Opinions and insights from our Corporate and Commercial team
Top 10 tips to consider before a business sale
- AuthorBeth Wallace
Selling a business is quite an undertaking and can often flag up issues or concerns that require additional time and costs to resolve. Beth Wallace and Ollie Peckham have compiled a list of issues to consider in advance of a sale to help streamline the process and save you costs and time further down the line.
1. Agreeing Heads of Terms
Heads of Terms will almost always be inevitable when selling your business, whether this be in a more informal state such as an agreed email with the key terms, or in a fully fledged signed document setting out everything that has been agreed in terms of deal structure. Either way, it is an important aspect for the sale of your business as it details the expectations of both parties and can help significantly in streamlining the process, ironing out any major points early on and avoiding any substantial arguments ‘down the road’ once parties have started incurring larger costs.
Whilst this may not be something to consider prior to deciding to sell, it is an important aspect of any business sale once a buyer has been identified and having some advice and guidance on how you may wish to structure any deal and what you may wish to include and exclude from Heads of Terms can be integral. The negotiation on Heads of Terms can also often be a strong indicator of the stance a buyer may take on the deal as a whole and how open to negotiations they may be.
We would always advise potential sellers to have representation at Heads of Terms stage, rather than attempting to change parts of the deal after these have already been agreed and this is something we can help with.
An asset sale, whereby you can agree with the buyer the particular assets you intend to sell, could prove more efficient in the scenario where you do not intend to sell all of the assets of the business. However, if the agreed sale method is by way of share sale, you may want to consider some form of re-structuring or dividend in specie to remove certain assets from the Company prior to a sale.
It is important that this is considered as soon as possible in the sale timeline as this will have ramifications in relation to tax considerations to be discussed with your accountant and cost and time considerations to be discussed with your solicitor. Some restructurings will be reliant upon receiving clearance as well as potentially stamp duty authorisation from HMRC which can significantly impact upon timescales.
As always, the sooner these discussions are had, the less likely this will cause a pinch point in the timescale of the transaction.
3. Restrictive Covenants
Restrictive covenants are usually incorporated into business sale documentation whether in the main transaction document or within a settlement agreement. These are designed to prevent you from taking advantage of confidential information, customer and employee details and other information about the business after the sale.
Often these are an area of negotiation as a buyer will always draft these in their favour meaning they can sometimes be quite aggressive with long time periods and wide geographical remits. Furthermore, they can often be included at the heads of terms stage, so it is important that you clarify from the outset if you are not comfortable with the extent of the restrictive covenants proposed.
It would be advisable to consider carefully the restrictive covenants in the context of your plans post-sale. If the intention is retirement following the sale of your business, you may be less concerned as to the detail. However, if you hope to continue working post-sale, you will want to carefully consider the detail of the restrictive covenants to ascertain whether this will restrict your options post-sale. This will be the point at which we can offer advice and negotiate these to ensure your post-sale plans do not breach the restrictive covenants.
4. Articles of Association
A Company’s articles of association dictate what can and can’t be done when it comes to the constitution and shares of the Company. Therefore, it is vitally important that the articles are kept up to date and reflect the current position of the Company and it’s shares. It will often be the case that there will be multiple shareholders within the Company, who may also have different share rights. When preparing for the sale of your business (which may sometimes be years in advance), it is important to ensure that you have appropriate articles in place to enable a smooth sale of shares. This may all tie back into potential restructuring plans referred to above, but putting appropriate articles in place way before the event can be more beneficial, especially when it can involve changing share rights or putting in place things like drag along and tag along rights as it avoids potential sales being unduly delayed by a disruptive or unwilling shareholder.
Examples of potential article provisions include drag/tag rights (which allow you to pull along minority shareholders when selling your business), pre-emption or share buyback provisions allowing for shares to be re-purchased by other shareholders or the Company, or good/bad leaver provisions which may assist in dealing with any employee shareholders.
One key aspect of any business sale, whether this is done through the sale of shares, or an asset sale, are the employees of the Company. With the TUPE legislation protecting the employment of employees, it is more important than ever that you are both compliant and up-to-date with all employee information and contracts as it can be a major factor for buyers to consider when they look at what they may be inheriting.
