How to sell a business: the importance of preparation

The sale of a business can often be a stressful and time-consuming experience for a seller but there are steps that you can take before heading to the negotiating table to minimise the work involved in putting your business into a saleable condition, increase its attractiveness and reduce the time the transaction ultimately takes.

The first, essential step is to ensure that your documentation is fully up to date. If your Companies House filings are regular, correct and up to date, prospective buyers may feel reassured by your professionalism and transparency, and therefore more confident in dealing with you. Any discrepancies in your filings will need to be corrected and it is best to deal with that early, particularly if your company has been trading for a long time.

‘Statutory books’ (or ‘statutory registers’) refers to the collection of records and documents which companies are required to maintain. They contain basic information about the company (for example, registers of directors and of shareholders) and demonstrate its history dating back to incorporation. They must be kept complete and up to date throughout the life of the company and it’s often necessary to update these records before a sale. If it’s done early, the buyer isn’t inconvenienced by the lapse in housekeeping. The maintenance of statutory books is a legal obligation imposed on the directors and secretaries of every company by the Companies Act 2006. Registers are always requested when a buyer is conducting their due diligence investigations, and if they detect a serious gap in the target company’s records, it is highly likely that they will demand an explanation and require the seller to rectify any defect at their own cost.

Another key issue to consider is whether your company is compliant with its obligations under the data protection provisions of the UK GDPR (General Data Protection Regulation). Are your privacy policies (both internal and outward facing) GDPR compliant, for example? If they haven’t been updated for a long time or you bought an off -the-peg policy, it is worth having us take a look and make any necessary changes so the buyer sees a compliant policy on day one.

Where you are selling a business that owns a property, you should ensure that the property is in a marketable condition and that there are no existing breaches of the lease if your business holds leasehold property.

In the case of leasehold property, you should always ensure that your lease hasn’t expired and promptly start the process of renewing it if needed. You should also check that your lease was properly registered when it was first completed if it is registrable at the Land Registry. Our Commercial Property Team is happy to help with these matters.

Assemble your team

Having the right advisors working with you throughout the sale process is essential to ensure a smooth sale at the maximum price and to minimise the risk to you arising out of the transaction. In particular, you will need accountants and solicitors. The earlier the professionals are involved, the more we will be able to help you navigate the transaction. You may also wish to enlist a specialist tax advisor to handle any tax issues involved in the sale and businesses often need those with expertise in insurance and pensions on board, too.

Share or asset sale?

The sale of a business normally takes one of two different forms:

• The sale of the assets of an operational business: the business carried on by a company can be sold independently of the company itself as a going concern and, in some cases, you might be looking to sell one business of several carried on by your company. This would be by way of an Asset Sale. The buyer acquires the underlying assets needed to carry on the business (such as freehold premises, plant and machinery, and intellectual property). Each asset must be transferred in accordance with the specific form of transfer required for that asset (such as a conveyance for a transfer of land). After completion, the buyer will own the business and will continue operating it using the assets acquired. The ownership of the company (the seller) is unchanged and the seller can either distribute the proceeds to the shareholders of the company, or reinvest them into new projects. If the company has no other businesses, it may end up as an empty shell once the sale is complete.
• The sale of a private company by share transfer: with a Share Sale, the buyer acquires all of the issued shares in the company that owns and operates the business. The ownership of the company is transferred to the buyer, but there’s no change in the ownership of the business, which remains in the company’s hands.

It is essential that you decide at an early stage exactly which type of sale works best for you, taking into account any advice your financial advisers may have to offer.

Negotiating an offer

You will need a non-disclosure agreement (NDA) at the earliest possible point in negotiations to protect the confidential information which you will be sharing from the outset. Your business may well have a commercial template NDA which it routinely uses but we can prepare an NDA which is tailored to the fact that the business is being sold. An NDA can also prevent a prospective buyer from taking the opportunity to poach your employees and/or customers.

In the course of negotiations, you should agree Heads of Terms with the buyer and have these reviewed by your advisory team. Heads of Terms (also known as Letters of Intent) comprise a document which sets out the terms of a commercial transaction agreed in principle between parties and will usually cover matters such as the agreed price, whether the transaction is to be an Asset or a Share Sale and a proposed timescale for the transaction.

Often, buyers ask for a period of exclusivity to be included within the Heads of Terms i.e. you will not negotiate with anyone else for a specified period to give the buyer a fair opportunity to complete the transaction. Most aspects of Heads of Terms are not legally binding but exclusivity periods are usually expressly said to be.

To speak to the team at Woodfines Solicitors visit their website.