Selling your business: What pitfalls to avoid

In any circumstances selling a business is not a decision to be made lightly.

In any circumstances selling a business is not a decision to be made lightly. No matter how big or small a business is, changing ownership would pose numerous commercial, legal and tax questions that the parties should consider carefully to ensure they secure the best valuation and avoid any disputes after the business is sold.

Structuring the deal

Generally, there are two main ways to sell a business.

Asset sale

In an asset deal, the buyer only acquires selected or all assets, which can be in the forms of contracts, databases, premises, etc. They don’t acquire the business shares and liabilities . In this structure, the buyer can choose what they want to buy and don’t want and incorporate it into their own business. In addition, they generally will not take on historic liabilities of the business so it is much more attractive to them.

The benefit for the seller is they can retain any assets they want to , maybe the commercial property for example, but they will also retain the liabilities and usually all debts.

Share purchase

A share deal means the buyer purchases all or part of the shares in the seller’s company. This process is likely more straightforward although extensive due diligence may still be required depending on each target because the Buyer will be subject to risks if the business does not perform as well as expected and will potentially be liable for historic liabilities. As such this is preferable for most sellers. The Buyer will become a shareholder usually a majority controller so the seller will if staying in the business may struggle to now be an employee or beholden to someone else (unless selling 100%)

Parties should consult with professional advisors including legal, financial and tax advisors when deciding how to structure a business sale transaction as it can save money in the long run if tax efficiently structured and our role is to protect the founders and the business during the processes.

More importantly, not having properly drafted documentation in place could have dire consequences on both sides, such as the seller having to repay some of the sale price the buyer suffering losses after taking over the business.

How does it often work

Depending on how the deal is structured, the parties would need to enter into agreements such as the sale and purchase agreement (SPA), disclosure letter and other ancillary documents required to implement the transaction (such as corporate approvals and indemnities). If the parties have entered into the heads of terms, it will be used to prepare the transaction documents and this is usually best so all parties are clear from the onset.

Legal advice is this necessary?

Normally the buyer would instruct their solicitors to conduct due diligence (i.e., review of documents and information) so we strongly suggest you with your lawyers carefully review these first so any errors are spotted and resolved early.

The buyer may and often will require a seller to give extensive warranties about their business in the SPA. In order to avoid a breach such as something forgotten or misconstrued (for which the buyer can claim for damages or cancel the sale), the seller is advised to instruct their solicitors to prepare a‘disclosure letter’, i.e., a letter in which the seller makes general and specific disclosures to the buyer as to ensure the seller’s warranties are true, correct and complete. So if there is a claim pending or an unsigned contract or an anomaly on the filings these have been flagged so cannot come back to haunt you.

My business has debts

This is more relevant in case of a share sale as the buyer will acquire the business including its liabilities. Debts can affect the sale price as a business with less debt-including low running costs and overheads would generally attract higher offers. If the company’s liabilities are relatively high compared to its assets, the seller should consider getting the business into its best possible shape, e.g., settling or agreeing to settle on completion certain debts, to secure the most favourable sale price.

Your value is in your contracts

For many businesses one of their most valuable assets is the contracts with their customers, suppliers and partners. In a share deal, the parties of the contracts remain the same, however if there is a change of control provision, the target may need to notify or seek consent of the other contracting party. Caution is needed as some contracts can be terminated if there is a change of control! If it is an asset deal, the contracts will typically need to be assigned or novated to the buyer, so it simply transfers as is, but would likely still require third party’s consent and again caution is needed as it can affect the sale if such consent is delayed or withdrawn.

What about my employees

If the business is being sold includes employees, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), will apply, which protect employee’s rights when the business they work for changes ownership. The general rule is that the employees will automatically become the employees of the buyer on their existing terms of employment if not more favourable (if new company has employees on better terms, they may need to address the imbalance). The buyer and seller will need to follow a specific process such as consultation, notification, and redundancy if they don’t want to acquire all of the staff and if handled incorrectly one or both could face a claim. If the buyer wants to vary the terms of employment this would need to be agreed with the employees. If not and the employer is disgruntled and for example constructively dismisses themselves potentially seller and buyer could face a claim so it needs to be handled very carefully.

In a share deal the buyer can ask to review employment contracts during the due diligence process. Depending on the buyer’s position on specific issues, the buyer can also request the seller to change or terminate certain agreements with their employees on or before completion. This places you the seller at risk unless very carefully and lawfully addressed.

Properties

If the business has properties, the buyer will normally ask to review documents relating to their titles and plans, such as transfers, leases and planning permissions. Certain interests will need to be registered with HMLR, such as lease of more than seven years, and the seller should also ensure that they have adequate insurance in place for their properties if required.

Intellectual property

IP can be an extremely valuable assets of a business. When selling a business, the seller should make sure they have a full and clear records of their IP rights, such as agreements, registrations and information of any infringements or claims relating to IPs as this can have an effect on the sale price. Ownership should be clear and unfettered with say those outsourced to create it as this will be a huge part of the due diligence .

Transfer of IP as part of an asset deal may be more complicated than in a share deal as the asset sale would need to cover each and every IP.

In a share deal the buyer will carefully review all documentation relating to the target’s IP assets and require the seller to give appropriate warranties about their IP rights to avoid any claims, infringements or disputes.

A smooth sale

Selling a business can be a high risk, costly and time-consuming process. Poorly drafted documentation can result in the seller being forced to pay for damages or the buyer having no recourse despite being misled as to the true value of the business. Thus, the parties should have expert legal representation when participating in this type of transaction and clear agreed terms and a structured process and timeframe agreed at the onset. Transactions can always throw up unexpected hurdles and having a proactive team with clear communication and realistic expectations is crucial to get it across the line. So, choose a team whom you know understands the process including the potential pitfalls and who you trust and can work with and is on the same page as you!