Whether it's a result of the pandemic or owing to fall-out from Brexit, the opportunities for business owners looking to sell up are plentiful.
Signs point to many proprietors seeking to diversify in the post-COVID world, whilst some seek to take advantage of overseas investors looking to snap up businesses in the UK following its departure from the European Union.
But whatever your reason is for wanting to move on, the process involved in actually making a sale can be overwhelming, with many legal and financial considerations all impacting upon any potential deal.
Here we look at how the process works and highlight what you need to be aware of to make your sale smooth.
Valuing the business
The true value of any business is the amount a buyer is willing to pay, so arriving at a comprehensive valuation will play a vital role in attracting the right purchaser at the right price.
Advice should be taken from your financial adviser but there are several methods which may be used to arrive at the price dependent upon the business concerned; 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 important 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 (SPA)
The sales and purchase agreement is negotiated by corporate lawyers and covers the most minute detail 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 sales and purchase agreement will include a restrictive covenant to stop the seller setting up in direct competition after completion.
One of the most crucial parts of the sales and purchase agreement 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.
If an issue has arisen during due diligence which gives rise to a cost, this may result in a renegotiation of the price or the seller being asked to give an indemnity in the sales and purchase agreement, meaning that if any cost arises post completion in relation to that indemnity, the seller will cover that cost.
The majority of warranties are valid between 18 and 36 months after completion, with tax reaching out for 7 years. This offers the buyer ample opportunity to discover any breach with a financial cap on the monies that can be claimed in light of a breach so that they don't exceed the purchase price. This again emphasises the importance to the seller of instructing advisers who are experienced and able to carefully manage the due diligence and disclosure process to minimise the risk of a future claim for any breach that might occur.
Completion
Once all the documents are agreed and the buyer has the completion monies in place, the lawyers representing both parties will oversee completion, arranging for the documents to be signed by both parties, the purchase monies to be transferred and complete.
The entire sales process is complex. Getting it right will impact the return to the buyer from the long-term investment it has made, preserve the 'legacy' of the business and safeguard the monies that the seller receives against any potential claim.
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 for all the parties involved.
