Selling the family business can be a daunting prospect, particularly for SME owners who have worked hard to create a successful company and then market it for sale. Many business owners will be unfamiliar with the legal process and structure of a company sale. As a result, they may not know what is expected from them and (perhaps more importantly) their solicitor.
This 6 key step guide to selling your business outlines the various stages and documents required, from agreeing on the terms of the deal, through to completion of the transaction.
1. Heads of Terms
Heads of Terms (also known as a Letter of Intent or Memorandum of Understanding) are a ‘subject to contract’ document that formally sets out the main deal terms and the buyer’s and seller’s expectations at the outset of the transaction.
A few key points which may be included are:
- Whether the buyer is purchasing the shares or the assets (together with only certain liabilities) of the company.
- How payment is being structured – i.e. will an element of the purchase price be deferred (perhaps with a portion retained in an escrow account held by the solicitors) or subject to post-deal performance conditions.
- How the deal is being financed by the buyer.
- Whether you will receive any security from the buyer if the business is not paid for upfront.
- Whether you will be required to enter into post-deal restrictions.
- Whether the buyer will benefit from a period of exclusivity to negotiate the sale.
Due to their ‘subject to contract’ nature, most of the provisions in Heads of Terms are not legally binding apart from confidentiality and exclusivity clauses.
Often sale negotiations can be ‘concluded’ without due thought being given as to how the deal will be structured and how it will work in practice. Formal Heads of Terms can save time and cost in negotiating the definitive sale contract. Considering whether the deal terms are right at an early stage will also, hopefully, avoid the parties pulling out after months of negotiation.
It is important to take advice before signing Heads of Terms as a buyer will likely be unwilling to renegotiate the terms at a later date.
2. Due Diligence
The buyer will want to investigate the business that it is buying. This may include obtaining information relating to the company’s:
- Accounts and finances.
- Key trading contracts.
- Intellectual property.
- Leasehold and freehold interests.
The Buyer may require this information to be provided by formally replying to a Due Diligence Questionnaire. This document would then normally form the basis of the warranty schedule to the main deal document.
Before providing this information, you should require the buyer to enter into a Confidentiality Agreement to protect your company’s trade secrets and prevent the buyer from poaching staff should the deal fall through.
3. Principal Deal Document
The Share Purchase Agreement (in a share sale) or the Asset Purchase Agreement (in an asset sale) are the principal deal documents and set out the terms of the transaction and the parties obligations.
This will often be drafted by the buyer’s solicitor as most of the provisions are for the buyer’s benefit to protect its purchase. They will often contain:
- In an Asset Purchase Agreement, a detailed list of the assets and liabilities included in and excluded from, the sale.
- A warranty schedule – a list of statements which the seller confirms are true, accurate and not misleading on the date of completion, failing which the buyer may have the basis of a claim for breach of contract.
- Seller limitations – minimising your liability in respect of the warranty schedule (for example by placing a financial ceiling on claims and potentially also a financial threshold to be exceeded before claims can be made).
- Indemnities – in relation to specific areas of risk identified by the buyer during due diligence which the buyer is not prepared to accept the risk for and requires enhanced protection against.
- Post-deal restrictions – by which you undertake not to compete with the business or poach customers or employees for a number of months or years following the deal.
- In a Share Purchase Agreement, a tax deed relating to the tax affairs of the company.
4. Disclosure Letter
This is a document prepared by your solicitor by which you have the opportunity to say that you know that certain warranties are untrue. This may seem a strange process as you may expect the warranty schedule in the main deal document to be an accurate reflection of what you are prepared to say about the business.
However, the intention behind this process is to prevent an unscrupulous seller from withholding information from the buyer. The Disclosure Letter, therefore, provides an opportunity for a genuine seller to prevent future claims that you didn’t tell them something about the business. Therefore, the Disclosure Letter is the most important document from a seller’s point of view.
However, a buyer may not be prepared to accept a disclosure which has a high level of risk and may instead require protection on an indemnity basis.
Once the deal is agreed your solicitor will arrange with you to sign a bundle of paperwork. This will be the principal deal document, the Disclosure Letter and a variety of other agreed documents relevant to the transaction, such as:
- Stock transfer forms.
- Board minutes.
- Director resignations.
- Settlement agreements.
- Consultancy agreements.
- Security documents.
- Landlord’s licence to assign a lease.
In some transactions, there will be a period of time (or conditions required to be achieved) between the main deal document being agreed and completion. However, in other transactions, exchange and completion will happen simultaneously.
- Board meetings will take place to approve the deal.
- The solicitors will exchange signed documents (held to order).
- Usually, the solicitors will have a phone call to complete and the funds and documents will be released.
Upon completion, the company will be under the control of the buyer and you will no longer have anything to do with its affairs unless you are staying on as an employee, director or consultant.
BHW has a Corporate & Commercial department which regularly deal with company sales. For further information contact Partner & Head of the Corporate & Commercial department, Ed Nurse on 0116 281 6230 or email firstname.lastname@example.org.