Selling your business could be the most important decision you make in your professional life. Often this process will only be done once and will be the result of years of hard work. Our ten step guide to selling a business is to be used to help you in this process.
1. Put your house in order
In the same way you would spruce up your house if you were planning to put it on the market with the aim of achieving the best price – make sure your business is in good order. If you have had a draft customer or supplier contract floating around for months – get it finalised and signed. There’s nothing more off-putting to a buyer than to find that the huge lucrative customer contract which a lot of value is being attributed to was never actually signed. Or that the lease of your premises has long expired. Tidy up the paperwork. It will give your buyer confidence in a well-run organised business and will help you achieve better value.
2. Seek tax advice early
Once you have made the decision to sell, seek tax advice. Tax advisers will be able to advise you of any pre-sale restructuring of your business you could do to enable you to dispose of your business in the most tax efficient way as well as how to structure the disposal itself.
Consider all the options (even selling to employees using specialist trusts can generate tax efficiencies). Don’t miss out on potential tax savings by seeking tax advice too late.
3. Choose your corporate finance adviser wisely
Corporate finance advisers will help you market your business, find potential buyers and importantly help you achieve a good purchase price.
Their fee is always negotiable. Get a number of quotes from people in the market and don’t be shy about asking for their credentials and experience. Have they got good experience and existing contacts in your industry?
They need to be able to put your business in front of the right buyers.
4. Confidentiality Is Key
Before you start any discussions or negotiations with any third parties, ensure they have signed a confidentiality agreement (sometimes called a non-disclosure agreement or NDA). This is particularly important when entering into discussions with trade buyers. There is always the risk that they are not serious buyers and are just on a fishing expedition, so get your confidentiality agreement in place to protect against misuse of your confidential information and trade secrets.
5. Heads of Agreement
The heads of agreement, as the name suggests, sets out the principle headline terms of the deal. These, as a bare minimum, will include:
- the price;
- the payment terms (whether there is any element of the consideration that will be deferred or subject to adjustment);
- the structure (whether a disposal of shares or assets);
- the proposed timetable and any exclusivity arrangements (i.e. ceasing all negotiations with other potential buyers for a set period to allow the deal to be done); and
- any conditions of sale (such as getting the consent of a major customer, supplier or landlord to the disposal)
In addition to the above, it is worthwhile agreeing up front the following:
- what warranty and indemnity cover the buyer is seeking from you (basically - who bears the risk of any problem areas within the business);
- what restrictive covenants the buyer expects from you (used essentially to protect the goodwill of the business by preventing you from starting up a competing business or poaching customers, suppliers or employees);
- what limitations on your liability the buyer will be prepared to accept (for example time limits and financial caps on your liability);
- what (if any) transitional services may be required to enable the buyer to run the business post completion, where it is being sold out of a larger group;
- what terms will be offered to any continuing management team to motivate them in the business (remuneration, bonuses, equity ownership, etc.); and
- whether the buyer expects the continuing management team to provide any warranties in respect of the business.
It is really important to get the heads of agreement right as it will make negotiating the full agreements so much easier. By rushing it and not going into enough detail, it will likely cause the full negotiation process to be much more protracted and costly in respect of advisers’ fees.
It is strongly recommended that you involve lawyers in preparing the heads of agreement, if they haven’t been involved in the sale process already.
6. Due diligence
Most potential buyers will want to carry out some due diligence into your business before they put in their first serious offer. It will help them put a more accurate value on your business.
In the first instance that due diligence is most likely to be financial (reviewing your annual and management accounts, business plans etc.), but detailed legal and commercial due diligence will be required soon after heads of agreement have been signed. It is fairly common to expect a seller to provide access to information on the business via an online data room. This essentially involves you emptying most of the contents of your filing cabinets and your lawyers arranging for copies of the documents to be categorised, ordered and uploaded onto a secure web based data room.
Be warned – most buyers and their advisers will want to review everything – accounts, company books, customer contracts, supplier contracts, property deeds, employment contracts, employee handbooks, pensions details and scheme documents, insurance policies, claims history, health and safety records ….. the list goes on.
If you have put your house in order at the beginning, this should make responding to due diligence requests so much easier!
7. Full purchase agreement
Depending on whether you are selling shares in your company or you are selling the assets of your business, the principal agreement for the disposal will either be a share purchase agreement (often referred to as an SPA) or an Asset Purchase Agreement or Business Purchase Agreement (often referred to as an APA or BPA). The relevant purchase agreement will contain many of the terms referred to above in the section 5, heads of agreement, but in much greater detail. A significant proportion of the agreement is taken up with the warranty and indemnity cover to protect the buyer. The buyer doesn’t get any legal protection for the state of the business it is buying so it seeks to get this in the form of warranties in the purchase agreement. See below for more detail.
8. Warranties and indemnities
Essentially the warranties are statements or promises that the business is clean and does not have any problems, as the buyer is usually paying a premium price based on a clean business. If there are problems, then this would normally be reflected in the price being paid. If the business is being sold at a low price for this reason, then the buyer can hardly expect a platinum set of warranties stating that everything in it is in good order.
The warranties are typically confirmatory statements that the business has been run properly – paid it’s debts as they fall due, kept good records and accounts etc… and that it doesn’t have any outstanding problems – for example any disputes with customers or investigations by regulatory authorities. If any of these statements prove to be untrue then you could be liable for any loss suffered by the buyer who relied on the untrue statements. For this reason you need to make sure you can comfortably give these warranties and only give an extensive set of warranties if the price justifies it. The warranties can be qualified to limit your exposure by inserting certain thresholds or qualifying them by awareness. If you are not aware of certain matters, then you could not have known the statement was not true.
As noted above the relevant SPA or BPA will contain warranties. Essentially the buyer is looking for comfort that the business is clean and problem free. For example, the business is not involved in any disputes with its employees or the business has seen no adverse change in its turnover since its last accounts.
If any of those statements aren’t true, for example the business has an employee bringing an unfair dismissal claim against it or the business has lost a major customer leading to a material drop in turnover, then the seller gets an opportunity to disclose those matters prior to completion to try to avoid liability for any loss the buyer might suffer as a result of them. The seller will only avoid liability for such matters if it has fully disclosed the nature and scope of the problem and, if known, the likely cost to the business.
As a seller it is best to be up front about any problems and disclose them as fully as possible. If not, you could find yourself on the hook for a breach of warranty claim where you have wrongly misled the buyer that the business was clean and it wasn’t.
10. Don’t let £££ signs affect your good judgement
Some sellers can be so keen to complete the sale of their business and receive their sale proceeds that they will agree to many unreasonable buyer friendly terms in the process; often losing sight of the fact that some onerous terms give the buyer plenty of opportunity to claw back those sale proceeds in the future.
On the flip side you are not doing this deal to enable your lawyer to score unnecessary points against the buyer’s legal adviser. Overly seller friendly terms can be just as damaging to the transaction as a whole.
The best deals are those where both the seller and the buyer are happy and feel like they have achieved a good, fair outcome. This will often involve compromise on both sides, but as the parties have a common objective; the seller wants to sell and the buyer wants to buy – compromise should be attainable. It is a successful transaction if both parties have come away content. It is not to be underestimated how important this is, particularly if the parties will continue to work together following completion.
Enough to help you?
Turner Parkinson are experienced deal makers. Our "can do" approach and solutions driven focus has enabled the team to be top ranked as one of the most prolific teams both regionally and nationally.
Should any of the points above interest you or you require further information, please contact us.