Whether it’s a result of the pandemic or the fall-out from Brexit, the opportunities for business owners looking to sell up are plentiful. Robert Lee of Wright Hassall looks at the considerations that proprietors need to take into account before doing so.
There are many proprietors looking to diversify in the post-pandemic world, whilst a growing number of overseas investors are also looking to capitalise on the UK’s departure from the European Union. No matter what the reason is for wanting to move on, the process of selling your business is a lot more complex than it may seem, and there are many serious legal and financial considerations to make before a deal can be finalised. To ensure the entire process runs smoothly, it is important for business owners to understand each step in detail, so they are prepared for what lies ahead.
Valuing the business
Arriving at a comprehensive valuation is vital, as this will help you attract the right purchaser, who is happy to pay the asking price for your business. To achieve this, it is important to seek expert advice from an experienced financial adviser, whilst utilising some of the other methods available to you. These include an asset valuation (appropriate if the business owns assets such as plant and machinery or a property), price-earnings ratio (P/E ratio), discounted cashflow, and the cost to the buyer to enter the market.
Documentation
To progress a sale, several documents need to be prepared and agreed. Primer A ‘teaser’ for prospective buyers that includes basic details about the business, USPs, customer base, existing key contracts, potential for future growth, turnover, gross profit and earnings before interest, tax, depreciation and amortization (EBITDA). Non-Disclosure Agreement (NDA) Confidentiality should be maintained in the early stages of a sale to protect the interests of employees, suppliers and customers, so potential buyers must be asked to sign an NDA before entering into more detailed negotiations.
Heads of Terms
Once the price and deal have been agreed in principle, the parties need to confirm everything in writing by signing Heads of Terms. Although not legally binding, these set out what has been agreed and become the roadmap for the deal to move forward to due diligence, the sale agreement and completion. It is sensible for a seller to ask the buyer to confirm it has the funds available for the purchase price at this stage before both parties spend a significant amount of their own time and professional fees moving to the next stages.
Due diligence
The buyer will want to perform detailed due diligence on the business and investigate the legal, financial and commercial aspects of the business by raising questions of the seller. The results of due diligence often form the basis of any warranties inserted into the final sales agreement and may result in the price being renegotiated if any issues arise.
Disclosure letter
A disclosure letter enables the seller to protect itself against a claim for breach of the warranties set out in the Sale and Purchase Agreement (SPA). The disclosure letter is the seller’s chance to inform the buyer of any aspect of the business which may not be entirely consistent with the warranties being given. The legal protection offered by the contents of the disclosure letter (and simultaneously the SPA) ensures the buyer is entering into the transaction in full possession of the facts.
Sales and Purchase Agreement
The SPA is negotiated by lawyers and covers the most minute details of the deal, stipulating all additional documentation, what needs to be delivered (hard copy or online confirmation) and by whom. It will also outline the exact amount the buyer has agreed to pay for the business, whether a fixed amount plus often a sum based on the future revenue or profit (an “earnout”), and how and when payment(s) will be made. An agreement setting out the involvement the seller may have with the business after completion may also be negotiated. The document will also include any employment contract changes to retain staff post-sale, whilst the SPA will include a restrictive covenant to stop the seller setting up in direct competition after completion. One of the most crucial parts of the SPA are the warranties which offer a contractual, binding assurance as to the state of the business at completion. These cover everything posing a potential risk to the business, such as staffing, the accounts, litigation, tax, compliance matters, and IT systems.
Completion
With documents agreed and the completion monies in place, the lawyers from both parties will oversee completion by exchanging the necessary signed documents and transferring the funds as required. Remember, the sales process is complex, and ensuring everything runs smoothly is vital to protecting the ‘legacy’ of the business and the interests of both parties. The sensible approach is to take legal and accountancy advice at the beginning of the process and gradually ramp up the professional input as the final sale draws nearer to ensure a smoother transaction and successful sale.
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