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Selling a business? Don’t ignore these legal considerations

07 April 2017

Selling a business can be a complex and nuanced undertaking and it is advisable to enlist help from professionals, such as solicitors and accountants, to enhance your chances of a successful negotiation.

Involving a solicitor from early on will help you to avoid pitfalls and maximise returns, simplifying what can often be a daunting prospect.

Here are four key considerations that need to be reviewed to help the process run smoothly and to the best of your advantage.

Structure of the sale

Be clear about exactly what you want to sell. Are you selling shares in the company that owns your business, or simply the assets which make up your business?

In a share purchase, the buyer buys the whole company (including liabilities that he may not know about).

In an asset (or business) purchase, the buyer chooses the assets that he wants to buy. This will provide more flexibility, but it can be complicated to identify and transfer specific assets.

If you’re selling shares, check that no important contracts can be terminated on a change of control.

If you’re selling assets, check that the contracts can be assigned to the buyer and that this is not prohibited under the terms of the contract. The same will apply to the lease of any property you occupy.

Be aware that the transaction may require approval from shareholders (yours or the buyer’s) or a professional/industry regulator.

Negotiation and preliminary agreements

A number of agreements will need to be produced to protect both you and the buyer.

Acquisitions are highly business-sensitive, so depending on the size and nature of the transaction, you should try to sign a confidentiality agreement (also called a “non-disclosure agreement”) at an early stage.

You will need a heads of terms/term sheet to set out the key terms of the deal. These are generally not legally binding, but be aware that legal obligations can arise inadvertently and a strong “moral commitment” can be created.

An exclusivity (or “lock-out”) agreement gives the buyer a period of exclusivity in which to negotiate the transaction by preventing you, the seller, from actively seeking or negotiating with other prospective buyers during this period.

Due diligence

Your buyer will need to scrutinize the assets and liabilities of your business – this is due diligence.

Part of this will involve the investigation of assets and liabilities, such as your intellectual property rights (IPR), your premises and your employees.

The buyer will want to know who your employees are and their terms of employment. The general position is that if a buyer is buying shares in your company, your staff will remain with the company.  If the buyer is buying the assets which form the business, your employees are likely to pass automatically to the buyer with all their accrued employment rights.

IPR, including brands, trade marks and patents, can be very valuable assets. A buyer will want to check that you own, and have adequately protected, the IPR and that these rights can be transferred to them in the event of an asset sale.

Is a business property part of the sale? Restrictions and easements may affect the value of the property. The buyer will carry out property searches, check planning permissions and review the title documents.  It may therefore be prudent for you, the seller, to compile a complete list of property title documents at an early stage in the process.

Legal documentation

Unsurprisingly, the sale of a business involves a large amount of paperwork!

An acquisition agreement will need to be made, setting out the agreed terms governing the transaction and the mechanics of the deal. It will typically contain a number of additional provisions, such as the following:

  • Warranties are contractual promises you make regarding different aspects of your business (for example, that you own all the assets and there are no disputes with third parties). If they are untrue, the buyer can sue for damages.
  • Indemnities require you to compensate the buyer for specific liabilities if they arise (for example, potential tax or environmental liabilities).
    • Restrictive covenants can prevent you from competing with the business you’ve sold, or poaching key customers or employees for a period following completion.
    • You should add limitations on claims made against you (for example, limiting the time within which the claim can be brought and the amount that can be claimed).

Another important document is the disclosure letter, which must be read in conjunction with the warranties in the acquisition agreement. A buyer cannot make a warranty claim against you for anything disclosed in the letter.

There will also be many ancillary documents, such as directors’ service agreements, settlement agreements, resignation letters and board minutes.

If you’re considering selling your business, contact our team of experienced solicitors for clear, expert guidance. Willans has a highly-regarded multi-disciplinary team across its commercial, employment and property departments who can advise you at every stage of a transaction.

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