Ready, Steady, Sell!
4th May 2021
Looking to sell your business? Read our handy introduction to the sales process to get you started.
It’s never too early to get ready to sell your business, even if you are only just starting out. In our experience, the more organised you are, the smoother a sale process will be.
All company and business sales start with a due diligence process, which is a chance for a potential buyer to take a look under the bonnet and push the buttons to make sure everything is as they expect. Any offer letter or heads of terms is likely to be subject to completion of due diligence and you can expect to receive a detailed list of questions that your buyer will expect you to respond to fully. Typically, all the relevant information you provide is uploaded to an electronic “data room” (essentially an online filing cabinet) for the buyer to review and then ask any further questions.
There are a number of things you can do now to make sure that a due diligence process runs smoothly, with no nasty surprises for your potential buyer:
· Make sure that your Companies House filings are up to date and accurate- your solicitor or accountant should be able to help you check that everything looks to be filed properly. You should also make sure that any old charges have been marked as “satisfied” at Companies House.
· Find your statutory books (these should contain a shareholder/ members register and, for a company, a register of directors as a minimum) and make sure that they are up to date. These should have been put together on incorporation of your company and it is important to make sure that the shareholder register is always kept up to date as it shows who the legal owner of the shares is.
· Keep your share certificates somewhere safe, a buyer will want these on completion of a company sale.
· If you hold regular board meetings or members meetings check that the minutes are all written up and signed and that you have electronic copies of them.
· Check that the copies of contracts you hold with key customers and suppliers are all signed and dated, and that you have electronic copies saved in an organised way, with a sensible title! This will make it much easier to upload key contracts to an electronic data room.
· Make sure that all of your employees, consultants and contractors have signed contracts or service agreements and that you have electronic copies which are fully signed and dated.
· Check that your policies and procedures are up to date. Have you reviewed your data protection policies recently? Do your terms and conditions need to be updated following Brexit? Do you HR policies need to be updated to reflect increased remote working?
Don’t forget to make sure that your potential buyer has signed a confidentiality agreement (sometimes referred to as a non-disclosure agreement or NDA) before providing any sensitive information to them!
To sell your business you need to find a buyer who is willing to buy it and, more importantly, buy it for a price that you are happy with! Your accountants or a corporate finance adviser will be able to help if you are actively looking for buyers. Solicitors tend to become involved once a buyer has already been identified- and I would always suggest you ask a solicitor to review a heads of terms/ offer letter before you sign it.
A few key things to think about when agreeing terms with a potential buyer:
· What price would you be happy with? Most buyers will not pay all of the consideration upfront on completion, so you should consider whether you are willing to accept a deferred payment of some of the consideration. Lots of transactions are structured with an “earn-out” or conditional element, where part of the consideration is linked to the performance of the business after completion of the sale. Some buyers also offer shares in themselves as part consideration, instead of cash. Depending on the plans of the larger group, this may offer an opportunity to sell the “consideration shares” at a later date for an even higher price.
· Do you want to continue to be involved with the business for a period of time after you sell? What is the maximum time that you are willing to continue to work for the business? The answer to this question will depend on your motivation for selling! If you are looking to retire then you should make it clear to the buyer that you only want to hand over for a short period after completion of the sale. If, on the other hand, you are selling to a buyer who intends to invest in the business and grow it, you may want to stay on for an indefinite period of time. Either way, you can expect to be asked to sign a new employment contract or consultancy agreement at completion.
· Most share purchase agreements will contain restrictive covenants, which prevent sellers competing with the business that they are selling. Typically, these last for 1 to 3 years after completion of the sale. If you plan to set up another business in the future, you will need to be mindful of the length of these covenants.
· Ideally, when do you want to complete by? Most transactions take at least six weeks and tend to complete on the last day of a month (as it is easier to draw up accounts to a month end). A buyer will usually ask for exclusivity period in a heads of terms or offer letter, during which you are restricted from engaging with any other potential buyers. This should be kept fairly short to discourage a buyer
from dragging their heels- two months should be adequate. You should also consider whether you need any regulatory or bank consents, as this could impact on timing.
· Does the buyer want to take on the property which is owned by the Company? Often we find that the freehold of a company’s offices are owned by the sellers’ pension fund and a new lease needs to be granted to the company at completion. It can take some time to deal with pension funds, so it’s worth getting the ball rolling early on this one.
Don’t forget to also check your tax position with a tax adviser. A deal can be structured in a thousand different ways and some will be far more advantageous to you from a tax perspective than others.
So, you’ve gathered all the due diligence information requested, you’ve agreed terms with the buyer and you’ve got a solicitor engaged. What next?
Well, next you need to agree and eventually sign all the required documentation! Most sellers are surprised how much legal work goes into a company or business sale. You can expect to negotiate a lengthy share purchase agreement (SPA) or asset purchase agreement (APA), which often run to more than 100 pages. You will also need to agree (with the help of your solicitor) numerous other documents including a disclosure letter, new employment contracts, board minutes, and, if part of the consideration is shares in the buyer, a shareholders’ agreement and new articles of association of the buyer.
A sale process is very time consuming and many sellers struggle to find the time to sell and to continue run the business. A buyer will always ask for updated accounts before completion of the sale, so you need to keep your eye on the ball from a business perspective throughout the sale process. You don’t want a last minute price chip because sales have fallen off whilst you’ve been busy negotiating the sale!
You should consider who within your company to tell that a sale is imminent. Whilst letting a number of other employees in on it may help to lighten the load, you may not want all of your employees to know that you have a buyer as it can cause concern and worry about the future.
Once all the documents have been agreed it’s time to sign. This is usually done remotely, and you will be asked to sign and send copies of the signed documents to your solicitors. Once everything has been signed and dated, and the purchase money is in your account (or your solicitors’ account), you can open the champagne, and put your feet up!
How can we help?
At GBH Law we work with owner managed businesses in a variety of sectors and Denise, Kate and the rest of the team have lots of experience guiding business owners through sales processes. No two sales are the same and there is not much that we haven’t come across before! Have a look at our website for details of some of the transactions that we have worked on recently.
Our approach is always friendly and proactive and we take the time to get to know our clients and understand what they want out of a transaction. We work hard to meet your deadlines.
We’d love to chat with you so, if you would like to discuss the sale of your business or just want to say hello, do contact either Denise or Kate.
- Kate Doody Director/ solicitor email@example.com 01483 239285 07814646414
- Denise Herrington Director/ solicitor firstname.lastname@example.org 01483 239271 07808760525