Are you ready to sell?

Posted: 17/05/2022

Selling a business is monumental for many people - and complicated. A seller will want to make the business as attractive as possible and maximise sale proceeds, while minimising taxes due and risks. To succeed, thorough planning in the months leading up to a sale is essential.

This article is the first in a series that will provide an overview of the processes and considerations involved when selling a business.

Thinking about it

Selling a business takes time. The process of ‘thinking about’ whether it is ready to sell varies from deal to deal, but it is not unusual for the process to start some 12-18 months prior to actually marketing the company.

Business owners should ask themselves questions such as:

• When is the best time to sell?
• What is the business worth?
• How can the value be enhanced?
• How long will the transaction take?
• What will the impact of the sale process be on the business?
• Can confidentiality be maintained?

Dealing with these questions at an early stage will help ensure that the seller is comfortable with the deal that is eventually struck.

Is the price right?

Valuing a business is an art not a science. The value of shares in an unlisted company can be affected by many factors. It is not unusual for owner-managers initially to name prices that are twice, or even three times, as much as they eventually end up with. Ultimately, the price that a seller will achieve for their business will depend on how much someone is willing to pay for it.

Corporate finance specialists (who are usually part of an accountancy practice or are niche finance specialists), can assist in valuing the business. They can also help find a market for the sale of the business and will usually have good contacts to assist in sourcing finance for any acquisition, such as venture capital funding in the case of a management buy-out.

Identifying the buyers

The structure of the deal will vary depending upon who is likely to acquire the business. Usually the choice is between competitors (who may want to complement their own business or simply remove the target from the market), the management team (who may already be shareholders or who would like to be) or venture capitalists (who will look to invest with a view to a later trade sale or flotation).

Forming the team

No matter how independent the seller is, the sale of a business is not something to undertake without professional support. Assembling a team of experienced experts to manage the sale process is a key ingredient in the success of the sale process. The make-up of a team will vary according to the deal in question but, on any deal, effective teamwork and management of the sale process will be key to ensure all deadlines are met and that each person is kept aware of developments and knows what they have to do at any one time.

The appointed advisers should have the necessary expertise, resources and experience for the transaction. Lawyers or accountants who may have been used for everyday matters (such as preparation of a lease or auditing accounts) may not be appropriate for the proposed transaction.

Appointing and involving professional advisers at an early stage may save costs in the long run.

Warts and all: due diligence

Once agreement in principle has been reached, the buyer will begin its formal investigations into the target business with the process known as ‘due diligence’. Any potential buyer of a business will want to carry out checks on what it is buying, to ensure that the business is owned by the seller and that it is worth what they say it is worth.

Subject to any confidentiality concerns, the seller should at an early-stage form a due diligence team comprising appropriate personnel. This team should be led by a person with a good understanding and overview of the target and its business.

Identifying issues

A seller may want to begin organising relevant information for due diligence before it receives the buyer’s questions. This is a good opportunity for the seller to spot issues that may prevent a sale or prove to be unattractive to a buyer, which may need to be resolved. However, this does not always mean trying to correct possible problems before discussing them with the buyer. A knee-jerk response could mean, for example, that a written contract is put in place on terms that are not acceptable to the buyer and then has to be renegotiated or even terminated!

Whilst every business will have its own circumstances to consider, the following areas and potential pitfalls commonly arise:

1. Corporate structure
   If the target is part of a group structure, can it be simplified or reorganised to help facilitate a more efficient disposal?
   
   Could minority interests frustrate the deal? Can their interests be acquired by the majority shareholders in advance of the disposal? If not, there are methods to legitimately force minority shareholders to sell along with the majority and early advice should be sought if relevant.
   
   
2. Are records up to date?
   Are the company’s statutory registers and filings up to date? For the importance of this, see our article ‘Company Statutory Registers – What are they and why keep them?’.
   
   
3. Consents
   Are any third-party consents required to effect the disposal? These may include customer, landlord and regulatory. It would normally be unwise to take any action until the prospective deal looks likely to happen, but it is sensible to be aware of all such requirements and consider how best to deal.
   
   
4. Documentation
   Can all the business’ key documentation be located? A prospective seller should begin collating copies of all key, signed documentation relating to the business’ employees, customers, suppliers and property.
   
   
5. Intellectual property (IP) rights
   Is the IP used by the business properly protected? Are proper arrangements in place for the business to use it? Have patents, trade-marks and domain names been properly registered?
   
   
6. Properties
   The seller should identify all premises used/owned by the business and check that the business is legally entitled to do what it is doing in those premises. Consider matters such as condition, planning permissions and environmental matters.
   
   Does the seller or business possess all necessary licences to comply with regulations? Do the premises raise environmental concerns? Consider carrying out a health and safety audit at the premises.
   
   
7. Employees
   Key employees can be crucial to the ongoing success of a business. Are all key employees effectively tied into proper service agreements that contain appropriate restrictive covenants and adequate notice provisions?
   
   
8. Customer/supplier contracts
   Are arrangements with key customers properly documented and have all key contacts been renewed? Are the business’ standard conditions of sale and purchase adequate?
   
   
9. Litigation
   Can ongoing (or potential) litigation involving the business be resolved or settled?
   
   
10. Finance
    Matters such as existing guarantees, loans, directors’ loans, grants, funding facilities and security will all need to be considered and advice sought as to the best way to deal with such arrangements.

Confidentiality

Before any information is given to a potential buyer, it is essential that the buyer should sign a confidentiality agreement. This will place the buyer under an obligation to use the information only for the purpose of assessing the business (and not to use it for its own gain) and to keep it confidential. Where the potential buyer is a competitor, the seller might consider whether it is wise to pass across particularly sensitive information too early in the process even where a confidentiality agreement is in place.

If negotiating with a management team, confidentiality provisions will help prevent news of the proposed sale becoming too widely broadcast, which could have a demoralising effect on staff.

Warranties

The buyer will generally seek to obtain warranties (essentially contractual promises) as to the condition of the target company and its business. Warranties may give rise to liability for the seller if they are not accurate and are a method of adjusting the purchase price when things are not as the buyer thought they were (as stated in the warranties).

The seller will, therefore, want to tell the buyer if the warranties are inaccurate in any way – this is known as ‘disclosure’. The negotiation of the warranties and any disclosure against them will be ongoing, often until the last minute before the acquisition is completed. The more thorough the initial due diligence process, the less likely there will be any nasty surprises late in the disclosure exercise and any price adjustment through a warranty claim. Similarly, the better managed the due diligence has been, the easier the disclosure should be.

So are you ready…?

Fundamental to a successful sale is preparation. The key is to identify and deal with issues early - potential sellers should therefore be planning for any sale well in advance. The positive impact of careful preparation, a team of well selected advisers, a strong idea of what a seller may want from the sale and intimate knowledge of its business cannot be underestimated.

This article is an edited summary from Penningtons Manches Cooper’s Guide to Selling a Business. For a copy of our Guide please click the banner below or get in touch with your usual PMC contact.

Our highly regarded corporate team provides clear, pragmatic and practical advice to businesses large and small from the UK and around the globe on the corporate transactions and the legal issues they face. To find out more about our corporate team please click here.

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