THE ANATOMY OF A BUSINESS SALE
Most owners of businesses do not sell their business more than once or twice in their lifetime.
It is therefore quite a confusing process if you have not done such a sale before.
If you are considering selling your business there are a number of legal and commercial steps that you will need to take prior to the actual sale of the business. This series of notes is intended to provide some general guidance with regard to a proposed sale of a business operated through a private limited company.
It is important to establish from the start whether or not you are intending to sell the entire business or to sell only part of the business. This will to a large extent dictate the options open to you in relation to selling the business. If you are only selling part of the business then you will need to consider how you will operate the remaining business. This note assumes you are selling the whole of the business.
This series of notes is structured in three parts.
The first part sets out the basic differences between a share sale and an asset sale (also known as a business sale).
The second part will look at the different stages to a sale.
The third part will look at some of the documents required on a share or business sale and the post completion steps.
Part 1 - the basic differences between a share sale and an asset sale (also known as a business sale).
Broadly, there are two ways to sell a business (assuming the entire business is being sold) - a sale of the business and assets as a going concern and the sale of the entire issued share capital of the company. There are substantial differences between the two, even though they are both generically termed the sale of the business. They will ultimately achieve the same result but by different routes.
There are very different tax considerations between share and business sales and it is important to speak to your accountants early in the process to see which is the most tax efficient structure to sell them.
In simple terms, an asset sale is literally just that. All of the contracts and assets including properties and the like will need to be transferred from the selling company to the buying company. The employees that are employed by the business will normally transfer over to the buyer under what is known as the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE). This in its own right can be quite complex and involves certain timelines where the seller has to inform and consult with employees and potentially any trade unions to which they are affiliated.
The buyer will take over all of the assets and contracts that it wishes to do so and the remaining liabilities, contracts etc. will stay with the seller.
The funds that are passed to the seller on completion of the sale will then need to be returned to the shareholders of the selling entity by one of a number of different methods which are not considered in this note.
A share sale on the other hand is in effect the sale of the underlying business and assets of the Company by the shareholders (the owners of the Company) by them selling their shares in the Company. All of the employees, the contracts, liabilities and the assets will remain within the company that is being sold and all that changes hands is the owner of the shares. The proceeds of sale will on selling the shares go to the holders of such shares. It therefore takes away one of the steps for returning value to shareholders as they receive the consideration direct.
On a share sale the liabilities and the assets of the company will all pass in effect to the purchaser who acquires the shares. They in buy the business "warts and all".
The first step is to consult an appropriate corporate finance adviser or your accountant, with whom you can discuss the most appropriate and tax efficient way to sell the business and the value that should be attached to the business.
The whole concept of valuing a business is not an exact science. It is more of an art form.
There are a number of different ways of valuing a business and it is not as simple as saying that a competitor or similar business that the proposed seller knows of was sold for £x and, therefore, your business should be sold for the same sort of price.
The nature of the business will very much dictate the type of mechanism that will be utilised to value the company. For example, if the company comprises mainly investment-type assets, say property, then it may be more appropriate for the business to be valued on a net asset basis rather than, for example a multiple of earnings or profits. Your corporate finance adviser/accountant should be able to provide you with guidance in this regard.
If you are proposing to sell the entire issued share capital of the company, it is important that you do not go into the marketplace and provide information about the company to prospective buyers. There are a number of reasons for this. The principal ones are that information that you provide may contain confidential information which you would want to protect if the proposed buyer were not to proceed (this is equally applicable to an asset sale) and secondly, any form of information provided about the company on a share sale may (although generally one of the exemptions applies) constitute a financial promotion. There is very detailed legislation protecting proposed investors (buyers) of the business in connection with investment information provided on a sale of shares, so as to ensure that it is not misleading. It is, therefore, important that you take advice before approaching any person who you may consider to be a prospective buyer.
If it is proposed that the business is sold to the existing management team of the business, this adds another level of complexity as there will clearly be conflicting interests of those members of the management team who are proposing to acquire the business, as against those who are simply selling their interests in the business but not remaining in the business following completion of the sale. We have not gone into any detail in this note with regard to those additional concerns but we would be pleased to expand upon them if the need arises.
The first step is often either dealt with through a broker or selling agent in relation to the business being sold but in either event whether or not you are approached directly by a potential purchaser or the business selling agent seeks a buyer, the first step will be to put together information to provide to the purchaser.
Before any such information is provided to them the purchaser must be required to sign a confidentiality agreement (also known as a nondisclosure agreement or an NDA) and this will be necessary to protect the confidential information of the business that has passed to the purchaser so that they can assess the business to see whether or not they wish to purchase it and the price that they wish to pay. Please see the next part of this note for further details.
Once some additional information is passed to the purchaser (and it is important from the seller's perspective is that they do not pass over at the early stages any commercially sensitive information about the business), then the buyer will consider the business and will then make some form of offer to purchase the business.
The main terms of that offer are ordinarily contained in some form of heads of terms or letter of intent.
It is important that all correspondence that goes between the buyer and the seller and/or their advisers is marked private and confidential and subject to contract. This means that it is clear that the parties are not intending to be bound by the exchange of information and indeed any form of offer that passes between them because it is all subject to the parties entering into mutually acceptable sale and purchase documentation.
It is important as a seller that you understand the value of your business. In this regard although you may have a view as to what you believe your business is worth it is important that you speak to your accountants and somebody who is suitably qualified to provide corporate finance advice and to provide you with a valuation of your business. This may or may not be your normal accountant. Although this can be quite expensive in obtaining a valuation, it is worthwhile because you then have an idea as to what your business is worth in considering any potential offer put forward by the proposed purchaser.
Deals in themselves can be structured in any number of ways form a straightforward cash purchase where all of the money is paid on completion through to having payments that are staggered such that you get an initial payment on completion and then what is known as deferred payments and all this can be linked to the performance and profitability of the business following completion and this is what is known as an earn out.
When looked at from the seller's perspective you will need to consider whether or not if there is any deferred consideration the buyer is financially good for the money and as such matters such as interest payments on any form of deferred payment and/or security for those deferred payments (all money paid into some form of escrow account) will be required.
In our next bulletin we look at the stages of the acquisition process. Click here to read!
A member of the Corporate law team here at Chattertons would be happy to discuss confidentially any thoughts you are having on a free, no obligation basis. Please contact your local office, or complete our online enquiry form.
This briefing note is not intended to be a comprehensive guide and does not cover every aspect of the topic and is not intended to provide legal or other advice.
Chattertons Legal Services Limited
Dated May 2022