The legal process usually takes between 8-12 weeks, but of course this can only take place once the initial negotiations are complete, and this can take many more months.
A good solicitor will help you through all these steps and processes and advise you at each stage to help ensure that you (and your retirement pot!) are protected against any future liability or claims from a disgruntled Buyer. A great solicitor will also help you to understand the process and how it all fits together, and they will help to reassure you as often as necessary that the stress and upheaval and the myriad issues which seem designed to derail the process are absolutely normal, and usually just require tweaks to the structure of the deal or small compromises between the parties. The great solicitor will also work amicably and constructively with their opposite number who acts for the Buyer, to help to contextualise these issues and ensure that any risk or liability falls fairly, and they will work with you to protect and ensure the future of the business which you have built.
Beware any solicitor or adviser who boasts that they’ll run rings around their opposition, or who promises a shorter timeframe which cannot be guaranteed (and might in itself create problems - rushing a transaction is a surefire way to make mistakes or fail to spot potential issues which cause problems down the line. The best deals are those where both parties feel that the outcome is fair and balanced, and this also helps the Buyer who might otherwise be left with bad feeling which could damage staff morale or customer confidence at the start of their new venture just when they need it most. You as the Seller will also have an interest in the future of the business which you’ve built and will usually feel a strong sense of obligation to staff and trusted customers who you’ve worked with over the years, and want to ensure that your business is left in safe hands.
You should also tread carefully if you are offered a fixed fee. It is not possible at the outset to foresee all potential issues, and if a fixed fee is agreed the advisor has less incentive to really investigate and interrogate all the issues and drafting, or stand firm on important issues to make sure the transaction as a whole works for you, because they get paid in full either way! Further, fixed fees are often set high to cover the risk that a matter does become protracted.
A short summary of the main steps follows, with some basic information on each stage.
Asset Sale or Share Sale?
The first main issue to consider is the structure of the deal. Selling shares is technically a very simple process, as all you need to do is transfer the shares into new ownership. However it will rarely be as straightforward as that, because the business of the company will be sold “warts and all”, so a Buyer will want to carry out a thorough due diligence exercise (see below) to make sure there are no skeletons in the closet, and that the Company owns all of the assets that they expect – it is not unusual for major assets like buildings to be owned by separate companies or the individual, so as you can appreciate this would be a major blow for a Buyer who expected to get a freehold building but ended up homeless!
Selling assets (goodwill, stock, property, equipment etc.) can sometimes be more straightforward than selling the shares in a company since these are more easily definable and the Buyer can cherry-pick the good bits, and leave behind the bad bits like debts or liability for defective goods or services.
Tax is usually one of the main considerations for parties deciding whether to buy shares or assets and this can have major implications for the seller, for example selling shares usually incurs a capital gains tax liability, which can be further reduced with the benefit of business asset disposal (sometimes known as entrepreneur’s) relief, whereas asset sales out of a limited company could potentially lead to income tax payable at up to 45% when extracting the sale proceeds from the Company.
There are of course many issues which need to be considered at this stage, which an accountant will need to advise upon but this is an matter which needs to be addressed up front before any of the detail is addressed. The rest of this article mainly focuses on a share sale which is the more usual of the two, and both processes are similar, following the same basic outline.
Legal Due Diligence
The next main step is the due diligence. For this process the Buyer will usually send a questionnaire which is effectively a fishing expedition to get as much information about the company or the assets as possible. It will ask about the company structure and history, and for wide ranging information on accounting, tax, finance, borrowing, staff, clients, suppliers, customers, insurance, property, pensions, data protection, IT, intellectual property, environmental information and many more. Not all of the questions will be relevant to the business directly and it is easy to become overwhelmed by the breadth and detail of the questions, however this is an important step as it allows the Buyer to assess the detail of the company to ensure that it matches up with their expectations. Sometimes replies to the due diligence questionnaire might not match the Buyer’s expectations (see the example above of the freehold property) and it is at this point that the Buyer will then need to raise their concerns, renegotiating the transaction if necessary. It could be described as the point where they must “speak now or forever hold their peace” as they will then usually be deemed to have full knowledge of all matters disclosed, so that any future risk arising from those issues will fall on the Buyer.
A good solicitor will collate and coordinate the responses and send these off to the Buyer.
A great solicitor will advise you carefully on what information you should actually disclose, for example unless you are a surveyor you should not be answering questions about the state and condition of your premises (caveat emptor – they should carry out their own survey) and questions like “are there any matters which should be brought to the attention of the Buyer?” are far too broad and unspecific, requiring subjective opinion which could leave you open to risk in the future (see Warranties below).
