Selling a Business: Legal Matters Q&A
Michael Budd answers the typical questions that owners have when they are considering selling a business.
Should I sell the shares in my business or the assets?
There are two main ways of buying and selling a business: a sale and purchase of some/all of the assets or business or, if the business is being carried on by a company, a sale and purchase of the shares in that company. On an asset sale, ownership of the assets is transferred from the seller to the buyer. As regards shares, the assets and liabilities of the business belong to the company. The only change is ownership. In addition to tax issues, there may be other reasons which may make a share sale more or less attractive. Selling shares means the seller can walk away on completion as the buyer is taking on the company with all its assets and liabilities. On a sale of assets, the seller remains liable for all liabilities incurred before the sale. Broadly, the buyer will prefer to purchase assets; the seller will prefer to sell shares.
How should I prepare for the sale?
Before you consider selling, get your business ready for sale. Make sure all documentation relating to each part of the business can be presented to the buyer (and have a confidentiality agreement in place before providing it). Avoid trying to run a business and having to provide information to a buyer and answer their many questions. Typically, the buyer will ask about the ownership of the business, the products and services it sells and receives; premises; intellectual property rights; customers and suppliers; directors and senior management; organisational structure; employees; management information and IT systems; and financial records.
What process will the buyer go through to purchase my business?
The buyer will go through a due diligence process by which it and its advisers investigate the business and its assets and liabilities before completing the purchase. Caveat emptor (let the buyer beware) applies. Generally, a seller will not be liable for non-disclosure of information so buyers demand lengthy warranties from the seller concerning the state of the business, its assets and liabilities. If the buyer discovers matters during due diligence that it will not accept it may demand the seller provides it with an indemnity, whereby the seller agrees to reimburse the buyer for any loss which the buyer suffers as a result of the relevant matter.
How will I get the money for the sale?
There are many ways a seller can receive payment. These include a lump sum, instalments, some money may be retained as security for warranty and indemnity claims and some money may be deferred or be dependent upon the future performance of the company or business. Sometimes, the purchase price is not fixed and the parties agree a provisional figure which is subject to adjustment by reference to a set of accounts prepared as at or around completion. Sometimes the price is based on a value by reference to a multiple of estimated future earnings. Other methods include the parties agreeing a price payable for the target company or business in advance with limited ways in which the sellers can extract value between the date to which the accounts were drawn up and completion. The seller may also receive payment other than in cash, such as shares in the buyer or in loan notes, which are debt securities.
Here to Help
If you would like to discuss selling a business, please contact Michael Budd, Partner and Head of Company Commercial.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
This article was originally written for Inspire Magazine.
NLA article not to be reproduced.