Solicitor Emma Ford, in leading law firm Blandy & Blandy’s Corporate & Commercial team, explains the key stages of the process when selling your business.
The sale of a business is an important and rewarding milestone for business-owners, yet the process can appear complex to navigate. With many factors to consider from the outset, such as current market conditions and obtaining a suitable valuation, we would advise that professional guidance is sought to establish a suitable course of action.
Our Corporate & Commercial team is highly experienced in such matters, advising on the legal aspects of business sale transactions from the early negotiation of terms to a successful completion of the sale, and beyond. Our dedicated Employment Law and Commercial Property teams also advise in relation to all aspects of business sales and our expertise and experience is recognised in the UK’s leading guides to the legal profession, Chambers UK Guide and The Legal 500.
A business sale will usually comprise of the following key stages:
1. Preliminary discussions and valuation
During the early stages of the process, the seller will identify a prospective buyer of the business and/or assets of their company. It is advisable for the seller to establish the current market value of their business and assets, usually with the guidance of an accountant. The parties will often seek professional representation at this stage, in order to formally commence the negotiation process and determine the terms of sale.
2. Heads of Terms
The Heads of Terms is the first document that is prepared and signed by the parties. Its purpose is to set out the key terms agreed in principle throughout the course of negotiations and to outline the timetable of the transaction. The Heads of Terms is not a legally binding document, however provisions relating to confidentiality, exclusivity and costs may be binding on the parties if required. The Heads of Terms provide a useful framework for the more comprehensive Business Purchase Agreement, which will embellish the key terms and set out the binding obligations of each party.
3. Due Diligence and Disclosure
The purpose of due diligence is for the prospective buyer to raise various enquiries regarding all aspects of the target business, including but not limited to the finances, employees, real estate aspects, IT systems, data protection compliance, intellectual property rights and any litigation matters.
It is important that the seller provides full responses to the due diligence questionnaire and formally discloses any issues or particular matters of which the buyer should be made aware prior to completion.
The disclosure letter is prepared by the seller’s representative and sets out a list of general and specific disclosures from the seller to the buyer, in order to mitigate the risk that the buyer will bring a claim against the seller for a breach of warranty. The starting position is that if any warranty in the BPA is untrue, the buyer has a claim for breach of contract regardless of whether it relied on the warranty in question. However, the parties will usually agree that no claim will arise if the facts giving rise to the breach were adequately disclosed in the disclosure letter.
The seller’s solicitor will often host a secure electronic online data room, via which relevant documentation and supporting materials will be shared with the prospective buyer as part of the due diligence and disclosure process.
4. Business Purchase Agreement (BPA)
The Business Purchase Agreement (BPA) is the key transaction document, setting out the terms of sale and entered into by both parties at completion. The BPA will typically contain any conditions to completion, the liabilities of the parties, warranties and indemnities, restrictive covenants and the structure of the purchase price. A key aspect of the transaction is the pricing mechanism for ascertaining the consideration that is paid by the buyer to the seller at completion. This may be a fixed price, or may be determined by other approaches, such as by reference to a set of completion accounts that are drawn up following completion and adjusted accordingly, or by reference to a set of ‘locked box’ accounts which fix the purchase price in accordance with a set of accounts that are drawn up prior to completion, on the ‘locked box date’. The parties’ financial representatives usually advise alongside the legal teams, providing guidance in relation to preparing such accounts and any tax implications.
A BPA will usually include various warranties that are made by the seller to the buyer in relation to the target business. This is an aspect of particular negotiation between the parties, alongside the disclosure process, to achieve appropriate protection and risk mitigation for both the seller and the buyer in relation to potential claims.
5. Completion and Post-Completion Administration
Completion will take place when the BPA and other ancillary documents (such as board minutes, deeds of assignment, powers of attorney and director resignations) are agreed by the parties and in final form for signing.
Following completion, there will be a handover of any deliverables to the buyer as set out in the BPA. There may be a fixed period following completion during which the seller continues to work for the target business or provides advice as a consultant, to ensure a seamless transition and continuity. If there are any changes to the board of directors of the limited company, the statutory registers of the company should be updated accordingly.
If you are considering selling your business, or would like to get a better understanding of the process, we would be pleased to arrange an initial discussion with you. At our offices, in Reading, Henley-on-Thames or Wokingham, at your premises, or remotely.
For further information or legal advice, please visit www.blandy.co.uk.