During the due diligence process, the status of employees and their contracts are often one of the key areas in to which the buyer will delve, with questions ranging from terms of employment to disciplinary actions, grievances and pensions. It is vital that all of this information is easily accessible, compliant from a legal and regulatory standpoint and can be supplied to buyers. If this isn’t the case, it is likely that a buyer will ask for an indemnity to cover any non-compliance or failings.
We have a dedicated employment team who would be able to assist in this regard and this preparation will lead to a far smoother process when selling your business.
Due diligence is the process of the buyer taking an in-depth review of all areas of your business. We can assist you in running a due diligence process and have an online data room facility to ensure all documentation is retained in one place and easily accessible when it comes to later in the transaction where they might also be required for disclosure.
Importantly, one of the key areas of due diligence is around contracts to which the company is a party – this will include both in relation to your customers/clients and your suppliers.
In order to streamline the due diligence process, you may like to ensure that you have one place in which you retain electronic copies of all contracts to which the company is a party. This can help reduce time and costs both for you in having to locate them where some are hard copy and some electronic. But also, time and costs associated with us when it comes to follow up requests from a buyer in relation to one particular contract that you have not provided or queries around the content of a particular contract you have not been able to locate.
7. Data Protection
From professional experience, very few companies are fully compliant when it comes to data protection.
This can often lead to a request for an indemnity from the buyer within the transaction documentation meaning that you, as seller, will be liable for indemnifying the buyer on a pound for pound basis for any loss incurred as a result of pre-sale non-compliance (though we can often ensure these indemnities are subject to the wider limitations negotiated in the transaction documentation).
It is therefore helpful to have a brief review of your company’s data protection compliance prior to a potential sale in order to get your ducks in a row in advance firstly, to ensure compliance and secondly, to try to limit any non-compliance for which you might, as seller, be liable by way of such indemnity.
The reason why data protection is a key area for buyers is due, not only to the gravity of the fines associated with a breach, but also the reputational damage to the company.
The Information Commissioner’s Office has a helpful Guide to Data Protection here and we have data protection specialists in our team should you require further assistance.
8. Intellectual Property
It is often assumed by business owners that the company own the intellectual property rights in all intellectual property assets such as the company website, logo and branding. However, professional experience has shown that more often than not, where a website developer or branding specialist is involved, this is rarely the case.
It is important to check any terms and conditions that the company might have entered into with such individuals to clarify what the position is. Sometimes, you may not have been provided with such but an invoice from the individual will stipulate that your relationship is governed by their standard terms and conditions. Do check these if they are available to you and look for reference within to intellectual property rights.
It is often the case that the website developer or branding specialist will reserve the intellectual property rights over the website, logo or branding work to themselves. If this is the case, the problem can be rectified by having them sign a Deed of Assignment of Intellectual Property which is a quick, simple document ensuring those intellectual property rights are assigned to the company.
However, issues can arise where the individual refuses to sign such a document or cottons on to the wider context of the request being a business sale and then expects payment for their assignment of such rights.
As always, the sooner any issue in relation to intellectual property is discussed, the sooner a solution can be found and a longer time scale is available in order to obtain the individual’s agreement to such assignment.
9. Statutory Books
The statutory books of the Company are also important and are required by law to be kept up to date.
From experience, this is often not the case and it can cause delays in the process if either the Company has not kept statutory books or has not kept these up to date as they will need to be re-constituted.
If for example, a Company has been in existence for decades, re-constitution of these can incur a lot of time and costs as it will mean going through the full history of the Company and obtaining large amounts of information to populate these.
We would suggest that, before exploring the option of a share sale, the location and status of the Company’s statutory books are checked to avoid any unnecessary delays or costs later in the transaction.
10. Your Legal Representation
Finally, it is important that prior to a sale you think about who you might like your legal representation to be.
Whilst we, of course, have a team of recognised experts in business sales at Roythornes, we would be remiss to not encourage you to think carefully about this point.
Your legal advisors will be taking a deep dive into your business both whilst assisting you through the due diligence process and drafting the sale documentation. It is, therefore, important that you have someone you both trust has your best interests at heart as well as someone you actually like and get along with as you will be in close communication with your legal team throughout the process of selling your business.
If you feel we may be able to assist you as your trusted advisor in a future business sale, please do get in touch.