5 Steps to Selling Your Business: How sellers can influence the sale
During Covid-19 when selling your business the bargaining position of buyers and sellers has shifted from pro-sellers to pro-buyers. So buyers will likely be more aggressive about the terms of the acquisition agreement. This means that sellers need to be as prepared as they can for the sale and appreciate how much effort they are going to need to expend on certain parts of the transaction process. If they get those preparations correct and fully engage in the process, they can limit their chance of the buyer making valid claims for breach of warranty post-completion.
5 Steps to Selling Your Business
- Talk to your key management
- Get tax advice and ensure the value is right
- Prepare your documents for the buyer’s due diligence enquiries
- Understand how you can limit your liability
- Understand what disclosure means
Step 1. Talk to your key management
Talk to your senior management team and ensure they are on-board with a sale. They will be key to the process and whatever your involvement in the company there are certain matters that key management will know more about than you. This knowledge is essential for you to avoid liability for breach of warranty.
Step 2. Get tax advice and ensure the value is right
There are a number of advantages and disadvantages of share sales for the seller. These should be discussed with your tax adviser before you agree heads of terms with the buyer. It may seem obvious but the seller needs to understand if the sale price is correct and valuations may have changed due to Covid-19. Even if you are happy with the price you should understand how competitive it is. This could influence the approach of the parties to the transaction.
Step 3. Prepare your documents for the buyer’s due diligence enquiries
Whilst sellers will leave their lawyers to amend the terms of the acquisition agreement and draft associated documents, sellers are often not aware of the extent of work they must undertake as part of the sale process. The greatest volume of work relates to answering due diligence enquiries from the buyer and going through the disclosure process.
It is important for sellers to make proper preparations for the sale. They should ensure that the relevant information and documentation is in place so that it can be compiled and made available to the buyer. This will speed up the sale process. If sellers have time, and currently some sellers of distressed companies do not, a pre-sale review will alert sellers of any issues that might be perceived as problematic for buyers. This will enable sellers to either address these issues in advance or to give them advance warning so they can establish the best way to address these issues with the buyer. Even if sellers do not take this approach, they are going to need to answer potentially hundreds of questions from the buyer and collate documents relating to the company to be included in a data room to be accessed by the buyer. This is a hugely time-consuming exercise for sellers and can often be a source of frustration during the sale process.
Step 4. Understand how you can limit your liability
The other time-consuming area is one in which sellers can be most involved in limiting their liability and that is in relation to disclosure. It is the single most significant aspect of the sales transaction over which sellers have the most direct influence. The buyer will demand warranties from the seller. A warranty is a contractual statement concerning various aspects of the company’s business assets and liabilities. If a warranty is untrue the buyer will have a claim for breach of warranty against the seller if the seller does not say how and why the warranty is untrue. However, if the seller knows that a warranty is untrue it can avoid liability by telling the buyer. For example, if the buyer wants a warranty that there is no current or threatened litigation but in there may in fact be claims in litigation. Instead of amending the warranties in order to make exceptions for matters known to the seller which would make them untrue, it is usual that the agreement provides that warranties will apply “except as disclosed” in a disclosure letter. This is a letter from the seller to the buyer detailing matters which would amount to a breach of warranty.
Step 5. Understand what disclosure means
The buyer and the seller will need to agree a standard of disclosure. Generally, this could mean a matter is “fairly disclosed”, “fully and fairly disclosed” or “fully, fairly and accurately disclosed” or, more simply, that the matters are ‘disclosed’ against the warranties. Each of these formulations, and there are some others, may be more or less onerous for the seller. A seller should try to keep the agreed standard of disclosure as simple as possible. From the seller’s perspective, the deal standard should probably be just to matters ‘disclosed’, but a buyer is likely to demand a higher standard than that, perhaps disclosures which are “fair, with sufficient detail to identify the nature and scope of the matter disclosed”.
The word “fair” has a legal meaning in this context. It has been held by the courts to mean that information is given in sufficient detail to identify the nature and scope of the matter being disclosed, so as to enable the buyer to form a view whether to exercise any of the rights conferred on it by the sale agreement. The disclosure will need to be full, clear and unambiguous so as to effectively bring the potential breach of warranty to the attention of the buyer. The disclosure will need to be sufficiently precise, so that it is fairly and clearly apparent from the disclosure that it would qualify the particular warranty.
If a high standard of disclosure is agreed by a seller the chances of failing to disclose in accordance with the standard is increased which will lead to a greater chance of warranty claims. In order to meet the demands of a high standard of disclosure the seller is going to have to be more detailed and explanatory in their disclosures.
For a seller to ensure the disclosure process is carried out properly and that disclosures meet the agreed standard of disclosure, the clearer and more specific the disclosure, the less likely that the buyer will have a claim. To achieve this, the seller is going to need to spend much time and effort going through the warranties and making the required disclosures. As frustrating as this process can be for the seller, taking the time to deal with it properly will reduce the chance of a valid warranty claim by the buyer and so help ensure the seller keeps as much of the sales proceeds in their bank account as possible.
Selling your business: how we can help you
Michael Budd is a corporate specialist who has worked as a senior solicitor in leading London commercial firms. He has significant experience in private mergers and acquisitions acting for buyers and sellers. He leads the Company Commercial team at Longmores who advise business owners on every stage of business evolution from start-up to sale.
The team also work with a network of accountants so they can put you in touch with other professional advisers if you need them.
Selling your business: take the first step
An initial conversation with Michael will provide you with some clear advice about what to expect if you are selling your business. Being prepared and ready to get involved in the whole sale process will help you achieve the best outcome and save you a lot of time overall.
Get in touch with Michael by phone or email:
Michael Budd, Partner and Head of Company Commercial
T 01992 305234