12 November 2019
How to sell your business
In the final stage of our business lifecycle series, insight focuses on matters to consider when planning to sell your company. B P Collins’ cross practice team of corporate and commercial, employment and commercial property lawyers offer key advice.
David Smellie – Partner, corporate and commercial
It’s important to find any skeletons before putting your company up for sale. They could range from legal, financial, property or HR issues – anything that might lead a buyer to place a lower value on your company than what you wish to sell it for.
It will be exciting for you if you’ve chosen to sell your business but, your employees might feel differently when there is so much uncertainty about their future. It is essential to keep them happy and motivated before and during the sale process. One way to do this is through adopting employee share schemes. These could also help retain employees whose contribution is essential to the success of the business. However, for these to be tax effective you need to think about implementing these a long time before the sale.
The anticipation of having a large sum of money through the sale of your business is soon eradicated at the thought of a large tax bill at the end. Sellers must ensure that the long period of preparation leading up to the sale is used to put proper tax strategies in place to maximise the tax savings that may be available at sale time.
Engaging an expert to find a buyer for your business and to look after the sale can be hugely helpful, as they will ensure that offers are received from as wide a pool of potential buyers as possible and so maximise the value that you will receive.
You will need to decide how to conduct the sale process and an expert, if appointed, can assist with this. You can either go down the route of an information memorandum (followed by a request to make best and final offers) or make discrete approaches. An information memorandum should include the key parts of your business such as the ownership and management structure, trading performance, key growth opportunities, competitive advantage and market data.
It is important to establish the heads of terms as early as possible once a buyer has been identified, as these will set expectations and record the core elements of the deal. The heads of terms will outline the purchase price (and how it will be paid), the structure of the deal, and incorporate some expectations about the legal terms that will apply to the deal.
You and the buyer will also have to agree whether the transaction will be a share sale or an asset sale. A share sale means the buyer takes on the company as a whole, as a continuing legal entity, with all the employees, contracts, leases and assets and liabilities. An asset sale allows the buyer to choose which assets they will take on and leave behind certain liabilities.
When you’re selling the business, this doesn’t automatically mean that you must leave. An agreement needs to be reached with the buyer on whether you leave immediately or remain, possibly in a different capacity, for an agreed amount of time. It is quite common for sellers to remain in place for some time to facilitate the handover.
Due diligence will also be essential for a potential buyer of your business, as it helps them to understand exactly what they’re taking on, including areas of concern where assurances or indemnities could be required and ensures the company’s value is accurate. For a seller, it is rather like inviting a stranger into your home and allowing them to ask questions about your private life.
When you first start thinking about selling your business, the dream is often to retire with the proceeds. Sale transactions, however, aren’t always that straightforward and Deferred Consideration or Earn Outs will often form part of the consideration; so you might have to wait a while longer for that beach house in Barbados. Deferred Consideration is where a fixed sale price, that has been agreed but part of the payment, is deferred until a specified later date and it will be paid, provided that the conditions have been met. Earn Outs will vary for each deal, but fundamentally, the price that a seller ultimately will receive is dependent on the company’s future performance with some payable upfront and the remainder due further down the line, based on that future performance.
Maria Mowberry- Partner, Property
When looking to sell your business and the property it operates from, it’s important to consider whether you’ll sell them together or separately. Finding a buyer who is interested in both may be more difficult, but this situation could enable you to boost the value of your sale.
As mentioned previously, it may be the case that the assets have to be broken up and the individually sold off. This could mean you having to find another buyer for the property or you could decide to retain it and rent it to another party to generate an income stream.
It’s important to remember that the sale of your property can be completed prior to the sale of the business. This frees up your time to focus on selling your actual business.
If you’ve rented the commercial property, you will need to ask your landlord for consent before you can assign your lease. If consent is given and the new buyer is willing to take on the lease, you may still have a responsibility as an ‘assignor’ to guarantee the incoming tenant’s performancee of their lease obligations.
Aside from seeking the advice of a lawyer, it’s vital to speak to an accountant early on so they can advise on the tax implications of any deal.
Kathryn Fielder- Senior associate, Employment
Selling your business may cause unease among your workforce, so it’s vital to keep your sale plans confidential until you are confident the deal is done. However, make sure you leave enough time to comply with requisite consultation obligations under the Transfer of Undertakings Regulations (TUPE), which protect employees' rights when the organisation or service they work for transfers to a new employer.
Take the opportunity to also review contracts to ensure they are up to date and ensure consistency of terms. This will help with the due diligence process. It’s also vital that you have up to date ID for all employees to ensure proof of their right to work.
It’s also important to review any current grievances and tribunal claims to see if they can be settled before putting the company up for sale as disputes can be off putting. If unionised, check that any collective agreements have been incorporated into the contracts.
If the buyer does not want to take on all the employees, avoid accepting dismissal obligations or providing indemnities which will impose obligations on you.
Selling your company often takes more time and is more emotionally draining than you might think – ensure that the business is not affected by you focusing on the sale especially if there is an earn out.
Ensure that you get on with the professional team you appoint – you may be spending a lot of time with them and you will certainly be on the phone to them a lot.
Normally you only get one chance so ensure that it is done correctly.
For any advice on selling your business,contact our expert teams.Call 01753 889995 or email firstname.lastname@example.org.