Why sellers should get involved in the business sales process
Michael Budd, Partner and Head of Company Commercial, explains why sellers should get involved in the transaction process and that you cannot leave it all to the lawyers.
How can sellers influence the company sale process?
As a seller you will need to be as prepared as you can for the sale and appreciate how much effort you are going to need to expend on certain parts of the transaction process. If you get those preparations correct and fully engage in the process, you can limit their chance of the buyer making valid claims for breach of warranty post-completion. Getting involved means dealing with the points discussed below.
I’ve heard about the buyer doing due diligence. What does this involve?
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. Much work is involved in answering due diligence enquiries from the buyer and going through the disclosure process.
Do I need to prepare for the sale?
You should make proper preparations for the sale. You 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 you have time, a pre-sale review will alert you to any issues that might be perceived as problematic for buyers. This will enable you to either address these issues in advance or it will give you advance warning so you can establish the best way to address these issues with the buyer. In any event, you 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 you and can often be a source of frustration during the sale process.
I’ve heard the terms “warranties” and “disclosure”, what do they mean?
The other time-consuming area is one in which you can be most involved in limiting your liability and that is in relation to disclosure. It is the single most significant aspect of the sales transaction over which you have the most direct influence. The buyer will demand warranties from you. A warranty is a contractual statement concerning various aspects of the target’s company’s business, assets and liabilities. If a warranty is untrue the buyer will have a claim for breach of warranty against you if you do not say how and why the warranty is untrue. However, if you know 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 you 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 you to the buyer detailing matters which would amount to a breach of warranty.
Here to Help
If you would like advice on selling your business, or any other company commercial matter then please contact Michael Budd, Partner and Head of Company Commercial.
Please note the contents of this article 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 published for Inspire Magazine, issue 42 (January 2021).