By John Young (partner) and Krystina Tang (associate) in the Corporate, Commercial & Finance team at law firm Kingsley Napley LLP
Selling a business may not be the top priority or long-term objective for the founders of all start-ups but there may be reasons or different points in the journey of growing a business where this makes sense. From engaging advisors to maximising value, there are many things to think about. Here we break down the critical steps and considerations.
1. Engagement of advisors
If you are looking to sell your business, the first step should be to appoint a corporate finance advisor. These specialists can help you understand the likely value of your business, organise a marketing process and negotiate initial commercial terms. Solicitors will also need to be appointed once you have identified a buyer or earlier especially if changes need to be made to
tidy up the company ahead of the sale – for example, by removing investment or personal assets.
Employment, tax, property and contractual obligations will need to be considered. Finally, you will also want to appoint accountants to help you with financial and tax due diligence. It is important to decide if your regular advisers are the right team for the specialist situation of a company sale.
2. Heads of terms
When you have found a buyer for your company, it is a good idea to document the main terms of this agreement (such as the headline price and how it will be calculated and paid) in a document called the “heads of terms” (also referred to as a letter of intent or term sheet).
Generally, the only parts of the heads of terms that are legally binding are:
- The confidentiality clause to ensure the parties keep the deal confidential and the buyer does not make public any of the information disclosed by you during due diligence.
- The exclusivity clause, which prevents you from negotiating the sale of your shares with anyone other than the potential buyer.
- The costs clause, which obliges each of the parties to pay their own costs regardless of whether the deal is completed.
The remaining clauses, such as those around price, are not usually legally binding so the parties can change their arrangements as they negotiate binding documents. However, they have moral force, making them a useful negotiating tool if your buyer tries to change the deal without good reason later on.
It is also good to ensure that the main commercial terms are included so that you are adequately protected – or at least that you know what you are getting into. Preparing the heads of terms allows potential misunderstandings or commercial differences between you and your buyer to be flushed out and dealt with at an early stage.
3. Due diligence
It is your buyer’s responsibility to ensure it understands your company and what it is buying, as the law does not offer much protection to a buyer once the deal is complete.
Consequently, your buyer will seek a lot of information via a due diligence questionnaire before signing any binding contracts, including for example about ownership, contracts with suppliers, financing arrangements and so on. You will be expected to supply documentary evidence to support your answers, often via a virtual data room that your lawyers can set up for you.
4. Transaction documents
The main transaction document required to implement a deal is the share purchase agreement (SPA), in which you agree to sell the shares in your company, and your buyer agrees to buy.
Your lawyers will ensure it includes all of the key deal terms in fully fleshed-out form, such as the price calculation and how it will be paid, the parties’ obligations on completion of the deal and protections for both you and your buyer. This document is frequently subject to intense negotiation as it allocates the risk in the transaction and typically spans over 100 pages. The bulk of its content revolves around one of the primary contractual protections for your buyer: the warranties.
For instance, a seller typically warrants that they legally own the shares, the company’s latest accounts are true and fair, and there is no actual or potential litigation involving the company. If any of these warranties are untrue, you risk being sued by the buyer for breach of warranty.
A lawyer’s job on the deal is to protect you against such claims in the way the warranties are negotiated and worded. It is essential business owners understand what they are being asked to sign and where the key risks are.
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5. Disclosure
In the disclosure letter, you will disclose to your buyer any matter which would make a warranty untrue. If the matter has been adequately disclosed before the completion of the deal, your buyer cannot sue you for the breach of warranty.
A disclosure letter covers the general matters your buyer could discover by doing online searches at Companies House or the Land Registry, as well as “specific disclosures” such as any loan arrangements.
6. Ancillary Documents
While the SPA and disclosure letter are the key deal documents, a whole host of other documents must be shared to implement the sale of a company – from employment contracts to board minutes or stock transfer forms. It is important to ensure these tie-ups with the heads of terms and properly reflect the terms of the deal.
7. Exchange
As with buying or selling a house, at an exchange, the SPA and disclosure letter will be signed by you and your buyer and, at this point, the parties will be contractually obliged to proceed with the sale and purchase of shares except in specific circumstances outlined in the SPA.
Typically exchange and completion of a company sale happen at the same time, since having a gap creates a lot of additional risk. However, a gap might be necessary if, for example, regulatory or key client or supplier consents are needed. If this is the case, additional terms such as limits on what you can do with the business between exchange and completion and walk-away rights for both sides will need to be negotiated and included in the SPA.
8. Completion
Completion is the point where the transaction is done, ownership of the company formally transfers from you to your buyer and most importantly completion payment is made. The documents are usually signed electronically (often using Docusign) and then the buyer and seller’s solicitors will formally complete them on a call, with payment made to the seller’s solicitors.
9. Post-completion
This involves the transfer of payment to you as the seller and you will also need to deliver key items, such as statutory registers and bank cards/card readers, to your buyer. On the buyer’s side, they will need to pay the applicable stamp duty, deal with Companies House filings and update the statutory registers. You and the buyer may also want to agree on an approach to telling employees and key clients and suppliers about the transaction.
As you can see, there is a lot to selling your company and having the right solicitors or other advisors is crucial in making the process as efficient and smooth as possible. At Kingsley Napley, we understand the complexities of selling a business and provide comprehensive support every step of the way.