When deciding to sell a business, there are legal aspects that need to be addressed, in order to protect both you as the seller, but also to protect the buyer.
The selling process will normally be made up of 5 stages.
At this stage, before having any discussions about the business, a Non Disclosure Agreement (NDA) should be in place. This protects both the buyer & seller of the business, and ensures that all discussions are kept confidential, regardless of whether the deal completes, or falls through.
Heads of Agreement
This document will identify what is to be included or excluded, from the sale. It will include the price, and how payments shall be structured. It will also include any pre-conditions of the sale, and a list of warranties & indemnities. There will also be a period of exclusivity stated within the document. This means that the buyer is given a specific time window that enables them to do all due diligence, and complete on the sale without having the risk of the business being sold to another party within that time window. Dependent on the business, a buyer may face due diligence costs of £100,000 or more, so the time window of exclusivity protects them against this ‘gazumping’ from happening.
When selling a business, a buyer will require that you complete a rather long questionnaire, covering the various areas of the business being sold. This will include details relating to clients, staff, litigation, accounts, property, & compliance.
This questionnaire will then be used as a basis to form warranties & indemnities between the buyer and seller of the business. If a seller misrepresents the business, this may affect the sale of the business. The buyer will spend time during this process attempting to verify some of the information, provided within the questionnaire.
The Contract of Sale Agreement
This document will include detailed terms of the purchase. The document structure will be structured according to the buyer and seller parties, thus is not a standard template document. The agreement will include warranties, tax covenants, the sale price, any completion arrangements, along with limitations on third party claims. It also includes the requirements of confidentiality, and any issues relating to post sale competition clauses. Normally there will be a clause stating that the seller cannot operate in competition with the business for a specific time period after completion. Likewise it might include a clause relating to existing customers or contracts, and staff employed on those.
Disclosure, Warranties & Indemnities
Where there is doubt, or a potential cause for concern, a buyer will request warranties from the seller. It’s important, as the seller, that you only give warranties that are accurate to avoid a claim from the buyer at a future date. In simple terms, this is basically a set of promises that the seller provides to the buyer.
From a buyers perspective, having warranties built into the agreement, reduces some level of risk, from incorrect information at the due diligence stage. One example of a warranty between a buyer and seller, may be related to past employees. If the business was going through a tribunal procedure with a past employee, but had not disclosed this fact to the buyer, this could seriously damage the business both its reputation, and financially. In this scenario, the seller would provide a warranty, stating that no such litigation processes are ongoing.
Legal Completion, is when the business ownership transfers to the buyer, and the seller can reflect on how smooth, but rather exhausting the process was.
We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.
If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen. It’s a full time job. - The time investment alone is enough to put anyone off. So imagine for just a minute, that you didn’t need to do all of this work. What if this could be done over the next 3 - 5 years (by someone else). Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.
Unlike other private equity firms, our focus is on growing businesses at the smaller end of the market. We’ve worked in, and grown our own businesses in the exact same fields you work today. We’ve spent years coaching and supporting small businesses just like yours, developing their teams, and helping them to grow, but now, we’d like to help you.
We have a solution for business owners that need to sell their business immediately, or for those who want to stick around for a few years.
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