You have made the key decision to sell your business. The next question is whether to proceed by way of a share sale or an asset sale. Going down the share sale route will allow you to sell your business ‘warts and all’ with all its assets and liabilities, including tax and employment history. An asset sale means you sell only assets of your choosing (or those which the buyer is willing to take on). There are advantages and disadvantages to both, so take advice before making a decision. If you decide to proceed by way of share sale, Paul Breen has these top ten tips should help make the process run smoothly:
Early preparation is crucial
Preparing to sell your business may take months (or even years!). Careful planning will maximise the value of your organisation and make it much more attractive to a potential buyer. Start planning as early as possible and look at ways of getting your business into the best possible financial shape before putting it on the market. This will save you time and money in the long run. Your company will be easier to sell as buyers are much more interested in a business that is well run rather than one that has not been looked after.
Assemble a good team
Make sure you have a strong management team in place prior to the sale. This is a sign of a well run company and will impress the buyer. Selling your business will take up a considerable amount of your time, so it is important that you have an able management team in place to deal with the day-to-day running of the business. It is also essential that you appoint a team of trusted advisors at an early stage. Having a negotiator in place from the get-go will be important in maintaining relationships with the buyer should discussions get heated. If the buyer is represented by legal advisers who are tough negotiators it is important that you have an experienced negotiator who will fight your corner.
Do your diligence early
Carry out your own diligence on the company as early as possible to avoid any nasty surprises for buyers. As a seller you should ensure that you have access to all master copies of all key contracts with employees, customers and suppliers, as well as all other relevant contracts and information. This will make the diligence process less painful as any issues (such as change of control provisions) can be identified and addressed at an early stage.
Timing and motivation
It is important to sell your business at the correct time and with the right motivation. Business owners may want to sell due to health problems or because they feel that they are getting too old to carry on. This is not the ideal time to be selling your business. The sale process can be extremely stressful and you need to be able to cope with the pressures this brings. In addition, you do not want the buyer to be able to use your situation to their advantage and gain the upper hand. The right time to sell is when the business is performing well and long before a sale becomes a necessity for personal reasons.
Letter of intent (“LOI”)
You should try to negotiate all of the material terms of the deal in the LOI, a legal document setting out the broad intentions of both parties before entering into a binding contract, since this is when your position as the seller is strongest. A buyer’s main concern will be to get the LOI signed in order to tie the seller up and prevent you from entering into negotiations with anyone else. You should therefore take legal advice early when the LOI is being negotiated. Certain terms may be deemed enforceable in court despite express language to the contrary. You should ensure that the LOI is detailed and covers as many bases as possible, as this will help to prevent the purchaser from renegotiating the price or the nature of the deal at a later date.
There will be different tax implications for both individual and corporate sellers to consider. A UK resident company will be liable for corporation tax on any gain that is made on its sale of a target company, unless certain exemptions apply, such as Substantial Shareholding Exemption (SSE) and Corporate Venturing Scheme Relief. Individual sellers will be liable for capital gains tax, unless certain exemptions such as Entrepreneur’s Relief or Enterprise Investment Scheme (EIS) relief apply. Consideration should be given at an early stage as to how tax on the sale of shares is going to be dealt with, and a good tax lawyer will be a crucial advisor in the structuring and timing of the sale.
Assess structural issues
Structural issues are an important consideration where there are a number of shareholders in the company, and in family businesses where there are shareholders in the background who may not have any connection with the Company – or, potentially, not even realise they are shareholders! Purchasers will rarely want to purchase anything less than 100% of the shareholding so it is important that the position is clear, the statutory registers are up to date and that all shareholders buy into the process.
Keep exit plans secret
It is not wise to let others know that you are planning to sell your business. This can cause alarm to suppliers, who may request payment up front for their products or services if there is uncertainty as to future arrangements. Similarly, letting employees know your business is up for sale could affect your relationship with them and cause them to look elsewhere for employment if there is any uncertainty over their future. Job insecurity is not a good motivator and could be costly for your business at this key time.
Protect your ‘trade secrets’ during a transaction and negotiation. During the process you will be giving the buyer access to information which you would consider confidential and sensitive. It is vital that the buyer signs a non-disclosure agreement (or confidentiality agreement) before they have sight of sensitive information- otherwise it may be difficult to protect this further down the line.
Address transitional issues
A key consideration which can often be neglected during the course of the sale is the transition process. The buyer may request that you remain in the business for a period of time after completion. Alternatively, there may be no request for your continual involvement. Whatever the scenario however, it is important to address this during negotiations and agree a transitional arrangement. This should ensure a positive relationship during negotiation as both parties understand that they will have to work together going forward.