Selling your business is one of the most significant decisions you may make. MICHAEL LEITH outlines the process
At the outset of a potential sale of a business, it is vital for both the buyer and seller to understand its value. To this end, the owner should engage with accountants, tax advisers and lawyers as early as possible.
Recognising the buyer’s motivation for acquiring the business is important, too. Often it can be obvious, perhaps they are a key customer, a competitor, or they are looking to break into a new market.
Unlocking value requires careful planning. A well-prepared seller can make the business more attractive by ensuring important assets are in the right place, intellectual property is protected, employees have suitably drafted employment contracts and the workforce is motivated and incentivised.
Preliminary documents
Once a buyer has been identified, the parties often reach agreement in principle on the key deal terms – known as Heads of Terms.
The Heads of Terms set out the principal terms such as (i) deal structure; (ii) price; and (iii) the conditions a buyer requires satisfied before proceeding with the deal.
As is standard in such a transaction, the buyer will require access to information relating to the business, much being confidential and sensitive. Prior to providing this, it is standard practice for parties to enter into a Confidentiality Agreement (also known as an NDA) which controls the buyer’s use of the information during their investigation.
Buyers may also require the seller to sign an Exclusivity Agreement to prevent them from negotiating with other interested parties whilst they are negotiating with the buyer.
Due diligence and consents
Once the preliminary documents have been agreed, the buyer begins a thorough investigation of the business. The buyer seeks to gain a complete picture of the business, the results of which can have an impact on the price the buyer is willing to pay. Therefore, it is vital for a seller to be able to present the business in the best light possible to ensure the buyer is comfortable paying the price they have agreed to pay in principle.
Unexpected surprises during the transaction process can delay or even derail the deal. However, the seller can get ahead of the game before it gets to that stage by managing the flow of information efficiently and proactively tackling any risks before they are presented to the buyer.
Consider speaking to legal, accounting and tax experts early in the process. Professional advice well in advance of a sale can help get your house in order before the buyer starts asking questions!
Documenting the transaction
The terms of the transaction will be set out in a Purchase Agreement, which forms the legally binding contract between the parties and is often heavily negotiated between the parties’ advisers. After all, it is crucial for the parties to have a robust contract to rely on if a dispute arises in the future.
The Purchase Agreement will include key terms such as (i) how and when the price is paid; (ii) any conditions that need to be satisfied before the transaction completes; (iii) assurances from the seller as to the state of the business; and (iv) restrictions on the seller from competing with the business in the future.
The Purchase Agreement will usually contain assurances given by the seller in relation to the state of the business. These assurances take the form of warranties and indemnities, which give the buyer recourse if an issue arises, and they suffer a loss.
When a buyer acquires a business, the law provides very little protection if things don’t turn out as the buyer expected. Depending on the nature of the deal, the buyer may be taking on the business “warts and all”, inheriting all the debts, liabilities and problems of the business. For this reason, the buyer usually seeks extensive contractual assurances in the form of warranties given by the seller.
During the sale process, the buyer may have identified certain issues affecting the business. In addition, the seller may have brought certain issues to the buyer’s attention.
Depending on the nature of the issue identified, the buyer may seek additional comfort in the form of an indemnity which is a promise by the seller to reimburse the buyer for a particular liability if it arises.
Completion
Once all the documents are agreed between the parties, the transaction will progress to “completion”. Typically, this involves the signing of documents, payment of the purchase price and delivery of any items that the buyer requires to run the business.
Employees, customers and suppliers
A well-prepared seller should agree the timing and content of any announcements to customers, suppliers, employees and the wider public ahead of completion. Some of these relationships may be critical to the continuity of the business, so the parties need to work together to ensure key employees stay with the business, and customers and suppliers don’t seek to terminate or renegotiate their contracts. Early consideration and planning goes a long way to mitigate the risk of surprises at, or shortly after, completion.
Tips for the seller
- Organisation. Ensure all your paperwork and legal compliance is up-to-date and accurate so you can spot risk areas and deal with them early.
- Don’t hold back. Ensure the buyer is fully informed of any issues affecting the business before they sign on the dotted line. Disclosure is a seller’s best line of defence.
- Limitations and controls. Ensure the Purchase Agreement contains a robust set of limitations on your liability (e.g. maximum monetary cap on liability and strict time limits for a buyer to raise a claim).
- Insurance. Consider exploring Warranty and Indemnity Insurance to help you satisfy a claim, should it arise.
Conclusion
Selling a business requires strategic planning, early engagement with advisers, and clear documentation to ensure the business owner gets the best deal possible. A well-prepared business owner who presents their business in a good light and negotiates sensible sale terms is likely to achieve more value for their hard work.
Aberdein Considine LLP is experienced in supporting business owners, shareholders, investors and management teams across a variety of industries and business sectors. If you are considering buying or selling a business, or want to know more about the process, please get in touch with our Corporate and Business Advisory Team at comm@acandco.com
Michael Leith is an Associate at Aberdein Considine LLP
This article is an edited version of a four-part series which includes more detail on the sale process.
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