Contemplating a sale? The key to a successful transaction starts long before the ‘For Sale’ sign goes up. Lucy Clarke, Corporate Solicitor at Sumer Law, unpacks the sale of a business in this article.
Get Your House in Order
Proper preparation is imperative for a successful business sale. Buyers typically conduct detailed due diligence, scrutinising every aspect of the business including financial records, contracts, legal compliance, and operational processes. If the seller hasn’t invested the necessary time in organising these materials, it can lead to increased costs or even the collapse of the deal.
A particularly common issue is the absence of an up-to-date set of statutory registers. This is a key legal requirement for companies in the UK, and yet many sellers only realise their statutory registers are incomplete or missing altogether when preparing for a sale. This oversight can create complications during due diligence, as buyers will expect to see accurate records of the company’s shareholders, directors, and other historical details.
To avoid these issues, sellers should conduct a thorough review of their statutory and legal documentation ahead of the sale. Addressing these preparatory steps early streamlines the process but also enhances the credibility and value of the business. Deciding Between an Asset and a Share Sale A critical decision in any business sale is whether to structure the transaction as an asset sale or a share sale. Each approach has distinct implications, and choosing the wrong structure can lead to complications.
Deciding Between an Asset and a Share Sale
A critical decision in any business sale is whether to structure the transaction as an asset sale or a share sale. Each approach has distinct implications, and choosing the wrong structure can lead to complications.
In an asset sale, the buyer acquires specific assets and liabilities of the business rather than the company as a whole. This allows the buyer to exclude unwanted liabilities, making it a popular choice for purchasers. However, for sellers, this structure can be more complex as they may retain residual obligations or less profitable parts of the business. Parties should also be mindful of the additional requirements to perfect the transfer of certain assets to the buyer (novation of contracts, conveyance of property, etc) which may add complexity and expense to the process.
In contrast, a share sale involves the buyer acquiring ownership of the entire company, including all its assets and liabilities. This option provides a clean break for sellers, but it usually requires more extensive due diligence from the buyer as the buyer is effectively stepping into the shoes of the business and continuing to operate it and inherit the existing obligations. The buyer usually requires a comprehensive suite of commercial and tax warranties on a share sale, amongst other key contractual protections to mitigate their risk. This can lead to complex and time-consuming negotiation processes to reach a commercially acceptable position for both buyer and seller.
“Sellers must carefully weigh the tax, legal, and operational implications of each structure to ensure the transaction is aligned with their goals.”
The Importance of a Confidentiality Agreement
As negotiations start to gather momentum, protecting sensitive information is critical. A Confidentiality Agreement (or, as it is often referred to, a Non-Disclosure Agreement/NDA) ensures that any information shared during the process is only used for the purposes provided and is kept confidential. This allows the seller to provide potential buyers with key insights into the business (such as financial performance or operational details) without fear of misusing it.
A Confidentiality Agreement minimises risks that such information could be used by the buyer for competitive advantage or that it can be disclosed in a way that damages the business’s reputation. Additionally, sellers often want to keep negotiations private, avoiding unnecessary disruptions to employees, customers, or suppliers.
A well-drafted Confidentiality Agreement safeguards the seller’s position while fostering trust between the parties. It enables the seller to control how and when sensitive information is shared, laying a secure foundation for the rest of the transaction.
Valuation Challenges
Determining the value of a business is often one of the most contentious aspects of the sale process. Sellers naturally want to maximise their return, while buyers are focused on ensuring they pay a fair price. Striking the right balance requires a robust valuation method that considers both financial performance and market conditions.
Overvaluing the business can alienate potential buyers, but no seller ever wants to think that they left money on the table. Sellers should prepare by analysing factors such as historical earnings, cash flow, growth potential, and comparable market transactions. To ensure an accurate and credible valuation, engaging a professional valuer is highly recommended.
As part of our wider group, we work alongside a network of trusted accounting partners who specialise in valuations and can provide expert assistance. A professional valuation not only supports the seller’s asking price but also provides an independent and credible basis upon which the deal is structured, and purchase price is derived.
Review of Key Contracts
A thorough review of key contracts is essential before selling a business. Some agreements, such as supplier, customer, or lease contracts may include “change of control” provisions, which require third-party consent before being transferred to a new owner. Overlooking these provisions can lead to delays or even the loss of critical contracts during the sale process.
In many cases, the successful transfer of key contracts is a condition of the sale. If these agreements cannot be assigned or novated, it could lead to the buyer renegotiating the terms of the deal or even walking away entirely. As legal specialists, we help clients identify potential obstacles to assigning and novating such contracts, assist with navigating the consent process, and ensure contracts are ready for a seamless transfer. This proactive approach not only safeguards the transaction but also minimises potential disruptions, giving buyers greater confidence in the sale and helping sellers sail through what would ordinarily be a cumbersome exercise.
Incomplete of Inaccurate Disclosures
Transparency is critical when selling a business, and the disclosure process plays a central role in this. Sellers are typically required to give warranties (statements about the state of the business) that buyers rely on when making their decisions. For example, sellers might warrant that there are no ongoing disputes or that all assets are in good condition. If these warranties are later found to be inaccurate, the buyer could claim for breach of warranty, leading to post-sale disputes.
To avoid this, sellers must provide a complete and accurate disclosure of any issues affecting the business. While it may seem counterintuitive to reveal potential weaknesses, full transparency protects the seller by preventing claims of misrepresentation or breach of warranty after completion.
So, how can you make sure that your disclosures are complete and accurate?
Ensure you have adequate records and supporting documentation for any key changes or decisions your business has gone through, e.g., any insurance claims, litigation, tax disputes, share buybacks, or restructures. The better your documentation is during the process, the easier you’ll be able to disclose against a suite of warranties requested by the buyer. Another thing we see in practice that makes the disclosure process easier is having the right people answer the questions. There is particular value in having your tech, finance, and HR resources available and on notice to assist with giving full and accurate disclosure against the relevant warranties. Not having the right directors or staff being part of the process can cause undue delays and incomplete disclosures, leading to protracted and expensive negotiations and ultimately increasing the risk of a breach of warranty claim down the line.
Contemplating Post-Sale Restrictions
When selling a business, it’s essential to think beyond the immediate transaction and carefully consider how the sale might shape your future. What will your next chapter look like, and how might legal restrictions affect your ability to pursue it?
Buyers often seek post-sale protections, such as non-compete, non-solicitation, and confidentiality clauses, to safeguard the business they’ve acquired. While these are often justified, if poorly negotiated, they can significantly limit your
future ventures, whether it’s starting a new business, investing in a related industry, or even hiring former colleagues. An overly broad non-compete clause, for example, could tie your hands for an excessive amount of time or across an
unreasonably large geographic area.
Turning your mind to this early ensures you don’t find yourself unable to pursue the next chapter you had envisaged.
Careful preparation is the foundation of a successful business sale. By addressing these key areas, sellers can anticipate challenges and ensure a smoother transaction process.
Hi, I’m Lucy Clarke!
I am a Corporate Solicitor at Sumer Law and my experience includes advising on a range of M&A transactions, corporate restructuring, share/asset sales, capital raises, commercial contracts, and general corporate/commercial matters.
If you’d like to explore how our team can assist you through the process and help you achieve a smooth and successful business sale, schedule a complimentary discovery call with us today.
