Having spent years establishing your business, your exit plan merits careful consideration, especially with Covid-19 shaping the outlook for business transactions locally and nationally.
Make a plan
If you are planning to sell your business, involve your solicitor and accountant early. Start to get your house in order, rather than wait for the sale process to begin. When the time comes for due diligence, being able to present a “clean” business is invaluable.
Top tip: Tackling housekeeping will involve reviewing everything from statutory records to contracts and policies, and considering resolving outstanding disputes. It is monotonous, but if you tackle and resolve issues early you can circumvent delay later, or the need to give potentially costly indemnities to your buyer in the sale agreement.
The right buyer
You may have nurtured a management team with a view to a buy-out, or identified a trade buyer or a private equity investor. The nature of your buyer will raise different legal issues and you need to factor this into your planning.
Top tip: work with your corporate finance advisors and solicitors to understand how your buyer plans to finance the acquisition. Take time to assess the buyer’s position and anticipate the likely hurdles.
Your solicitor and accountant or corporate finance advisor should work together to help you structure a transaction that can be documented sensibly from a tax, accounting and legal point of view. You want to sell confident that you achieve a clean break with no lurking liability to the business/your buyer.
Top tip: your accountant and solicitor should understand your motivation for the sale and your goals. This is key to determining the myriad of approaches in later stages of the transaction.
Business valuation and structure
Whilst you will probably have a ball park figure in mind, business valuation is not an exact science. If you are confident of the future of your business you will need to quantify this to prospective buyers using financial forecasts with detailed written assumptions to support the numbers. In the current climate running two or three scenarios to show you are being prudent in the face of the unknown will help you and your corporate finance advisors to achieve the best price.
The sale price is likely to be based on a formula and various assumptions set out in the business/share sale agreement, often tested against completion accounts which are prepared after the sale date. This means your outcome is not certain as at the date of the sale.
Whilst a full cash payment upfront is ideal, the majority of sales involve some form of deferred payment. This may either entail instalment payments, or an “earn-out”, the payment of which is conditional on the business reaching certain performance targets in the post-acquisition period. An earn-out may well be sought if you agree to work in the business for a period post-sale. You may wish to seek security and interest for any deferred payment arrangements.
Top tip: deferred payment and earn outs-merit early attention so involve your solicitor at the ‘heads of terms’ stage. Ensure you take tax advice on the treatment of any amounts you will receive.
In particular, remember earn-out payments are contingent on future events. Factor them in as “nice to have” rather than relying on them. Sellers who negotiated earn-out payments two years ago could not have predicted Covid-19 and the consequent inability in some sectors to deliver the growth necessary to meet the profit or earnings triggers which deliver earn-out payments.
The buyer (and possibly its lender too) will conduct financial and legal due diligence on your business to check what they are buying and identify any issues. This entails asking a suite of questions which you need to answer carefully with input from your advisors. A confidentiality agreement should be in place and you will no doubt consider carefully the timing of release of your most sensitive business information, especially if your buyer is a competitor.
Top tip: You might be expected to warrant the accuracy of the responses you give, so be careful. This is sometimes inappropriate and could result in unexpected liability for you.
The sale agreement
The devil is in the detail and the sale agreement will be a lengthy detailed document usually including a suite of warranties about all aspects of your business, its tax and VAT affairs. You need to be confident that you can make these various promises and to the extent that you cannot, your solicitor needs to prepare a disclosure letter (and related disclosure bundle of documents) to qualify those warranties in the appropriate way.
Top tip: this is key to protecting yourself against a warranty claim and you must be very thorough to ensure that the buyer understands the nature of the disclosure you are making.
Birketts has extensive experience of selling all types of businesses and can advise on all aspects of the process from the tax implications to employment issues. For further advice please contact Rachel Astill.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at December 2020.