The sale of a business or shares is a daunting and complex process for those who have never done it before and it is easy to see how it can become very stressful for the unprepared.
Many lawyers love to tell war stories about difficult transactions which left a seller wondering why on earth they decided to go through it. However, with good preparation and an understanding of the process, this need not be the case.
At the outset, it is time well spent to draft and sign Heads of Agreement which accurately reflect what has been agreed about the sale. Whilst not normally legally binding (apart from some clauses), the Heads do serve as a useful reminder of where the parties were with their agreement when the transaction started. This can be helpful to pull things back on track if they start to slip.
Once the Heads are agreed, the real work starts with the due diligence process. The seller must be prepared to gather together a lot of documents and provide replies to a list of comprehensive questions about the business. This can be a challenge, especially if the seller doesn't want to disclose the transaction to staff within the business. When this is the case, the seller can find it more time consuming to deal with due diligence than if they can enlist the assistance of people working within the business.
If internal confidentiality is not an issue, it can work well to create a project team with clearly defined responsibilities for document disclosure and the drafting of replies to enquiries. This spreads the workload and can be very helpful if the timescale for due diligence is limited.
From the information provided through due diligence, the buyer will decide whether they want to do the deal, if the price and payment structure are appropriate from their perspective and what warranties should be in the Sale and Purchase Agreement.
Once due diligence is over and the buyer is happy to proceed, the deal enters the execution phase. If a draft has not already been provided (usually on the basis that it is subject to the results of the due diligence), the Sale and Purchase Agreement (often referred to as the "SPA") and other documents (Service Agreements, etc) will be circulated between the parties to be negotiated. The SPA can be a long and complex document depending upon the nature of the transaction. It will contain mechanisms to deal with what the parties have agreed. It will have general and (in respect of share sales) tax warranties which are promises from the seller about the business or shares being sold.
The seller must ensure that the SPA contains appropriate protections for them. These usually consist of financial thresholds that must be reached before a claim can be made under the warranties, as well as time limits for bringing a claim.
As well as the seller protections in the SPA, the seller will prepare a disclosure letter and bundle of documents. The purpose of this is to inform the buyer of any issues that may affect the seller's ability to give certain warranties as they stand. The disclosure letter will contain information about circumstances which could amount to a breach of a warranty without the disclosure. The effect of this is that the buyer is deemed to have notice of the situation and to prevent the buyer from bringing legal proceedings against the seller in respect of the disclosed point.
There are other documents to look at as part of the deal such as board minutes, letters of resignation, forms for Companies House, etc. These will all be prepared and put together as part of the pack of completion documents to be signed.
Selling a business or shares is a transaction like no other. Preparation and a calm and efficient approach to the deal will help to make a sale a far more interesting experience with a greater chance of success.
By Daniel Gardener
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