Step 1 – Instructing your solicitor
In the sale of any business, the first step should be to seek professional advice. As stated in our previous article, the earlier you seek advice, the better, as it will enable you to start getting your ducks in a row.
When selling a private limited company, you will need to consider whether you wish to sell the share capital of the business or just its assets. There are advantages and disadvantages to both approaches and what is appropriate for you will depend on the nature of your business, your objectives and the preference of the purchaser. An overview of the key differences between an asset sale and a share sale can be found here.
For the purposes of this article, we will focus on a share sale.
Step 2 – Non-disclosure agreement (NDA)
NDAs have gained a certain notoriety in recent years, but they remain crucial in a business sale due to the disclosure of highly sensitive information (potentially to a competitor). The aim of the NDA is to prevent the leakage of confidential information into the public domain.
Step 3 – Heads of terms
These are parameters that will need to be set down before any contract can be drawn up. They will include key features of the transaction, such as the parties, the estimated value and what is to be sold.
Step 4 – Due diligence
The purchaser will provide a due diligence questionnaire. The level of due diligence will depend on the type of sale, for example, whether it is arm’s length or intra-group.
The seller will respond to these questions and disclose any relevant supporting documentation. This will allow the purchaser to draft a due diligence report, which should determine whether they need to make further enquiries.
Step 5 – Share Purchase Agreement (SPA)
This is the main contract governing the sale of the business and so is the focal point of negotiations. Usually, the purchaser will produce the first draft.
Step 6 – Disclosure
The SPA will contain a series of promises by the seller (known as warranties) relating to the condition of the business and circumstances in which it is being sold. Common warranties are the seller having the right to sell the business, there being no remaining charges over the assets of the business and that taxes have been paid. Sometimes an additional document called a tax covenant will be required dealing with the allocation of risk between the purchaser and the seller.
The aim of disclosure is to prevent the purchaser from being able to bring a claim based on the breach of the relevant warranty. This is done by way of a disclosure letter. The letter will contain statements against the relevant warranties, and where necessary, it will be supported by documents. For example, where there is a warranty that the business is not involved in any litigation, the seller would need to disclose any relevant litigation along with supporting documents. The purchaser may then require that additional indemnities be included in the SPA as a result of the disclosures.
Step 7 – Ancillary documents
Once an agreement is on the horizon, the parties will need to draft the ancillary documents. These are the documents that will implement the mechanics of the sale, such as the stock transfer form and the accompanying board minutes. Which documents are required will depend on the circumstances, for instance, does the seller wish to continue as an employee? If so, a service level agreement maybe required.
Step 8 – Exchange/Completion
As with a house sale, exchange is where the contract (SPA) is signed and completion is where the purchaser becomes the owner. It is common for exchange and completion to happen simultaneously. Where this is not the case, the contract may require certain actions to be undertaken for completion to go ahead. Usually, money is transferred upon completion, although, depending on the structure of the sale, there may need to be adjustment payments or deferred payments following completion.
Step 9 – Post completion matters
What these steps entail will depend on the contents of the SPA. It can mean simple administrative tasks, such as filing documents with Companies House or HM Land Registry, or there can be more significant steps, such as making deferred payments. In some sales, the true value of the business will not be determined until after completion with the finalising of the completion accounts. This can mean that payment is not made until these accounts are produced or that an adjustment payment is required following completion. This would be the case where the completion payment did not reflect the true value of the company.
The large array of options can be daunting to someone seeking to sell their business. It is, therefore, important to seek early advice to ensure that the sale is tailored to your objectives. TWM has a wealth of experience acting for both purchasers and sellers and so for further advice please contact a member of our Business Law team.