Taking the decision to sell your business is tough but can be exciting. Whilst you certainly know the ins and outs of the operation of your business, many questions and misconceptions can appear in the heads of business owners who have never been involved in a sale process. This article gives a brief overview on the following aspects of selling 100% of the shares in a private limited company:
- How to find a buyer
- Negotiating the main terms of sale
- The due diligence process
- The sale and purchase agreement
- How to prepare in advance for selling your business
- What team you need
- How long the process takes
1. How to find a buyer
It may be that a potential buyer approaches you directly – they could be one of your suppliers, competitors or somebody else expanding into your market. Otherwise, if you want to take a more active approach, you could open discussions with parties who you think may be interested in your business or, if you are looking to cast the net any wider, then you might consult a broker.
It is important at this stage that you make sure you have the ability to sell your shares, for example, checking that they have not been charged to a lender and are not subject to any option or pre-emption rights.
2. Negotiating the main terms of sale
Once you have found a potential buyer, you will usually want to agree “Heads of Terms”. These should not generally be legally binding, but rather, should set out the main commercial terms to be included in the eventual sale and purchase contract. They usually cover matters such as sale price, payment mechanics, pre-sale conditions, post-sale obligations, and any exclusivity period for the buyer.
Whilst not binding, the Heads of Terms constitute the cornerstone for preparation of the sale and purchase contract. Any attempt to deviate from the agreed Heads is generally considered in bad faith unless there has been a substantial change in the commercial proposition.
3. The due diligence process
Before entering into a legally binding sale and purchase contract, the buyer will carry out extensive due diligence. This can take anywhere between a few weeks to a couple of months depending on the size, structure and complexity of your business, as well as the extent to which your affairs are in order. The buyer will typically raise wide ranging investigations on, amongst other things, the financial state of your business, major contracts and suppliers, corporate structure, current loans, assets and liabilities, employees, and any ongoing litigation.
Before disclosing any confidential or sensitive information or documents as part of this process, it is crucial that you have robust measures and safeguards in place to protect the integrity of your information, and to prevent the buyer from using it to their benefit if they were to withdraw from the transaction.
4. The sale and purchase agreement
At the same time as dealing with the due diligence process, work on the sale and purchase contract should be well underway. This is a substantial document which will set out the detailed terms of the sale and purchase. In addition to the terms set out in the Heads of Terms, some of the other key points to be included and negotiated include:
- indemnities – the buyer may request that you indemnify them against certain losses or liabilities. Any indemnities should be given with caution and careful wording to ensure these go no wider and are to no greater extent than is appropriate in the circumstances;
- warranties – these are statements of fact about your business and its affairs which the buyer would rely on in entering into the contract. It is crucial to ensure that appropriate disclosures and qualifications are made in relation to any warranties the buyer wishes to include that are not true in all respects; and
- covenants – once you sell the business, the buyer will likely want to impose obligations on you that will refrain you from taking certain actions post-completion. These should only be agreed to the extent is reasonable to protect the business and with due consideration of your future plans.
5. How can I prepare for the sale in advance?
There are a number of things you could do in preparation of a prospective sale:
- check if you have any oral contracts and put these in writing;
- see if there are any assets or parts of business which you are not willing to sell and transfer these out of the sale business;
- check if there is any pending or on-going litigation, and see how this could be resolved;
- check if there are any loans which the company could repay before the sale process starts;
- identify the areas of the business which require improvement, and work on that before the sale price is agreed; and
- start putting together all contracts, corporate and accounting documents for due diligence.
6. What team do I need?
You will usually need sale team comprising of the following personnel:
- Business valuers
- Accountants and tax advisers
- Management team
- Wealth manager
7. How long will the sale take?
Sale of a small or mid-sized business, with full due diligence, usually takes between three to six months, however it can take longer in some cases. If you find a buyer who is willing to buy your company “as is” (without any due diligence or extensive warranties or indemnities), and no third-party consents are required, then you may be able to sell you sell your company much earlier than that.
This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you would like to discuss any aspect of it please contact Deborah Mills, Paramjit Sehmi or Anastasiya Kapustina.