Selling Your Business – The Legal Process
By Duncan Walker, Walker Wallis Solicitors
Most people who are looking to exit their business are “first-time sellers”. It’s very helpful to know in advance what the legal process actually involves.
Heads of Terms
The legal work usually starts when the terms of the transaction are agreed in outline and it is best to record them in a non-binding letter known as “heads of terms”. You should get your legal adviser involved in preparing this document; it’s vital that its terms are clear and protect your interests as it is difficult to go back later on what it says.
The heads of terms typically include the following information:
• The sale price.
• When is the price going to be paid, is it to be paid in cash or shares/loan notes, and if any of it is variable, on what will it depend?
• What arrangements will protect any post-completion payment e.g. parent company guarantee, security over specific assets?
• Will there be any price adjustment depending on net assets or cash/working capital as at the completion date?
• Which shareholders will give warranties (see below) and what time periods and financial limits will apply (if agreed by then)?
• Will any of the price be retained in an escrow account to cover warranty claims and for how long?
• Will the sellers remain involved in the business and on what terms?
• Will the sellers be prevented from soliciting staff, customers and/or suppliers or competing with the business being sold (and, if so, for how long)?
• Will the agreements be prepared using English law? (This is particularly relevant if your buyer is located abroad.)
• Any further items which are specific to the particular transaction or company being sold. The timetable for the transaction including due diligence, buyer funding and obtaining any necessary approvals from shareholders and regulators.
• Will the buyer be entitled to a period of “exclusivity” in which you promise not to negotiate with other bidders? (If used, this part of the heads of terms needs to be stated to be legally binding and needs careful drafting.)
P.S. I have assumed in this article that you are looking to sell your shares in the company, rather than the assets and business owned by the company itself. I won’t go into detail about that as it deserves an article all of its own!
Due Diligence and Disclosure
A buyer who is new to your business will want to investigate your business thoroughly and this process of “due diligence” is likely to include detailed questionnaires and requests for documents and one or more onsite visits.
As part of the due diligence process (see below) the buyer will have access to information about your business. You should help protect that information by getting the buyer to agree a legally binding confidentiality agreement before the process begins.
It is always a good idea to spend time with your legal adviser to discuss in advance any problematic areas so that you can take appropriate remedial action and avoid a possible delay or blockage to the sale.
The buyer may also request you to expedite your statutory accounts so that he can see a recent version.
Finally, the buyer will require the shareholders to agree detailed “warranties”, or legal assurances about the company and its business. Any exceptions or areas where the warranty is not correct will need to be clearly notified to the buyer by means of a “Disclosure letter”. Organisation and clear cataloguing of documents are key and this starts at the due diligence stage. For more complex companies you can discuss with your advisers the options for organising information in a special online “data room”.
The Legal Documents
• The key documents include the following:
• Share purchase agreement. This contains the detailed terms of sale, including the warranties (which are often lengthy). The first draft is customarily prepared by the buyer’s solicitors and is usually negotiated in detail.
• Disclosure letter and supporting files of documents.
• Tax covenant (dealing with the company’s tax liabilities and often contained within the share purchase agreement).
• Escrow account agreement.
• Employment termination agreements (“compromise agreements”) if the sellers are leaving the company, or ongoing consultancy/employment agreements if they are staying.
There will be a number of supporting documents including loan note deed, contribution agreement (between sellers for any warranty claims), share transfer forms, board minutes, powers of attorney, resignation letters and Companies House forms. By the time of signing they are likely to form a very tall pile!
Certain aspects of the company may require special treatment or even their own documentation, for example:
• Property assets/leases
• Subsidiary companies/joint ventures
• The company’s IP portfolio (including any patents, trade marks and rights to software)
• Any contracts or regulatory licences which require approval to a change of controller
• Any outstanding loans to or from directors or personal guarantees given to a bank or other lender
• Employee share schemes and trusts
• Any final salary pension scheme.
You should consult with your advisers about these items as soon as you can.
Your Time Commitment
Be prepared to have to devote a lot of time answering due diligence questionnaires, collating documents, finalising disclosures, negotiating commercial terms, formulating post-completion communication plans and dealing with correspondence from your solicitors, accountants, tax advisers and corporate brokers. All whilst keeping your business on an even keel!
Do think about ways of making the burden easier to handle, for example:
• Briefing trusted people in your organisation, so that you can delegate due diligence tasks to them
• Treating the exercise as a project: work with your advisers and the buyer to set out a realistic timetable and allocate clear responsibilities for tasks and their delivery
• Clear your calendar!