Share Purchase Agreement
This is the main transaction document. It will set out the structure of the deal, apportion risks and obligations to each party, set out how the Buyer should pay the purchase price (and detail about how this is to be done especially if there is deferred consideration) and requiring the Seller to appoint the Buyer’s representatives to offices of the company, hand over stock transfer forms (the actual share sale) and set out requirements for the Seller resigning as director and employee as applicable. This document will usually be negotiated between the parties’ solicitors, and follow the agreed heads of terms, but the main topic for negotiation and what often takes most time, is the Warranties.
Warranties
Having replied to the Due Diligence questionnaire above, the Seller must then “warrant” those replies, in other words they will make a legally binding promise to the Buyer that the information which they have given can be relied upon, and is true accurate and complete. This gives the Buyer certainty that they are getting what they are paying for, and that the Seller has not misled or misrepresented any risks or the value of the company generally. The Warranties usually make up the longest part of the document and this is where the wording can be hard fought between solicitors. A good solicitor will ensure that the Warranties are limited as much as possible to help the Seller avoid being sued for breach of warranty and losing part of the purchase price/their retirement pot in the process. A great solicitor will go through each warranty to explain them to the Seller and help the Seller understand the extent of their potential liability and obligation to produce thorough replies to the Legal Due Diligence questionnaire and ensure that warranties are limited to those which are vital to the Buyer. A great solicitor will also seek to strike out any warranty where the Seller is required to offer an opinion or warrant a well-known fact, both of which open the Seller up to risk of breach of warranty claims.
For example it is common for the Buyer to ask that you warrant that the business has sufficient IT hardware and software for its future needs. While on the face of it this may seem reasonable, the Seller does not have a crystal ball and it is not for the Seller to second guess the Buyer’s plans or what might happen in the future. Likewise if you are asked to confirm that the company has always carried adequate insurance this is a very subjective question and what one person thinks is adequate, another more risk averse person may consider it wholly inadequate. The Seller will produce the insurance documents during due diligence to allow the Buyer to draw their own conclusions, and the Seller should not then be asked to warrant any matter where it is for the Buyer to assess the risk before he buys.
Disclosure Letter
The Disclosure Letter is an important document for the Seller. It is in this document that the Seller discloses any potential risks which might affect the Company so that the Buyer is made aware and there is then no recourse after completion if the risk materialises. For example, the Seller might state that there are no court proceedings which affect the company however they may then also disclose that an employee has recently left on bad terms, which allows the Buyer to be aware of the potential issue and decide whether it has any bearing on their decision to purchase the Company and the price. Alternatively, the Buyer might seek an indemnity. If the Buyer accepts the disclosure, the Seller will have no further liability, but if this fact were not disclosed then the Seller would be liable for breach of warranty. Either way, the matter is resolved amicably before completion rather than through the Courts after completion!
Ancillary Documents
There are lots of other documents which are required under company law, including board minutes and resolutions for all the limited companies involved (by which they consider the transaction and hopefully “resolve” to proceed) and appointment and retirement of directors, indemnities for lost share certificates, stock transfer forms, and service contracts for Sellers who are staying on to facilitate the handover of the business etc. While these documents are very important generally, they are usually not the subject of great debate or negotiation. A good solicitor will have no hesitation in drafting and agreeing these in fairly short order. A great solicitor will also explain them to you in the context of the transaction generally and help you to understand their nature and purpose which will help you to feel more comfortable with the entire transaction as you hopefully move onto your next venture or into retirement with a sense of peace that a good job has been well done.
General
Going through these processes is very important for several reasons, but one which is often forgotten is that the detail and the level of information provided means that both parties know what they are getting into, and any problems or potential problems are spotted and addressed before the transaction proceeds which means that the likelihood of dispute down the line is considerably reduced. Completion is usually a cause for celebration and is a major step in the lives of both parties, and a great solicitor will be very conscious of the highly personal implications of the transaction in the parties lives, and will act and advise accordingly.
Please note that this is a highly simplified summary of each step in the process, if you would like further information on any of these issues, or indeed you’d like to sell your business and you’re in want of a great solicitor, please speak to our Helen Carville or Kira Luka-Langley on 01604 887455 or helen.carville@maxengel.co.uk or Kira.Luka-Langley@maxengel.co.uk.