There are many reasons for wanting to sell your business, and the best way for you depends on what you aim to get from the sale itself. There are two main routes you can take when selling your business:
- Share sale
Here the shareholders sell their shares in the company, allowing the buyer to take ownership of the business itself. This includes the business’s liabilities, assets and contracts. This means the business stays the same but under new ownership.
- Asset sale
Here the business sells some or all of its assets rather than the business as a whole. These assets can include intellectual property, machinery and property.
Unlike a share sale, the buyer doesn’t take ownership of the business therefore they do not take on its liabilities, contracts and obligations, that are not included with the asset sale. This is a well-suited option for business that are looking to sell a part of their business while retaining ownership of the company.
Checking the health of your business
Once you have decided how you want to sell your business it is advisable to undertake a business health check. This is a form of pre-sale internal due diligence, and your way of making sure there are no issues with your business before selling. You can prepare for this by:
- Gathering the relevant information needed for the sale, such as financial statements, corporate governance records, terms and conditions and contracts
- Making sure employment contracts are up to date
- Making sure your customer and supplier contracts are also up to date and signed
- Checking your business owns its intellectual property
- Getting your financial accounts in order
- Making sure any current disputes are resolved
Historic registers
These are your company’s statutory registers, which include things like your shareholders and shares they hold, your directors, and people with significant control (PSC). Potential buyers will want to look at these, so do ensure that your registers are complete and up to date.
Change of control provisions
Your contracts may include change of control provisions. When a buyer takes ownership of the company through a share sale, this is known as a change of control. Other parties to the contract may need to give consent to this or may decide to exit the contract. It’s important to flag these contracts early to prevent any delays or contract loses.
Employee ownership trusts (EOT)
An EOT is a way to sell your business internally by setting up a trust, which buys a controlling interest (more than 50% of shares) in the company from its owners and holds it on behalf of all its employees. If you are selling to an EOT, the health check requires less due diligence, as unlike a third party, the buyer already knows the business. This is a great option for business owners that are looking to leave the business for the benefit of their employees.
Getting valued
Once you have checked the health of your business, you can start to put a price on it. Getting your business valued will help you set a good asking price that reflect what you are selling.
You can get a valuation from a valuation accountant or a financial adviser, who will look at your business’s finances and the current selling market to give you an estimated sale price. An estimated price from an independent third party is more likely to be accepted by the buyer, as it shows impartiality.
We can help sign post you to appropriate experts in this area if required.
Compile your legal documents for due diligence
These are the legal documents the buyer will need to conduct checks on your business. help the buyer understand what they are potentially buying, any risks involved, and whether the value of which you are selling is fair.
You will need your:
- Articles of Association – these hold your company’s internal regulations, the rights of its members and how it operates.
- Shareholder Agreements – if you have one, this contains the rights and obligations of the shareholders.
- Companies House filings – this is where your filed account records, confirmation statements and any changes to directors or persons of control are, its important these are up to date as the buyer will need to view these documents.
- Employment contracts – setting out the rights and responsibilities of all employees.
- Intellectual property records – showing who holds the rights to the business’s IP such as trademarks, patents and designs.
- Property documents – any leases or deeds the business holds.
- Financial records – bank statements, accounts and any loans and debts the business may have.
- Data protection – provides evidence that the business complies with the UK General Data Protection Regulation (UK GDPR).
Finding a trusted buyer
Once you have all your legal documents ready for the sale, you can start looking for a buyer. You can find potential buyers through business brokers, advisers or personal connections such as family or friends. You can also find a buyer within your organisation:
Employee Ownership Trust (EOT)
The buyer here is the trust which controls the company on behalf of its employees. This can be a simple and reliable way to sell your business while also rewarding the people who have worked for your business. Although the buyer is trusted, due diligence is still important and should not be overlooked.
Management buyouts (MBO)
This is similar to an EOT, where the business is sold internally. However, it is sold specifically to the management team rather than to all its employees. This is a great option where selling externally isn’t possible, as the business is handed over to an experienced management team who already know how to run it.
When you have found a buyer, you are interested in selling to, you should set up a non-disclosure agreement (NDA) before you share any confidential information. This protects your business’s confidential information from being shared and made public. An NDA can be drafted by our corporate commercial solicitors at Stephensons.
Drafting and negotiation
Once the buyer decides to purchase your business, you can start setting out your head of terms. These set out the main points of the deal, including the price of purchase and how that will be paid. Although head of terms are not legally binding, they help guide your negotiations and the drafting of the sale agreement.
What is negotiated in the head of terms:
Structure of the sale – what type of purchase the buyer is making, either shares or assets.
Price and Payment method – what the purchase price is and how it will be paid for, for example all con completion or in instalments.
Due diligence – what checks the buyer needs to carry out to confirm a safe purchase.
Period of exclusivity – an agreed period where you do not negotiate with other buyers.
The sale agreement and its key provisions
Depending on your method of sale, either share sale or asset sale, a share purchase agreement (SPA) or an asset purchase agreement (APA) will be drafted. This is the contract that holds what has been negotiated and agreed so far as well as the following provisions:
Warranties - these are legally enforceable statements about the business that assure the buyer that certain facts and conditions about the business are true. If anything is found to be untrue a buyer may be able to claim damages.
Disclosure letter – this allows the seller to disclose any information against the warranties, so that the buyer can’t claim any damages for a breach of warranty to any matters that have been disclosed.
Indemnities – these are contractual promises where the seller must compensate the buyer for any losses resulting from any identified risks such as ongoing disputes.
Limits on Liability - as a seller, you can limit your liability to warranties and indemnity claims by negotiating a limited amount of claims the seller can make.
Restrictive covenants – these prevent the seller competing with the business, poaching or solicitating its employees or customers for a certain period of time from the sale.
Once these areas are negotiated and agreed upon, the sale agreement can be signed, which lead to the completion of the sale.
Complete and handover
Following the signed sale agreement, completion can take place, where ownership passes to the buyer and the and the payment goes to the seller. Here, the final formalities will take place, including the filing of forms and documents like stock transfer forms for share sales or asset transfer documents for asset sales.
Handover can include passing on knowledge of the business, such as keys, passwords and access codes to the business’s system, as well as introducing the buyer to the employees and customers of the business to ensure a smooth transition.
If you are considering selling your business and require expert legal advice, contact us today. Our team is available to discuss your options and guide you through every stage of the process.
Call us on 0161 696 6170 or complete our online enquiry form to arrange a consultation.
Blog author: Santana Schmool
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