Sellers Guide to Selling a Business

Posted 5th October 2012

Written by Malcolm Jones

Newtons guide to selling a business

1. Introduction

1.1  This guide is intended to provide a brief overview of the legal steps involved for sellers of a business based on a straightforward transaction for the sale of a solvent business operating from rented premises.

1.2  Although this guide sets out the various steps in chronological order in practice there will be several matters happening at once.

2. Running the Business

2.1  Until the business has been sold you, the existing owner, will of course be running a business.  You need to make sure that the business continues as normal in case:

  • the sale falls through; or
  • the buyer wants to renegotiate the price because the performance has declined while the sale is proceeding.

2.2  While you are waiting for a buyer is a good time to consider the information and safeguards the buyer is likely to require.  It can save time and make the business more saleable if you:

  • put in place anything the buyer is likely to expect, for example renew a lease that has expired;
  • collect the information and copy documents that will have to be supplied to a potential buyer; and
  • discuss the tax effects of a sale with your accountant.

3. Preliminary Matters

3.1  Before you give too much information to a prospective buyer, who may be a competitor, you may want to obtain a non-disclosure agreement.

3.2  If you receive an offer for the business, whether through personal contacts or a business sales agent, you should find out as much as possible about that buyer.  The most important matters you need to discover are likely to be:

  • whether the buyer has run a business before and is aware of what is likely to be involved;
  • how the buyer is raising the total costs of buying the business together with the working capital he will need?

3.3  The costs the buyer will have to raise include: the purchase price, the cost of stock, any professional fees the buyer may incur himself and costs in connection with the transfer of the lease of the business premises.

3.4  Other matters you may want to consider are:

  • whether you want to exclude some of the assets that are needed in the business;
  • whether any third parties need to agree to the change in ownership; this includes any regulator, landlord or franchisor and possibly suppliers and customers who have long term arrangements with the business;
  • who you are going to instruct as your solicitors in relation to the sale.

3.5  If speed is important you may decide to instruct your solicitors to prepare the sale agreement and the information a buyer is likely to want in advance so these can be sent out as soon as an offer is accepted.

4. Asset Sale or Share Sale

4.1  If the business is operated by a limited company there are two ways in which the business can be sold:

  • the buyer can purchase the shares of the company carrying on the business from the shareholders (share sale); or
  • the buyer can purchase the assets of the business from the company carrying on the business (asset sale).

4.2  The tax treatment and risks involved vary between the two types of sale and this can affect the price.  As a rule of thumb the sellers are likely to prefer a share sale and the buyer an asset sale but this depends on the circumstances of each transaction.

4.3  This guide assumes that the business is not carried on by a limited company or it has been agreed that the transaction will proceed by a sale by the company of the assets of the business.

5. Due Diligence

5.1  Any buyer is almost certain to want to carry out financial, legal and other due diligence on the business.  In the case of a small business this will typically involve asking questions about every aspect of the business, carrying out searches and looking at documents and other evidence to prove the replies are accurate.

5.2  To ensure that the information you provide is complete and accurate you will be asked to provide warranties and indemnities so that if there is a problem after the sale has been completed the buyer can ask for some or all of his money back.

6. Pre exchange Due Diligence re Business

6.1  The buyer will normally ask to see the accounts of the business for the last few years.  He may also want details of the trading record of the business since the date of the last accounts.

6.2  The buyer will also want details of the assets included in the sale and confirmation that they all belong to you.

7. Pre exchange Due Diligence re. Property

7.1  The property due diligence is the same as the conveyancing procedure if business premises are bought on their own.  The buyer´s solicitors will want to see a copy of lease of the premises and to make searches and enquiries about the premises.

7.2  Normally, the seller will still be liable under the lease until it expires or the buyer sells it.  This can cause difficulties if several years after the sale is completed the landlord comes back to ask you for the rent your buyer has failed to pay or the cost of repairs he hasn´t carried out.

8. Employees

8.1  The buyer will automatically become the employer of the staff working in the business on the same terms as they work for you.  You will be expected to give the buyer information about the employees of the business so he can see the extent of the liabilities he is taking on.

8.2  Some buyers will not want all the employees or want to negotiate their own terms of employment.  If you are asked to dismiss employees or to make any changes to their terms of employment you should take advice as to whether this is possible.

8.3  Both buyers and sellers should consult with employees at the earliest possible stage although as this can be unsettling and cause difficulties.

9. ´Papering´ the Deal

9.1  The main document is called the business sale agreement. The following terms will be covered:

  • the price you are selling the business for and what you are giving in exchange;
  • procedure and timing of completion;
  • any post completion restrictions e.g. not to start a competing business;
  • warranties and indemnities about the business to ensure the buyer receives what you have agreed to sell.

9.2  When you are happy that you understand the business sale agreement and its terms are satisfactory, assuming you still wish to go ahead, it can be exchanged with the buyer.  At this stage the usual procedure is that you receive a deposit to seller and the buyer is committed to buying the business except in the unlikely event that the landlord of the premises will not accept the buyer as its tenant.  Sometimes completion follows immediately after the agreement is entered into.

9.3  Completion can either take place as a meeting between all of the parties and their solicitors or, as is more common these days, by the solicitors on behalf of their respective clients over the telephone.

10. Transfer of Lease

10.1  Before the buyer can become the tenant of the premises you will have to get the landlord´s permission to transfer the lease to the buyer.  The landlord may ask for:

  • references and other information before it decides whether to accept the buyer as a suitable tenant; and
  • a rent deposit of perhaps three to six month´s rent dependent on the buyer´s financial standing.

10.2  Your solicitors will obtain a licence to assign from the landlord which the buyer will have to sign.  You may ask the buyer to pay the landlord´s costs for dealing with the licence to assign but these are normally paid by the seller.

10.3  Your solicitors will also prepare the form of assignment/transfer of lease.  This is the document that transfers the lease to the buyer.

11. Completion

11.1  When all the above steps have been carried out a date will be set for completion.

11.2  As you will have paid business rates and the rent and any service charges under the lease in advance these payments will be apportioned and the part that relates to the period after completion will be added to the price.

11.3  The arrangements with the landlord of the premises will have to be in place.  This is usually a licence to assign but may include a rent deposit deed and personal guarantees.

11.4  Some assets may need additional documents to transfer ownership.  Contracts entered into with third parties, such as any equipment leases for vehicles and supply agreements with customers or suppliers may need a ´novation´ between the buyer, the seller and the third party.

11.5  When everything is ready, the buyer will pay the purchase price to you (less any deposit paid earlier) and apportionments or other amounts due.  The buyer will then become the owner of the business, employer of the employees and the tenant of the premises.

12. How long will it take?

12.1  In most cases completion will be achieved about 6 weeks after the instruction of solicitors by the buyer and the seller. This is however dependent on there being no undue complications or delays.

12.2  In all cases the seller´s solicitors are only able to work at the pace of the buyer and the buyer´s solicitors.  However it is the involvement of third parties, such as landlords and banks, which tends to lead to the greatest delays.

For more information contact Malcolm Jones or Scott Simmons on 01423 789 059 or malcolm@newtons.co.uk or scott@newtons.co.uk

These notes are an overview for general information only. They are not intended to replace legal advice for a specific set of circumstances. No responsibility can be accepted for anyone acting or failing to act as a result of anything contained in or omitted from these notes.  We would advise prospective sellers to take professional advice on any specific circumstances where they might apply.