly which could be more efficient from a tax perspective. However, it also means that your buyer takes on both the assets and the liabilities of the Company. You would also be personally liable for the warranties that your buyer will inevitably require in the sale contract.
The alternative is that the company sells its business as a going concern. The proceeds of sale belong to the company in this instance and you will need to consider how you extract them from the Company and any tax implications associated with this. This can benefit your buyer, as they take on only the assets and not the liabilities (unless agreed) which you would still have to deal with. The Company would also be giving the inevitable warranties, although your buyer may require you to personally guarantee these in any event.
There is no ‘one size fits all’ in a transaction and it is important that you get the structure that is right for you and your buyer and balances both the risks and rewards from the sale.
2)Â Â Â Â Payment on Completion vs Deferred Consideration
Another key factor in a sale structure is when you will be paid. In an ideal world, you would receive all of the sale proceeds up front however this may not be agreeable to your buyer. They may need more time from a funding perspective and need to defer part of the payment. It could be the case that they are concerned about potential warranty claims and wish to retain a part of the purchase price to set-off against these potential claims. The sale price may be dependent upon hitting certain targets in the future, which by default means it cannot be paid ‘up-front’.
Whatever the reason, it is becoming increasingly common for a part of the purchase price to be deferred. This presents a risk to you as a seller that you do not realise the full sale proceeds and you need to ensure that you factor into your structure appropriate documentation to mitigate the risk that you don’t get paid.
3)Â Â Â Â Post-Completion Adjustments
There are many different adjustments to the purchase price that can be made post-completion.
The purchase price may be adjusted to reflect the actual net asset position of the Company on Completion or to take into account the cash in the bank (subject to any indebtedness and there being sufficient working capital) as at completion. These are commonly referred to as a ‘net asset adjustment’ or a ‘cash free/debt free’ deal.
The purchase price could also be adjusted depending on post-completion performance of the Company, this could take the form of an ‘Earn-Out’ if you are staying on post-completion or even be a direct reduction if the Company’s financial position isn’t maintained.
Ultimately, if there is to be any variation of the purchase price your documentation has to be carefully drafted so that they are clear, concise and include accountability provisions and the ability for you to fairly challenge any variation.
The above are just some examples of structure variations that may need to be factored into your deal. At the end of the day, each transaction is unique and it’s important that you consider the structure with your professional advisors to ensure that it works for you.
Legal Documents
Any sale of your business needs to be governed by the appropriate legal documentation. Failure to engage properly in the legal process can result in a lack of protection, ambiguity and ultimately expensive and costly litigation. Legal documentation need not be daunting, and your legal advisor should guide you not only through the process but the documentation and what the implications are for you in the long-term. Some of the key documents you can expect to encounter include:
Sale and Purchase Agreement – depending on the deal structure that works for you this would usually take the form of a Share Purchase Agreement or a Business Sale Agreement. This will contain the operative provision for your transaction including your purchase price, when you will be paid, warranties and restrictive covenants to protect the buyer.
Disclosure Letter – this is a key protection for you as a Seller as it gives you the opportunity to formally notify your buyer of considerations that could otherwise give rise to a claim against you. Where something is disclosed, your buyer is proceeding at their own risk in the knowledge of the point disclosed and therefore this prevents a claim against you. It is therefore important to ensure this is properly scoped out and carefully negotiated to mitigate your risk post-completion.
Ancillary Documents – these are a series of documents which are necessary to effect the transaction. These will include Stock Transfer Forms, Board Minutes, Resignation and Appointment Letters and Companies House Returns. Many of these will be required as a completion deliverable for your buyer, but they can also stand in evidence of certain agreed matters and therefore it is fundamental that they are accurate and carefully drafted.
Ultimately, the documents for your transaction will vary depending on what the parties agree, for example if you are agreeing to stay on for a period of time post-completion or if you are using an ‘Earn-Out Structure’ you may need a Consultancy Agreement or if part of the consideration is deferred you may need Loan Note or security documents. Your solicitor should guide these through these and ensure that the necessary documents are effected and agreed to ensure the transaction works for you.
Contact the Franklins team about selling your business
If you have any questions about selling your business, please don’t hesitate to contact our team of experts who are on hand and ready to help you.
