You have worked long and hard and built up your successful business from scratch and now there is an offer on the table and you are thinking about selling. Running a business is hard work and it’s all paying off, but there a number of things to think about, including what you are selling, the structure of the sale and terms for your exit strategy. We set out below some key considerations.
Are you selling shares or assets?
If you have a company you will most likely hold shares in that company. You may have other shareholders who are also selling their shares in this process. Selling your shares means that you sell your part of the ownership of the company that’s to say all the Company’s assets and liabilities are included (subject to any terms you might otherwise agree as part of your deal).
Alternatively you could decide you wanted an “asset” sale. This is where the company sells all or some of the selected assets required to run the business as a going concern (property, contracts, employees, data, IP, stock etc.) normally in return for cash.
An asset sale may be attractive to a buyer who is concerned about any liabilities the company may have or if the line of business is a separate and discreet revenue stream mixed within a larger business. An asset sale may allow the seller and buyer to agree which assets are to be sold.
The cash paid for the assets is paid to the company and the buyer walks away with the business as a going concern. The buyer may decide to purchase the assets under the umbrella of a newly formed shell company.
A share sale usually sees the cash directly paid to the sellers, whereas an asset sale means the cash is paid into a shell of a company and the directors are left trying to extract the cash. This is a matter for negotiation. You will also want to consider your tax position and the application of, any reliefs that may be available to you as a seller.
The “consideration” is what you get for what you are selling. For there to be a binding agreement there needs to be an offer, acceptance, consideration and intention to enter into a legal contract. You can take professional advice as to the valuation of your company but in any transaction the seller has to be satisfied they are getting a good deal and the buyer has to believe they are getting value for their money.
What is the structure of the offer? Is it a payment due on the day you hand over your business; is it related to the performance of the business after you leave; or is there a split payment of cash up front in addition to delayed consideration?
There are many ways in which consideration can be structured but we will consider below three of the most common:
a) Cash on completion
The sale is documented by a Share Purchase Agreement or an Asset Purchase Agreement. Once the matter is ready to complete the buyer will pay a set amount and the seller will hand over the shares (or assets). In a share sale there may be an adjustment period whereby the seller takes over control and does an accounting exercise to balance whether money is owed to the seller after sale. This exercise is normally referred to as drafting completion accounts and is undertaken by accountants post-completion.
b) Cash on completion plus an Earn Out
It can often be the case that your business has been very successful because of your involvement. That knowledge and skill is often valuable and a buyer may want to retain your expertise after purchase by using an incentive payment linked to the success of the business (coupled with new service agreement or consultancy terms).
This is commonly referred to as an Earn Out. The seller(s) will receive a further payment if profits at a given date reach an agreed threshold or amount. This again is for negotiation. It is very important that you are aware of the expectations and how this is to be achieved. You need to ask yourself whether it is feasible and what happens if such profits are not reached, do you receive a lesser earn out payment or no payment at all? For your consultancy terms you will want to know if you receive a payment or salary during this period of time also or are you expected to share your input for free? Will you be able to continue to contribute to business strategy? What part will you play? Most importantly are you going to have the control you need to hit those profit targets?
You probably won’t have ultimate control; you have just sold your business, but we can seek to negotiate as part of the draft what the parameters of control are going to look like and assist you with service terms to ensure that the deal fits with your desired objectives.
c) Cash on completion plus deferred consideration
This can be quite a common structure where the buyer does not immediately have all the cash available to pay the total sum. It also offers a level of protection to a buyer who may be cautious about what they are buying. It leaves them with some of the consideration in their control. However for a seller, they want to know they are going to receive their deferred consideration.
We recommend for sellers that this deferred consideration should be secured in some way. There are various methods of securing outstanding monies and as your lawyers we can discuss all the options available. This again is a matter for negotiation between the buyer and the seller as to how much and for how long the consideration is deferred but we can assist you with the process so you can make informed decisions on what you want to agree to.
Each payment structure has tax implications and we can work with your accountants to advise you on your position as seller in each of these scenarios.
The sale process
Once you have received your offer and you are minded to accept you should instruct your lawyers and accountants, who will work closely during the sale process. Being in touch with your lawyers and accountants early on in the transaction helps to avoid unnecessary pressure later on.
You should ensure that the terms of the offer are contained in a Heads of Terms document (HOTS). Having a lawyer draft these early can normally save lots of time at a later stage, especially to address if the seller and buyer have interpreted the offer in different ways. Your Heads of Terms will also deal with any exclusivity period relating to the offer, timescales, payment structure and confidentiality amongst other transactional aspects.
b) Due diligence and consultation
Your buyer may have already conducted a fair amount of due diligence in coming to the decision to purchase your business, however it is likely there will be more legal and financial due diligence to cover. Enquiries may be raised which require specific responses, and which your legal advisers can give you expert guidance upon. This will also set the stage for the disclosure letter (see below).
Where you are selling assets and this includes a work force (or even just one employee) then you will need to inform (and possibly consult) with the work force in accordance with their employment rights. You will need to detail what is happening and how they are affected. The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) is likely to apply to your circumstances. It is very important that TUPE is considered and addressed properly early on in the transaction so as to ensure that all obligations are adhered to. Communicating with the workforce (within the parameters of the confidentiality obligations) is normally a part of a smooth transaction. We are able to advise you on TUPE and the implications for your business and staff as required.
The Share Purchase Agreement (or Asset Purchase Agreement) details what is being bought, the consideration, time-scales, what is required of each party at completion, any interim measures, the warranties and any aspects relating to tax.
Warranties are likely to be required of the seller(s) on various aspects of the Company. A warranty is a statement that the seller makes about the company. If it turns out to be untrue then the buyer potentially has a claim for breach of warranty. These are normally contained in a separate schedule and your lawyers will go through the warranties in detail with you to ensure that any contradiction to a warranty is disclosed.
The Disclosure Letter goes hand in hand with the Warranty Schedule and is the seller(s) qualification of the warranties contained in the Warranty Schedule. This will be a letter from the seller to the buyer disclosing against the warranties and thereby protecting the seller(s) from a later potential breach of warranty claim. The seller(s) response to a potential claim for breach of warranty is to show that the matter had been disclosed to the buyer, e.g.:
- Warranty 1: The Company owns a fleet of 50 black cabs.
- Disclosure 1: The Company owns a fleet of 48 black cabs and two yellow cabs.
Other key documentation may include: service contracts for the “Earn Out” period, interim services agreements or security documents for deferred consideration. There will then also be various ancillary documents such as board minutes, incoming director appointments, outgoing director resignations, waiver letters, bank mandates, press releases, stock transfer forms etc.
It’s the big day! All documentation is to be signed, the process for handover will have been agreed and the buyer and the seller will probably have a physical handover together at the company premises. The lawyers will communicate and documentation will be dated and effected. The consideration will be transferred accordingly and the parties can celebrate their deal having completed.
e) Communication is key
Communicating to the tax authorities is an important stage and this will involve taking advice regarding your tax liability.
Whatever the structure or timescales of the deal we can support you throughout the sale process to make it as smooth and stress free as possible, cutting through the legal jargon and advising you on the implications of what you are being asked to agree we can advise you on the pitfalls and traps to avoid and what should or shouldn’t be agreed.