Laying the groundwork for a successful sale of a business is a challenge; sellers need to manage the competing interests of the day-to-day business of the company whilst preparing the business for sale at maximum value. Here, we set out 3 of the key considerations to bear in mind if you’ve made the decision to sell.
1. Shares or assets?
There are two methods of acquiring a business. Potential buyers can either buy all of the shares issued in your company or they can buy the assets which make up the business.
- In a share purchase, a buyer will (usually) buy all of the shares issued in your company. As a result, the buyer will also acquire all of the assets, liabilities and obligations – even if they don’t know about them.
- Unless agreed otherwise, the buyer will take over the business and run it as a going concern. The seller’s liabilities will be limited to any warranties and indemnities it gives the buyer in the share purchase agreement, and will not usually be involved in the running of the business.
- A share purchase may be preferable where a seller wants to sell their entire business and limit their liability going forward, and if it would be difficult to obtain consent from clients and suppliers that the company has contracts in place with.
- In an asset purchase, a buyer will only acquire the identified assets and liabilities they agree to. This structure is much more flexible as the assets to be sold can be “cherry picked”.
- An asset purchase may be preferable where liabilities cannot be easily identified or quantified, or where a seller only wants to sell part of their business.
- However, asset purchases can be more complex due to the need to separate the assets from the business. It is also more likely that an asset purchase will require consent from customers and suppliers, as contracts are not normally automatically transferred.
2. Get good advice – and act upon it!
Get good accountants, solicitors and tax advisers involved as soon as possible.
Decide how you’re going to sell and obtain a valuation for fair market value. An expert can use a number of different methods to value your business including considering the cash flow and performance of the business and comparisons within the market. The valuation can also depend upon the potential buyer. For example, is it a strategic move by a buyer that wants to break into a new market, or is it an investment opportunity with expected returns in the near future? Ultimately, the due diligence process discussed below will determine the final price for the business but a thorough valuation can be a good starting point when negotiating with potential buyers.
As far as tax is concerned, each party will likely have different objectives and it is imperative that all parties obtain tax advice to ensure that the deal structure suits their goals. Tax advice may impact upon the decision to sell by share or asset purchase.
From a legal perspective, it’s important that the sale agreement reflects what was agreed, and protects your interests following completion of the deal. The sale agreement will deal with any issues which arise following completion of the due diligence process and put the heads of terms into a formal legal document.
3. Due Diligence – know your business!
As soon as any preliminary arrangements are settled, a potential buyer will commence the process of due diligence. In other words, they will start to gather information about your business, including strengths and any areas of weakness. As a seller, it is in your interests to ensure this process is as efficient as possible; the information obtained at this stage can help a buyer decide whether to proceed with the acquisition and, if so, at what price and on what terms.
When both parties engage legal advisers, the solicitors acting for the buyer will usually send through a questionnaire asking for relevant information and documents. It will then be up to you, as seller, to provide a response.
It is therefore a good idea to try and gather and organise as much information as you can as soon as you make the decision to sell. The earlier this is done the better as this process can flag potential issues which can either be resolved ahead of the transaction or which can be identified at an early stage and managed, rather than leading to an unforeseen problem and possible dispute with the buyer part way through a sale. Look at your business from a buyer’s perspective and consider whether there are any areas which may have implications for a buyer. Potential issues may affect the price a buyer is willing to pay.
If you’re thinking of selling your business or want further information on what it involves, get in touch with our Corporate law specialists.