The top 10 things to consider before selling your business

Step one – prepare your business for sale. 

A crucial part of selling a business is making the business look attractive to prospective buyers. In order to prepare your business for sale, you should:

• Settle any disputes with suppliers, employees, and clients.
• Organise all contract and lease documents.  
• Prepare up-to-date accounts.
• Speak to financial advisers to gain advice on tax and accounting issues.

Step two – agreeing Heads of Terms. 

Heads of Terms are an essential part of any business sale; they can take the shape of an informal agreement or a signed document setting out the agreed terms in great detail. It is an integral part of the transaction as it sets out the objectives and expectations of both parties and irons out any discrepancies in the early stages.

Whilst the majority of the clauses will not be legally binding, agreed and signed Heads of Terms can serve as a useful drafting guide and make it less likely that either party will seek to renegotiate the terms of the transaction substantially.

Negotiating Heads of Terms can often be a good indicator of the buyer’s position and how open they are to negotiations throughout the process. It is also worth considering the agreement of a Confidentiality Agreement before Heads of Terms are discussed, as if the fact that your business is subject to negotiations for sale was to find its way into the public domain, this information could reduce the value of the business.

Step three – prepare for due diligence. 

Most buyers will want to carry out rigorous due diligence to ensure they get what they pay for and to have a clear picture of any issues they need to mitigate against in the contract. It is prudent to ask your solicitor and accountant to assist with this to ensure enquiry responses are accurate but subject to appropriate limitations. There may be aspects of the due diligence process which do not seem relevant to your transaction. Still, they will help eliminate any uncertainty on behalf of the buyer and their solicitor.

Step four – restructuring: asset sale or share sale?

On an asset sale, you will negotiate with the buyer on precisely which assets you wish to sell on completion. Any assets you wish to retain under the business sale agreement will remain in your possession. A share sale is a lengthier process, depending on the complexity of the business.

The process can be particularly protracted if there is a high consideration being paid for the business. It is more straightforward, however, than an asset sale as it is just the shares in the company which are being transferred from the seller to the buyer, so there is no requirement to specify each asset.

You must consider this step early on as it will have tax implications and will determine the likely timeframes for completion. As a general rule, buyers prefer an asset purchase as they can cherry-pick what assets to buy and avoid liabilities. Sellers, on the other hand, generally prefer share sales which offer more of a clean break and may have tax advantages.

Step five – Articles of Association.

If the sale of the business includes the sale of the limited company and its shares, it is vital that the articles remain up to date to reflect the company’s current position. Ensuring articles are up to date will help facilitate the smooth sale of the shares. Your solicitor will also have to check that the seller has the requisite authority under the company’s articles to sell the shares and that consent from any third parties is not required.

Step six – restrictive covenants.

Restrictive covenants are often incorporated within the sale documentation or within a settlement agreement. They are used to prevent vendors from taking confidential information, customer details, and information about employees with them after the business sale has been completed. The scope of any restrictive covenants must be reasonable; however, otherwise, they may be deemed unenforceable.

Step seven – contracts.

As part of the due diligence process, the buyer will undertake an in-depth review of your business, including any contracts to which the company is a party.

To ensure the process remains streamlined, it would be beneficial for you to retain electronic copies of all business contracts. Storing all contracts on a central database will save time and money in the long run.

Step eight – employees.

A vital aspect of any business sale is ensuring you are both compliant and up to date with all employee information and contracts to comply with TUPE legislation.

As part of the due diligence process, prospective buyers will want to delve into employee records, including disciplinary actions, grievances, and pensions. This information should be made easily accessible to buyers.

Step nine – intellectual property.

The business owners themselves may not always own intellectual property rights. If this is the case, it must be made clear to the buyer. A typical example of intellectual property that a business’s owner may not own is the company website, logo or any branding, which a third party may instead own, such as a web developer, graphic designer, or branding or marketing specialist.

If this is the case, the intellectual property rights owner can sign a Deed of Assignment, a simple document stating to whom the rights belong.

Step ten – statutory books.

It is imperative that you keep the statutory books of the company up to date. If this is not the case, this could cause unnecessary delays in the transaction as they will need to be reconstituted. If reconstitution is required, this could incur a significant amount of time and money, as your solicitor or accountant will have to sift through the company’s complete history.

Contact us today for advice on selling your business. 

If you are buying or selling a business, it is imperative to seek legal advice at an early stage. Our corporate team have a wealth of expertise in the many facets of business sales and purchases.

We have offices in London, Brighton, Eastbourne, Hastings, Uckfield, and Ulverston and work with business owners across the UK.